Adapting to Change

This chapter serves as an introduction to the study of alternative finance tools, their risks and opportunities for firms, and their interaction with Environmental, Social, and Governance (ESG) factors in finance. The chapter begins by defining alternative finance and describing its various tools. It examines the opportunities these tools offer to firms, as well as the associated risks. The focus then shifts to how ESG factors are assessed in finance, discussing the determinants of ESG scores and their impact on firm risk, profitability, and value. The chapter also explores the evolving relationships between banks and firms in the context of alternative finance and ESG practices, highlighting how these factors are changing traditional financial relationships. Finally, the chapter outlines the research objectives, setting the stage for a deeper exploration of these themes. It concludes by providing a structured overview of the monograph, detailing the focus and content of the subsequent chapters. This layout effectively sets the tone for a thorough investigation into the intricate interplay between bank-firm relationships, ESG factors, and alternative finance in the modern financial landscape.

This chapter analyses the evolving dynamics between banks and firms. It begins by examining the bank-firm relationship from before 1995, characterized by mutual trust and personal interactions, through to the period between 1995 and 2010, where the relationship gained complexity due to global banking practices and judicial systems. The phase from 2010 to 2023 is marked by banks’ transition towards ethical banking and becoming holistic partners for firms. The chapter also explores conventional finance, focusing on consistent elements like credit rationing, interest rates, and collateral requirements. It introduces the concept of alternative finance, highlighting its impact on traditional banking models and the necessity for banks to innovate in response. The chapter concludes that while basic lending principles remain unchanged, the bank-firm relationship has evolved significantly, influenced by broader financial, societal, and technological trends.

This chapter analyses the integration of Environmental, Social, and Governance (ESG) factors in the financial sector. It highlights the link between credit policies and ESG practices in shaping sustainable finance. The chapter examines how ESG factors influence firm risk and profitability, noting that better ESG performance can lead to reduced risk and more favourable loan conditions. The impact of ESG scores on the bank-firm relationship is also explored, revealing that strong ESG performance may result in better lending terms and improved access to capital. Despite these findings, there is a noted gap in research on the market reactions to banks’ ESG performance. The chapter concludes by discussing the European Banking Authority's guidelines on incorporating ESG factors in banking, emphasizing the need for sustainable and risk-sensitive lending practices in the financial industry.

This chapter of the document, ‘Empirical Evidence on the Trinomial Bank-Firm Relationship, ESG, and Alternative Finance’, investigates the impact of FinTech Credit on the financial sector. It examines how FinTech Credit affects financial operations, stability, and borrowing patterns, showing a significant influence that extends over multiple periods. Firms utilizing FinTech Credit display enhanced financial stability and an increased tendency to take on more debt. The study also observes consistent effects of FinTech Credit on interest expenses over time. When exploring the interaction between FinTech Credit and Environmental, Social, and Governance (ESG) factors, the findings reveal a complex relationship. Certain ESG aspects, particularly in environmental and governance, reduce default risk, but their combined effect with FinTech Credit does not consistently enhance benefits. This comprehensive analysis highlights the profound and lasting impact of FinTech Credit in the financial sector, crucial for shaping future financial policies and strategies.

This chapter, ‘From Theory to Practice: Discussion and Managerial Implications’, explores the impact of financial technology in banking also looking at ESG (Environmental, Social, and Governance) factors. The chapter evaluates the effect of FinTech on bank-firm relationships, especially in credit risk assessment, revealing a tendency for banks to favour firms with efficient FinTech interactions and robust environmental practices. The text explores the intricate connection between firms’ characteristics and financial terms, drawing attention to FinTech’s long-term impact on interest rates and capital structure. It unravels challenges encountered by banks with FinTech, including the ability to maintain close associations and conduct thorough due diligence. The work highlights the importance of reliable ESG metrics and unbiased FinTech algorithms. Finally, this chapter proposes a research programme that concentrates on interdisciplinary studies and creating predictive models to support financial institutions with strategic ESG compliance. It also emphasizes the need for a balance between quantitative and qualitative approaches to comprehend fully the impact of FinTech on banking.

The final chapter of the monograph, ‘Adapting to Change: ESG and Alternative Finance in Shaping the Bank-Firm Relationship’, provides an in-depth analysis of the progressive shift in the relationship between banks and firms, moving from a foundation of personal trust to one characterized by strategic, value-driven partnerships. It chronicles the post-1995 trend towards prioritizing economic efficiency and judicial context in credit dealings and highlights the significant changes from 2010 to 2023, where ethical banking, reliability, and stability have become the cornerstones of banking practices. The role of technological advancements, especially FinTech Credit, is examined for its impact on lowering default risks, suggesting an inverse relationship that underscores the need for banks to leverage technology in credit evaluations. Environmental and governance aspects of ESG criteria are also analysed for their growing influence on financial stability and creditworthiness, with a notable emphasis on the European Banking Authority's guidelines. The monograph further assesses how engagement with FinTech Credit influences lending rates over time, advocating for dynamic risk assessment models that can adapt to these evolving factors. Ultimately, the study advises banks to modify their credit assessment processes to integrate a firm's technological and ESG engagements, reflecting the long-term implications for the bank-firm relationship amidst the rise of alternative finance and sustainability considerations.