FinTech credit and MSME financing: Evidence from developing and OECD countries

• Fintech credit reduces the financing gap of micro, small and medium enterprises (MSMEs) in developing countries • In developing countries, fintech credit reduces MSME financing gaps most effectively among digitally visible firms, revealing a digital divide that limits benefits for less-equipped MSMEs • The demand for bank loans by SMEs in OECD countries reduces by 0.029 percent for a percentage increase in fintech credit • In OECD countries, SMEs substitute fintech credit for only short-term loans, not long-term. • Hence, fintech credit enables SMEs to diversify their demand for credit, thus reducing their exposure to banks' credit shocks. Access to credit by micro, small, and medium enterprises (MSMEs) from conventional financial institutions has historically been challenging. This has led to an increased use of alternative financing sources by MSMEs to bridge their long-standing funding gap. In this study, I examine the impact of fintech credit on MSME financing. Using a novel data set from the International Finance Cooperation and the World Bank, I empirically quantify how Fintech credit closes the MSME financing gap in developing countries. I find that a percentage increase in fintech credit reduces the MSMEs’ financing gap in developing countries by about 0.20 percent. However, moderating analysis reveals that this effect strengthens among digitally visible MSMEs, while delivering weaker benefits to the less digitally equipped ones, underscoring a digital divide that conditions fintech's inclusion potential. Furthermore, I use data on bank loans to SMEs across OECD countries to examine the substitutability or complementarity between fintech and bank credit. I find that SMEs' demand for bank loans is reduced by 0.029 percent for a percentage increase in fintech credit. However, the substitution occurs only in short-term loans. These findings imply that fintech credit closes aggregate MSME financing gaps in developing countries and complements traditional banking in OECD countries, but realizing broad-based financial inclusion requires complementary policies to enhance MSMEs' digital readiness, particularly in developing economies where digital divides are most pronounced.