For small businesses, geography can shape access to credit. Banks have traditionally relied heavily on local knowledge and relationships to evaluate borrowers, making it harder to assess businesses located farther away. New research suggests artificial intelligence could help banks overcome that information gap.
A study finds that banks using more AI extend significantly more small business credit to distant borrowers.
Using confidential U.S. Census Bureau data, the researchers tracked a period of rapid AI adoption among banks. The share using AI climbed from 14% in 2017 to 43% in 2019.
The expansion of distant lending was especially pronounced in communities with unmet small business credit demand and places with more minority-owned small businesses, pointing to AI’s potential to improve access to financing in markets where traditional banking relationships may be limited.
Diana Weng
Importantly, reaching farther did not appear to mean accepting greater risk. Banks with greater AI use recorded lower charge-off rates among distant borrowers and offered them higher interest rates. The results suggest AI can help lenders identify creditworthy businesses that conventional screening may miss.
The researchers found no similar increase in distant lending associated with cloud systems, other software or hardware, suggesting the effect is distinct to AI rather than technology investment generally.
Authors: Jeffery Piao, University of Missouri-Columbia; K. Philip Wang, University of Florida; Diana L. Weng, University of South Florida.