Distant Lending, Specialization, and Access to Credit

66 Pages Posted: 4 May 2020 Last revised: 7 May 2020

See all articles by Wenhua Di

Wenhua Di

Federal Reserve Bank of Dallas

Nathaniel Pattison

Southern Methodist University, Department of Economics

Date Written: January, 2020


Small business lending has historically been very local, but distances between small businesses and their lenders have steadily increased over the last forty years. This paper investigates a new lending strategy made possible by distant small business lending: industry specialization. Using data on all Small Business Administration 7(a) loans from 2001-2017, we document a substantial increase in remote, specialized small business lenders, i.e., lenders that originate many distant loans and concentrate these loans within a small number of industries. These lenders target low-risk industries and, consistent with expertise, experience better loan performance within these industries. We then examine whether this industry-specialized lending serves as a substitute or complement to traditional, geographically specialized lending. We exploit the staggered entry of a remote, specialized lender to estimate the impact of specialized lending on credit access. Entry significantly increases total lending, with no evidence of substitution away from other lenders. The results indicate that specialized lending can deepen credit markets by providing new loans to low-risk but underfinanced small businesses.

Keywords: Technology, Distance, Banking competition, Fintech, Credit access, Small business lending, Specialization

JEL Classification: G23, L11, G21

Suggested Citation

Di, Wenhua and Pattison, Nathaniel, Distant Lending, Specialization, and Access to Credit (January, 2020). FRB of Dallas Working Paper No. 2003, Available at SSRN: https://ssrn.com/abstract=3592426 or http://dx.doi.org/10.24149/wp2003

Wenhua Di (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
Dallas, TX 75201
United States

HOME PAGE: http://www.dallasfed.org/research/economists/di.cfm

Nathaniel Pattison

Southern Methodist University, Department of Economics ( email )

3300 Dyer Street, Umphrey Lee Suite 301
Dallas, TX 75275
United States

HOME PAGE: http://pattison-nate.github.io

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