Banks using AI are better at identifying creditworthy borrowers from afar, new study finds

COLUMBIA, Mo. -- Artificial intelligence could be a game changer for small businesses struggling to secure loans — even in areas without access to a brick-and-mortar bank branch — according to a new study from the University of Missouri.

Since the 2008 Great Recession, more than 13,000 bank branches have closed across the U.S., many in rural areas. These closures have created “banking deserts,” where traditional face-to-face lending — often required to build trust and share sensitive financial information — is no longer feasible. The result? Small business owners are increasingly cut off from the credit they need to sustain and grow their operations.

Jeffery Piao, an assistant professor in Mizzou’s Robert J. Trulaske, Sr. College of Business, wants to solve this problem using artificial intelligence. Specifically, he believes AI could help banks identify and support creditworthy borrowers, even if they live far from a physical bank branch — opening new doors for economic growth in local communities.

For the study, Piao and his colleagues analyzed the U.S. Census Bureau’s annual technology survey, which tracks AI adoption among banks. They then compared the results with banks’ small-business lending patterns. The researchers discovered three main findings:

1. The percentage of banks using AI increased from 14% in 2017 to 43% in 2019.
2. Banks with greater AI usage lent money to borrowers who were located farther away from physical bank branches.
3. Banks with greater AI usage offered lower interest rates and saw fewer instances of default even while lending money to distant borrowers.

“When implemented carefully, AI can help banks extend credit to underserved regions without sacrificing loan quality — a result that is both unexpected and encouraging for policymakers and lenders,” Piao said. “This is exciting news because of the implications for local economic development. As AI becomes more widely adopted, expanding credit access to underserved communities could boost job growth, increase tax revenues for local schools and increase the formation of start-ups.”

AI helps banks make smarter lending decisions through its ability to collect and process massive amounts of data quickly, allowing banks to make better-informed decisions.

For example, when processing loan applications, AI can determine whether a business is located in an area where the economy has been booming or busting recently, even if the loan officer has never visited the area. It can provide data on foot-traffic patterns or whether a particular industry is on the rise or in decline in a certain area. While the credit risk profiles of borrowers were traditionally monitored periodically, AI can now track them in real time, improving accuracy.

“This research is an example of Mizzou’s land-grant mission, and my ultimate goal is to support small businesses in Missouri, which make up 99.5% of all Missouri businesses,” Piao said. “Seeing the ripple effect of our research going from Cornell Hall across the state of Missouri is humbling and motivating.”

“U.S. banks’ artificial intelligence and small business lending: Evidence from the Census Bureau’s annual business survey” was published by the United States Census Bureau. Philip Wang with the University of Florida and Diana Weng with Baruch College collaborated with Piao on the study.