Journal Pre-proof

Do financial technology firms influence bank performance?

Dinh Phan, Paresh Kumar Narayan, R. Eki Rahman, Akhis R.

Hutabarat

PII: S0927-538X(18)30563-8
DOI: https://doi.org/10.1016/j.pacfin.2019.101210
Reference: PACFIN 101210

To appear in: Pacific-Basin Finance

Journal

Received date: 9 November 2018

Revised date: 1 August 2019
Accepted date: 23 September 2019

Please cite this article as: D. Phan, P.K. Narayan, R.E. Rahman, et al., Do financial
technology firms influence bank performance?, Pacific-Basin Finance Journal(2018),
https://doi.org/10.1016/j.pacfin.2019.101210

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 Journal Pre-proof

Do financial technology firms influence bank performance?

Dinh Phan, Paresh Kumar Narayan, R. Eki Rahman, Akhis R. Hutabarat

Taylor’s University, Kuala Lumpur, Malaysia

Centre for Financial Econometrics, Deakin Business School, Deakin University,
Melbourne, Australia
Bank Indonesia Institute, Bank Indonesia
Bank Indonesia Institute, Bank Indonesia

Mailing Address
Corresponding author at:
Paresh Kumar Narayan
Alfred Deakin Professor Centre
for Financial Econometrics
Deakin Business School
Deakin University
221 Burwood Highway
Burwood, Victoria 3125
Australia
Telephone: +61 3 9244 6180
Fax: +61 3 9244 6034
E-mail: [email protected]

1
ABSTRACT
We develop a hypothesis that the growth of financial technology (FinTech) negatively influences

bank performance. We study the Indonesia market, where FinTech growth has been impressive.

Using a sample of 41 banks and data on FinTech firms, we show that the growth of FinTech

firms negatively influences bank performance. We test our hypothesis through multiple

additional tests and robustness tests, such as sensitivity to bank characteristics, effects of the

Global Financial Crisis, and the use of alternative estimators. Our main conclusion that FinTech

negatively predicts bank performance holds.

sKeywords: Financial technology; Bank performance; Predictability;

Estimator
 I. Introduction

The last decade or so has seen strong growth in digital innovation, especially in

financial technology (FinTech). However, the traditional players (financial

institutions) in the financial sector have only slowly begun to participate in new

technological innovations (Brandl and Hornuf, 2017). Although there have been

acquisitions of FinTech firms by banks recently, most FinTech start-ups are

independent of banks and are open to investment interests. Because many banks,

apart from the well-known big banks, still offer old-fashioned, costly, and

cumbersome financial services (Brandl and Hornuf, 2017), FinTech firms have the

opportunity to take over several key functions of traditional banks (Li, Spigt,

and Swinkels, 2017). Put differently, FinTech firms are likely to trigger a

substitution effect, whereby banks are likely to cede some business activity. To

what extent banks will be affected and how much FinTech firms will replace the

activities currently controlled by banks is an empirical issue.

The effect of FinTech firms on banks can be explained by the consumer theory (Aaker and

Keller, 1990) and disruptive innovation theory (Christensen, 1997). The consumer theory

suggests that new services (such as those provided by FinTech firms) by meeting the same

consumer demand can replace the old services (such as those provided by traditional banks).

Based on the
disruptive innovation theory, new entrants who apply innovative technology to provide more

accessible and cost-effective goods and services can create competition in the market. The remits

of these theories are relevant to our story where new entrants are FinTech firms and established

incumbents are traditional banks. Complementing this line of thought is the work of Jun and Yeo

(2016), who provide a model of a two-sided market with vertical constraints, emphasising on

firm entry. Their model focusses on end-to-end and front-end service providers—a distinction

that we do not make. Competition in our story is generated by new entrants regardless of who

they are. A key feature of FinTech firms is that they apply innovative technology to perform

tasks previously reserved for banks, such as lending, payments, or investments (Chishti and

Barberis, 2016; Brandl and Hornuf, 2017; Puschmann, 2017). Recently, FinTech firms have been

developing practical applications to improve efficiency in financial services across a range of

services, including (but not limited to): contactless and instant payments; asset management

services; investment and financial service advice; and information and data

management/storage (Villeroy de Galhau,

2016). In this vein, Jagtiani and Lemieux (2018) argue that non-bank lenders can secure soft

information relating to creditworthiness. This service is considered valuable for consumers and

small business alike, particularly those that are characterized by weak credit history. On the

contrary, banks operate on old information technology system and are perceived to be slow in

adopting new technology (Hannan and McDowell, 1984; Laven and Bruggink, 2016; Brandl and

Hornuf, 2017). The main conclusion, therefore, is that eventually FinTech firms can substitute

the traditional banks by providing less expensive and more efficient services. Our hypothesis,

therefore, is that FinTech growth will negatively influence bank performance.

Despite the emergence of digital innovation and its perceived effect on the financial

industry, the effect of digital innovation and FinTech growth on the financial system are less
understood. Exceptions include: (a) Cumming and Schwienbacher (2016), who investigate the

pattern of venture capital investment in FinTech using a global sample of firms; (b) Haddad and

Hornuf (2018), who test the determinants of the global FinTech market; (c) Brandl and Hornuf

(2017), who trace the transformation of the financial industry after digitalization; and (d) Li et al.

(2017), who focus on how retail banks’ share prices react to FinTech start-ups.

We test our hypothesis using bank-level data from Indonesia. We consider Indonesia

because, among emerging markets, its FinTech growth has been phenomenal, as shown in Figure

1. This trend in the growth of FinTech firms makes Indonesia an interesting case study to analyse

how FinTech influences bank performance in an emerging market context. In general, we

understand little about how FinTech impacts the banking sector. Using data from 41 banks, our

panel models of the determinants of banking sector performance suggest that FinTech firms have

a negative effect on Indonesian bank performance. FinTech, we show, also negatively predicts

bank performance.

Specifically, we summarize our key findings as follows. First, we find that FinTech

reduces net interest income to total assets (NIM), net income to total equities (ROE), net income

to total assets (ROA), and yield on earning assets (YEA) by 0.38%, 7.30%, 1.73%, and 0.38% of

their sample mean values (reported in Table I), respectively.

Second, FinTech predicts bank performance. With every new FinTech firm introduced

into the market, we find that FinTech negatively predicts NIM, ROE, ROA, and YEA by 0.53%,

9.32%,

2.07%, and 0.48% of their sample means, respectively. Third, we test whether bank

characteristics, such as market value (MV) and firm age (FA) influence the way FinTech

influences bank performance. We find that they do. Specifically, the effect of FinTech is
stronger on (a) large banks compared to small banks, and (b) mature banks compared to younger

(new) banks. We conclude

our analysis by testing whether FinTech affects bank performance differently for state-owned

versus private banks. We show that FinTech has a bigger effect on state-owned banks.

We confirm our results through multiple robustness tests. Using four measures of bank

performance, we test the sensitivity of the relation between FinTech and bank performance to

measures of performance. We find no evidence that measures of bank performance matter to the

relation between FinTech and performance. We explore the effects of FinTech on bank

performance by asking whether the way FinTech affects performance is dependent on specific

bank characteristics. By and large, we find that FinTech negatively influences performance

regardless of bank size and age, and while we do uncover some positive effect of FinTech for

younger banks, there is no evidence that FinTech predicts performance of these younger banks.

We explain this positive effect by drawing on Giunta and Trivieri (2007) and Haller and

Siedschlag (2011). These authors find that younger firms adopt and use technological innovations

much more successfully. In addition, in testing the effects of FinTech, we utilize a wide range of

control variables consistent with the banking performance determinants literature. The role of

FinTech in influencing performance survives these tests. We also check for the sensitivity of our

results by (a) controlling for 2017 Global Financial Crisis (GFC) effects and (b) using a different

panel data estimator. We conclude that the negative effect of FinTech on bank performance

holds across all these additional tests.

Our paper’s main contribution is to show how FinTech influences bank performance.

There are no studies on this subject at present. Our paper, therefore, represents the first empirical

study exploring the hypothesis that FinTech negatively influences bank performance. Using

bank-level
data from Indonesia,1 we show that FinTech negatively influences bank performance and that

this relation is robust.

This paper is organized into three additional sections. We discuss the data and the

empirical framework in Section II. A discussion of the results appears in Section III. Finally,

Section IV sets forth our concluding remarks.

II. Data and empirical framework

This section has two objectives. First, we discuss the data. Then, we present the empirical

framework for testing our hypothesis that FinTech has a negative effect on bank performance.

A. Data

We collect data from multiple sources. The data on FinTech firms are obtained from FinTech

Indonesia Association.2 We collect the annual number of FinTech firms registered to the FinTech

Indonesia Association. The FinTech firms are those new supply firms and settlement processes

related to the banking sector, such as lending, payments, personal finance management, crowd

funding, and cryptocurrencies. In Indonesia, the bulk of the FinTech activities are centered on

lending (45%) followed by payments (38%). Bank-level data—NIM, ROA, ROE, YEA, total

assets

(SIZE), ratio of equity to total assets (CAP), cost to income ratio (CTI), loan loss provision
(LLP),

1
The literature on Indonesian banks is rich. Several studies examined the Indonesian bank performance (Aviliani,
Siregar, Maulana, and Hasanah, 2015; Wu, Ting, Lu, Nourani, and Wkeh, 2016; Ekananda, 2017; Irawan and
Kacaribu, 2017; Ekananda, 2017; Shaban and James, 2018; Ibrahim, 2019), efficiency (Widiarti, Siregar, and
Andati,
2015; Anwar, 2016;, Purwono and Yasin, M., 2019), risk (Agusman, Monroe, Gasbarro, and Zumwalt, 2008;
Hidayat, Kakinaka, and Miyamoto 2012; Agusman, Cullen, Gasbarro, Monroe, and Zumwalt, 2014), stability
(Mulyaningsih, Daly, and Miranti, 2016; Karim, Al-Habshi, and Abduh, 2016; Dienillah, Anggraeni, and Sahara,
2018), and Islamic banking (Pepinsky, 2013; Gustiani, Ascarya, and Effendi, 2010; Hidayati, Siregar, and
Pasaribu, 2017; Anwar and Ali, 2018).
2
https://fintech.id. This data is not available to public. We obtained data from Bank Indonesia which was sourced
from Asosiasi FinTech Indonesia (Aftech).
annual growth of deposits (DG), interest income share (IIS), and funding cost (FC)—are obtained

from Datastream. Of these data, NIM, ROA, ROE, and YEA are proxies for bank performance—

our dependent variable in regression model (1). Variables SIZE, CAP, CTI, LLP, DG, IIS, and

FC are firm-specific control variables. We also use macroeconomic variables—gross domestic

product (GDP) growth rate and inflation (INF) rate—as additional controls. These data are

obtained from the Global Financial Database. All data are annual over the period 1998 to 2017.

Specific details, including variable definitions, are provided in Table I.

A description of our dataset appears in Table II. Selected basic statistics are reported to

obtain insights on the data. These statistics are for the entire sample as well as for banks at the

25th and 75th percentiles. The number of new FinTech firms averages 7 per annum over the

1998 to

2017 period. The bank performance statistics (for our sample of 41 banks) reveal the following.

Average NIM is 4.94% per annum while ROE is 7.99% per annum. By comparison, ROA stands

at 0.40% per annum. Moreover, YEA is valued at over 10% per annum. Annual average CAP, a

measure of market capitalization, is around 12%. These performance statistics, as expected, are

higher at the 75th percentile compared to the 25th percentile. Amongst the control variables,

interest income is 91.2% of total income, with a CTI of around 56% per annum for our sample.

Growth of deposits is 16.32% per annum.

B. Empirical framework

Our empirical model is motivated by the literature that estimates the determinants of bank

performance (Dietrich and Wanzenried, 2011, 2014; Trujillo-Ponce, 2013; Köster and Pelster,

2017; Shaban and James, 2018). We augment this conventional model of performance

determinants with the FinTech variable. Our regression model is:

 𝑃����,𝑡 = � + �1 ����������ℎ𝑡 + �2 𝑃����,��−1 + �3 ���𝑃��,𝑡 + �4 �𝐼𝑍���,𝑡 +

�5 ������,𝑡 + �6 𝐿𝐿𝑃��,𝑡

+ �7����,𝑡 + �8𝐼𝐼���,𝑡 + �9����,𝑡 + �10��𝑃𝑡 + �11 𝐼𝑁�𝑡

+ ����,𝑡
We collect data for all Indonesian banks from Datastream. Data availability leads to a sample of

41 banks. Our sample of banks excludes unlisted banks since they are likely to introduce

potential estimation bias. Indonesian banks are required to reveal their performance through

annual reports submitted to the central bank – the Bank Indonesia. However, there are

differences between listed and unlisted Indonesian banks in the level of risk disclosure that is

conveyed in their annual reports. Adhering to capital market regulation, listed firms commit to

extensive public disclosures and transparency in showing their performance in order to attract

investors for external funds. Unlisted firms, with fewer stakeholders, however, have lack of

incentives and the absence of transparency when revealing their performance in annual reports

(Goktan & Muslu, 2018).

Our data sample spans 1998, when the first FinTech firm was established, to 2017. A

two- step generalized method of moments (GMM) system dynamic panel estimator is employed

to test the null hypothesis that FinTech negatively influences bank performance in Indonesia.

Specific definitions and expected signs on each of the variables are set forth in the last

column of Table I. We briefly discuss these relations here. The first control variable is CAP,

measured as equity scaled by total assets. Previous studies that test the capital—bank

performance nexus fail to find conclusive evidence on how this relation unfolds. Some studies

document a positive effect of capital on bank performance (Berger, 1995; Holmstrom and Tirole,

1997; Jacques and Nigro, 1997; Rime, 2001; Iannotta, Nocera and Sironi, 2007; Mehran and

Thakor,
2011; Naceur and Omran, 2011; Berger and Bouwman, 2013), while others find the opposite

(Altunbas, Carbo, Gardener and Molyneux, 2007; Lee and Hsieh, 2013) or mixed results

(Dietrich and Wanzenried, 2014). Berger (1995) draws on the bankruptcy cost hypothesis to

explain the
relation between capital and bank profits. This hypothesis suggests that banks with a higher

capital ratio increase their expected profits by lowering interest expenses on uninsured debt.

Berger (1995) also provides an alternative explanation through the signalling hypothesis, which

describes increasing capital as a positive signal on the bank’s prospects. Banks with higher

equity-to-asset ratios may not require external funding, which can positively influence

profitability. On the other hand, Osborne, Fuertes and Milne (2012) suggest that a higher CAP is

associated with lower bank performance. This is because capital is considered more expensive

than debt due to market imperfections and tax-shield savings associated with debt. These authors

also provide an alternative view, suggesting a possible positive relationship by claiming that

higher capital reduces risk, thus reducing the compensation premium demanded by investors to

cover the costs of bankruptcy. This claim is consistent with the popular “trade-off” view, which

implies a positive relationship between capital and bank performance. As a result, we expect

CAP to have either a negative or a positive effect on bank performance.

On the effect of bank size (SIZE), which we proxy using bank total assets, the effect is

again a priori unknown. Large-sized banks are set to gain from economies of scale (greater

operational efficiency) and enjoy greater economies of scope (greater diversification with respect

to product and loan) compared to small banks. We, therefore, predict a positive effect of bank

size

on profits, consistent with, for example, Pasiouras and Kosmidou (2007) and Smirlock
(1985).

Short (1979) argues that large banks have access to cheaper capital, which is reflected in healthy

profitability. Djalilov and Piesse (2016) argue that large banks reduce their level of risk by

diversifying their products and services, which contributes to higher operational efficiency and
profitability. Furthermore, Flamini, McDonald and Schumacher (2009) document that, in a non-

competitive environment, large banks can obtain higher profits compared to small banks. This is
because large banks, since they hold greater market share, can offer lower deposit rates and

maintain high lending rates. Moreover, Stiroh and Rumble (2006), Berger, Hanweck and

Humphrey (1987), and Pasiouras and Kosmidou (2007) show that bank size is negatively related

to profits due to bureaucracy. On the other hand, Shaban and James (2018) and Chen, Liao, Lin

and Ye (2018) find mixed results on the size and bank performance nexus.

The CTI variable is computed as operating costs (staff salaries, property costs, and

administrative costs, excluding losses due to bad and non-performing loans) scaled by total

generated revenues (see Pasiouras and Kosmidou, 2007 and Dietrich and Wanzenried, 2014). As

CTI increases, implying lower bank efficiency, it should negatively impact bank performance.

This negative relationship is documented in previous empirical studies; see, among others, Hess

and Francis (2004), Athanasoglou, Brissimis and Delis (2018), Pasiouras and Kosmidou (2007),

and Dietrich and Wanzenried (2014).

To proxy credit risk, we use LLP, a variable considered a reserve to cover for any

potential loans default, which protects bank positions in terms of profitability and capital (Beatty

and Liao,

2011). The level of LLP indicates a bank’s asset quality and can be used to judge changes in

future performance (Thakor, 1987). Miller and Noulas (1997) argue that when banks are exposed

to high- risk loans, they will accumulate unpaid loans and profitability will be lower.

Athanasoglou et al. (2008), Sufian (2009), and Dietrich and Wanzenried (2014) suggest that

increased exposure to credit risk is associated with decreased bank profitability, as bad loans are

expected to reduce profitability. We, therefore, expect a negative effect of LLP on bank

performance.

We employ DG to measure bank growth. A growth-oriented or growing bank indicates

business expansion, thus generating greater profits. On its own though, an increase in deposit
growth does not necessarily imply improved bank profits. Banks need to be able to convert

deposits
into productive investments. One source of achieving this is by giving loan preference to

borrowers with lower credit quality. In addition, deposit-growth can attract and stimulate

competition in the market. This can potentially reduce profits for banks in the market. Therefore,

a priori, from a theoretical viewpoint, the effect of DG is unknown. The existing empirical

evidence is mixed. Naceur and Goiaed (2001), for instance, find a positive relation; Demirguc-

Kunt and Huzinga (1998) find a negative relation; while an insignificant relation is discovered

by Dietrich and Wanzenried (2014).

IIS, which equals total interest income over total income, is also used as a control

variable. In general, commercial banks obtain higher margins from asset management activities,

such as “fee and commission income” and “trading operations” compared to interest operations.

We predict that banks will be less profitable if the share of interest income relative to total

income is high (Dietrich and Wanzenried, 2011, 2014). In other words, we expect a negative

effect of IIS on bank performance.

The final firm-specific control variable is FC, which equals interest expenses over

average total deposits. As FC increases, bank profits are expected to be lower. Dietrich and

Wanzenried (2011 and 2014), for instance, find a negative and statistically significant effect of

FC on bank performance.

To conclude the motivation for our empirical framework, we discuss the use of

macroeconomic indicators, INF and GDP, as control variables. The way INF influences bank

profits depend on whether the rate of increase in inflation is slower compared to wages and other

operating expenses. Studies such as Bourke (1989), Molyneux and Thornton (1992), Pasiouras

and Kosmidou (2007), Athanasoglou et al. (2008), Claeys and Vander Vennet (2008), García-

Herrero, Gavilá and Santabárbara (2009), Kasman, Tunc, Vardar and Okan, (2010), and

Trujillo-Ponce
(2013) show that inflation and profits are positively related. However, if inflation is

unanticipated and banks fail to adjust their interest rates, costs may escalate faster than revenues,

thus adversely affecting bank profits. These discussions imply that a priori there is an unknown

effect of INF on profits.

Finally, we turn to the role of GDP, which influences bank performance through the

business cycle. When the economy is not doing well (recession), the quality of the loan portfolio

worsens. This leads to credit losses, which reduces bank profits. In addition, profits are likely be

pro-cyclical given that economic influences net interest income through lending activity. It is the

demand for lending that is increasing (decreasing) in cyclical upswings (downswings) as argued

by Dietrich and Wanzenried (2014). Additionally, there is a vast literature that shows that

economic growth stimulates the financial system (e.g., Demirguc-Kunt and Huizinga, 1999;

Bikker and Hu, 2002; Athanasoglou et al., 2008; Albertazzi and Gambacorta, 2009). We,

therefore, expect that the GDP growth rate will predict bank performance positively.

III. Results

A. Benchmark model

We begin the discussion of our results with Table III, where we estimate the traditional

determinants of banking sector performance. The panel data regression is estimated using the

two- step GMM system dynamic panel estimator. The results are provided column-wise

representing each of the four dependent variables, which are measures of banking sector

performance. This regression sets the benchmark for the rest of the analysis because it is

estimated without the FinTech variable. Several observations are noteworthy from Table III. The

first regards which of the four proxies for banking sector performance perform best from a

statistical point of view. The weakest model has the dependent variable as ROE: 4 of the 10

determinants are statistically

significant. When the dependent variable is NIM, ROA, or EA, 60% of the determinants are

statistically irrelevant (insignificant). The variables that are significant regardless of the

dependent variable are CTI and GDP, followed by CAP and INF. LLP, DG, and IIS are

statistically significant in two of the four models. Finally, FC is the only variable with no

explanatory power.

B. Effect of FinTech on bank performance

We now examine how, if at all, FinTech affects bank performance. We begin with Table IV,

where we present results from a test of the contemporaneous effect of FinTech on each of the

four measures of bank performance. In all four models, the slope coefficient on FinTech is

statistically different from zero. FinTech negatively effects NIM (-0.019, t-stat. = -2.67), ROA (-

0.029, t-stat.

= -3.04), ROE (-0.138, t-stat. = -2.72), and YEA (-0.038, t-stat. = -3.51). These slope coefficients

imply that with one extra FinTech firm entering the financial services industry, NIM, ROA, ROE,

and YEA decline by 0.38%, 7.30%, 1.73%, and 0.38% of the mean value, respectively. (The

mean values of NIM, ROA, ROE, and YEA are 4.94%, 0.40%, 7.99% and 10.11%, respectively,

as noted in Table I).

In our next set of results, we test whether FinTech predicts bank performance. As with the

contemporaneous results, we find from results presented in Table V that FinTech negatively

predicts NIM (-0.026, t-stat. = -2.86), ROA (-0.037, t-stat. = -3.74), ROE (-0.165, t-stat. = -1.83),

and YEA (-0.049, t-stat. = -4.47). In terms of economic significance, these slope coefficients

imply that with every new FinTech firm introduced into the market, NIM, ROA, ROE, and YEA

decline by 0.53%, 9.32%, 2.07%, and 0.48% (of their sample means), respectively (see Table

IX).
 We test whether the effect of FinTech on bank performance is shaped by bank

characteristics. The motivation for examining bank characteristics in shaping this relation has

roots in Iannotta et al. (2007), Dietrich and Wanzenried (2011, 2014), Matousek, Rughoo,

Sarantis and
Assaf (2015), Köster and Pelster (2017), and Talavera, Yin and Zhang (2018). These studies

show that bank characteristics are instrumental in shaping bank performance. Motivated by these

studies, we consider two aspects of bank characteristics, market value (MV) and firm age (FA).

High MV firms, because they have greater visibility and are expected to be more liquid, are more

competitive and efficient. We, therefore, expect that the way FinTech impacts high MV (MV2)

banks will differ compared to low MV (MV1) banks. In addition, with age (maturity), we expect

the effects of FinTech to be heterogeneous.

Our results are reported in Table VI. We observe clear patterns in the FinTech effect

conditional on firm characteristics. Based on MV, the effect of FinTech is negative for both large

and small banks but stronger for large banks. A possible explanation is that smaller firms can

adapt to technological innovation faster than larger firms (Dos Santos and Peffers, 1995; Giunta

and Trivieri, 2007; Haller and Siedschlag, 2011; and Scott, Reenen and Zachariadis, 2017). The

literature argues that larger firms must bear substantially more costs in reorganizing because of

their legacy systems compared to smaller firms. When there are technological transformations,

Scott et al. (2017) argue that it is the small firms that are more apt at adjusting to internal and

external changes related to their operations. On the other hand, larger firms may respond slowly

due to legacy systems that demand substantial modification.

Mature banks are negatively affected by FinTech, with a slope of -0.018 (t-stat.

= -1.69), -0.028 (t-stat. = -2.43), and -0.037 (t-stat. = -2.87) when NIM, ROA, and YEA are

dependent variables, respectively. However, younger banks are positively affected with a slope

coefficient of 0.052 (t-stat. = 1.87) and 0.020 (t-stat. = 2.42) when NIM and YEA are dependent

variables, respectively. Previous studies find younger firms to be more successful in adopting

and
using technological innovation. This is because they adopt technological innovation more

(Giunta and Trivieri, 2007; Haller and Siedschlag, 2011).

Predictability is also dependent on bank characteristics. We see that regardless of bank

size, FinTech predicts performance; however, FinTech matters more to small banks than to large

banks. With age, on the other hand, FinTech predicts performance only for mature banks and not

for relatively young banks.

In our sample, we have both private banks and state-owned banks. Results can be

summarized as follows. In additional results reported in Table VII, we focus on controlling for

bank ownership. The effect of FinTech on the performance of state-owned banks is noteworthy.

We find that NIM is unaffected by FinTech firms, while FinTech negatively and statistically

significantly influences ROA (-0.043, t-stat. = -2.20), ROE (-0.276, t-stat. = -1.79), and YEA

(-0.036, t-stat. = -2.65). However, when it comes to FinTech’s ability to predict performance, we

see that it predicts NIM (-0.027, t-stat. = -3.15), ROA (-0.034, t-stat. = -3.29) and YEA (-0.050, t-

stat. = -3.06). FinTech, however, does not predict ROE for state-owned banks. With respect to

private banks, we see that FinTech contemporaneously affects all four performance measures but

predicts only ROA (-0.052, t-stat. = -2.10) and YEA (-0.051, t-stat. = -2.93). Overall, we see that

the negative effect of FinTech is stronger for state-owned banks compared to private banks. This

is because state-owned (public) banks are likely to be slow in adopting and using technological

innovations compared to private firms. While private banks generally adopt innovations

proactively, state-owned firms tend to introduce innovations reactively due to a bureaucratic

culture.3 Additionally, state-owned firms are slow in adopting technological innovation due to

3
This point is made with respect to firms by Troshani, Jerram, and Hill (2011).
budget-timing restrictions (Caudle, Gorr, and Newcomer, 1991). They depend on budgeting

cycle constraints driven by political influences or periodic changes in political priorities (Caudle

et al.,

1991). In another strand of literature, studies point out that the state-owned banks are less

competitive compared to private banks. Cull, Peria, and Verrier (2017), for instance, argue that

the inefficiency in operating and low intermediation quality due to high agency costs that

characterize state-owned banks reduce their competitiveness. Several studies end up comparing

competition between state-owned banks and private banks through examining their performance.

They found strong evidence favouring private banks in Latin America (Micco, Panizza, and

Yane, 2007), Asia (Williams and Nguyen, 2005; Micco et al., 2007; Cornett, Guo, Khaksari, and

Tehranian, 2010); MENA (Farazim Feyen, Rocha, 2013); and Europe (Bonin, Hasan, and

Wachtel, 2005a,b; Iannotta, Nocera, and Sironi, 2007; Yildirim and Philippatos, 2007).

Therefore, the state-owned banks are affected more than private banks when competition in the

market increases due to new entrants (FinTech).

We conclude the discussion of results with a note on the effect of some of the core

variables on bank performance judging only from Table III as results are more or less consistent.

We find mixed results on the signaling hypothesis consistent with the literature. For example,

while CAP positively influences ROA, it negatively impacts ROE and YEA. SIZE has a positive

effect (but significant only when ROA is the dependent variable). This is consistent with our

argument that large banks enjoy economies of scale, access to cheaper capital, and risk

diversification. CTI consistently appears with a negative sign on performance corroborating our

argument (supported by the literature) that an increase in CTI implies declining bank efficiency.

Finally, LLP appears with a negative sign when NIM and ROA are dependent variables because a

higher LLP, as we argued earlier, implies cover for default loans.

C. Robustness tests

We mount two lines of inquiry to confirm robustness, the lack of which could compromise our

main conclusions. The first is the effect of the GFC. Several studies (see Berger and Bouwman,

2013; Matousek et al., 2015; Vazquez and Federico, 2015; Olson and Zoubi, 2017) show that the

GFC impacted the banking sector. One limitation of our work, therefore, is that we do not

specifically control for the GFC effect. We do so now by including a dummy variable in the

regression model. This variable has a value of 1 for the years 2007 and 2008 and a value of 0 for

the remaining years. The results suggest that the effect of FinTech on bank performance is

insensitive to the inclusion of the GFC control (see Table VIII). FinTech still impacts all four

measures of bank performance negatively and statistically significantly.

Our second inquiry relates to the use of an alternative estimator. We use what is popular

in this literature: a fixed effects (firm and year) panel estimator. The results, also reported in

Table VIII, reveal that the effects of FinTech on bank performance are insensitive to the use of

an alternative estimator.

From these robustness tests, we conclude that the effects of FinTech we document are

insensitive to the GFC and the use of a different (popular) estimator.

IV. Concluding remarks

This paper is inspired by the phenomenal growth of FinTech firms in Indonesia and, indeed,

globally. Exceedingly little is known about whether such firms impact the banking sector. We

develop our hypothesis—that FinTech growth hinders bank performance—out of this gap in the

literature. We collect a unique sample of data on banks and FinTech firms in Indonesia. With a

dataset comprising a panel of 41 banks (spanning the period 1997 to 2017), we estimate both a
banking performance determinant and a predictability model. We augment this traditional

banking performance model with our FinTech measure. Given the lack of understanding of how,

if at all, FinTech affects banking sector performance, we use four measures of performance: ratio

of net interest income to total assets (NIM), ratio of net income to total assets (ROA), ratio of net

income to total equity (ROE), and yield on earning assets (YEA). We show from a range of

different models that FinTech negatively and significantly impacts all four performance

measures. A subset of our results suggests that high value, mature, and state-owned banks are

relatively more negatively impacted by FinTech compared to lower valued, younger, and private

banks. Our results are robust in the sense that they hold across most proxies of bank

performance, multiple control variables, controls for GFC, different composition of firm panels,

and a different estimator.

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 Figure I: FinTech firms in Indonesia in 1998-2017
This figure plots the number and accumulated number of FinTech firms established in each year in Indonesia in 1998-
2017. Data are obtained from the Fintech Indonesia Association.

140

120

100

80

60

40

20

0
1998 2000 2002 2004
Pre-proof
2006 2008 2010

Accummulated number of fintech firms

2012

Number of fintech firms established in a year

2014 2016
Journal Pre-proof

31
 Journal Pre-proof
Table I: Variable description
This table contains descriptions and sources of variables.

Variable Definition Source Expected sign

FinTech Number of financial technology (FinTech) companies founded Fintech Indonesia Association
NIM Ratio of net interest income to total assets Datastream
ROA Ratio of net income to total assets Datastream
ROE Ratio of net income to total equities Datastream
YEA Yield on earning assets Datastream
SIZE Log of total asset ($US million) Datastream +/-
CAP Capital ratio equals equity over total assets Datastream +/-
CTI Cost-to-income ratio equals total expenses over total generated revenues Datastream -
LLP Loan loss provisions equals loan loss provisions over total loans Datastream -
DG Annual growth of deposits Datastream +/-
IIS Interest income share equals total interest income over total income Datastream -
FC Funding cost equals interest expenses over average total deposits Datastream -
GDP Indonesia annual GDP growth rate Global Financial Database +
INF Indonesia annual inflation rate Global Financial Database +/-

32
 Table II: Descriptive statistics
This table reports selected descriptive statistics for the variables. The statistics include the mean, median,
standard deviation (SD), 25% percentile, 75% percentile, skewness, kurtosis, the Jarque-Bera (JB) test of non-
normality of returns, and a panel stationarity (Levin–Lin–Chu) test examining the null hypothesis of a unit root
(t-statistic is reported. The null hypothesis of normality is based on the p value from the JB test.

Mean Median SD 25% 75% Skewness Kurtosis

FinTech 6.850 2.000 9.672 1.000 9.000 1.791 5.055
NIM (%) 4.943 4.903 3.292 3.951 6.113 -1.969 13.123
ROA (%) 0.397 1.000 4.237 0.455 1.617 -5.964 41.270
ROE (%) 7.988 7.023 15.221 2.922 12.136 1.589 18.369
YEA (%) 10.112 9.444 2.923 8.200 11.272 1.558 6.186
SIZE 7.267 7.129 1.902 5.695 8.769 0.143 2.003
CAP (%) 11.968 10.960 6.931 8.585 14.834 -0.083 10.710
CTI (%) 55.976 54.446 19.185 44.909 64.596 1.657 8.333
LLP (%) 1.714 0.629 4.718 0.170 1.509 5.523 35.919
DG (%) 16.322 13.700 20.123 5.510 23.524 1.238 7.191
IIS (%) 91.175 92.680 6.355 87.913 95.779 -0.991 3.461
FC (%) 8.929 6.728 11.304 5.158 8.225 5.699 38.278
GDP (%) 3.210 4.912 5.725 2.777 5.954 -2.770 10.233
INF (%) 7.669 5.939 13.343 3.359 9.400 2.103 10.793

33
 Table III: Determinants of bank performance
This table reports regression results from the bank performance determinants model. The model has the
following form:
������,𝑡 = � + �1 ������,��−1 + �2 �𝐴𝑃��,𝑡 + �3 ���𝑍���,𝑡 + �4 ������,𝑡 + �5 𝐿𝐿𝑃𝑖 ,𝑡 + �6 ����,𝑡 + �7 𝐼𝐼�𝑖 ,𝑡

+ �8 ����,𝑡 +

�9�����𝑡 + �10 ��𝑁�𝑡 + ����,𝑡

In this regression, ���� is measured by NIM, ROA, ROE, and YEA, and the description of the control variables
are
noted in Table I. The estimation method is the two-step GMM system dynamic panel estimator. The Arellano-
Bond (AB) test for serial correlation is based on the null hypothesis of second-order autocorrelation in the first
differenced residuals. The p-value associated with the Hansen test for determining the validity of the
overidentifying restrictions is reported. Finally, *, **, and *** denote significance at the 10%, 5% and 1%
levels, respectively.

NIM ROA ROE YEA

PER(-1) 0.183 0.069 0.181* 0.416***
(1.41) (1.41) (1.76) (5.38)
CAP -0.005 0.056** -0.896*** -0.084**
(-0.18) (2.12) (-3.04) (-2.21)
SIZE -0.115 0.242*** -0.230 -0.155
(-0.85) (3.84) (-0.37) (-1.30)
CTI -0.107*** -0.028*** -0.337*** -0.046***
(-5.53) (-3.32) (-4.19) (-3.13)
LLP -0.075** -0.550*** -0.338 0.070
(-2.27) (-8.57) (-0.58) (0.92)
DG -0.019*** -0.004 0.037 -0.022***
(-4.50) (-1.07) (0.95) (-3.99)
IIS 0.060** -0.025 -0.056 0.105***
(2.10) (-1.49) (-0.30) (4.49)
FC -0.010 0.003 0.062 -0.004
(-1.04) (0.30) (1.32) (-0.33)
GDP -0.102*** -0.096*** -0.483*** -0.240***
(-4.23) (-3.34) (-2.59) (-7.39)
INF 0.026*** 0.015*** -0.017 0.029***
(2.90) (3.85) (-0.31) (4.62)
Constant 6.472* 3.236 43.696*** 2.110
(1.77) (1.61) (2.62) (0.63)
AR(2) 0.382 0.268 0.441 0.759
Hansen 0.722 0.588 0.527 0.346
Observation 374 494 492 494
 Table IV: Contemporaneous effect of FinTech firms on bank performance
This table reports regression results from the bank performance determinants model augmented with the
FinTech
variable. The regression model has the following form:
������,𝑡 = � + �1 ������𝑒𝑐ℎ𝑡 + �2 ������,��−1 + �3 �𝐴𝑃��,𝑡 + �4 ���𝑍�𝑖 ,𝑡 + �5 ������,𝑡 + �6 𝐿𝐿𝑃𝑖 ,𝑡

+ �7 ����,𝑡 +

�8 𝐼𝐼���,𝑡 + �9 ����,𝑡 + �10 �����𝑡 + �11 ��𝑁�𝑡 + ����,𝑡

In this regression, ���� is measured by NIM, ROA, ROE, and YEA, and the description of the control variables
are
noted in Table I. The estimation method is the two-step GMM system dynamic panel estimator. The Arellano-
Bond (AB) test for serial correlation is based on the null hypothesis of second-order autocorrelation in the first
differenced residuals. The p-value associated with the Hansen test for determining the validity of the
overidentifying restrictions is reported. Finally, *, **, and *** denote significance at the 10%, 5% and 1%
levels, respectively.

NIM ROA ROE YEA

FinTech -0.019*** -0.029*** -0.138*** -0.038***
(-2.67) (-3.04) (-2.72) (-3.51)
PER(-1) 0.168 0.060 0.149 0.367***
(1.43) (1.28) (1.38) (4.80)
CAP 0.006 0.086*** -0.761** -0.049
(0.17) (2.99) (-2.57) (-1.19)
SIZE -0.091 0.300*** -0.177 -0.096
(-0.69) (5.45) (-0.24) (-0.71)
CTI -0.110*** -0.026*** -0.318*** -0.044**
(-6.15) (-2.61) (-3.92) (-2.48)
LLP -0.065* -0.542*** -0.290 0.109
(-1.74) (-8.94) (-0.52) (1.32)
DG -0.021*** -0.007* 0.022 -0.026***
(-4.10) (-1.83) (0.64) (-4.58)
IIS 0.064** -0.016 -0.079 0.119***
(2.25) (-0.96) (-0.37) (4.67)
FC -0.012 -0.001 0.023 -0.007
(-1.55) (-0.14) (0.54) (-0.47)
GDP -0.107*** -0.103*** -0.530*** -0.249***
(-4.26) (-2.89) (-2.74) (-7.48)
INF 0.023*** 0.012*** -0.032 0.024***
(2.93) (2.78) (-0.66) (3.78)
Constant 6.236* 1.979 45.065** 0.824
(1.87) (1.08) (2.24) (0.25)
AR(2) 0.402 0.234 0.476 0.892
Hansen 0.717 0.469 0.576 0.362
Observation 374 494 492 494
 Table V: Lag effect of FinTech firms on bank performance
This table reports regression results of FinTech firms’ influence on bank performance with a one-period lag.
The predictive regression model takes the following form:
������,𝑡 = � + �1 ������𝑒𝑐ℎ𝑡 −1 + �2 ������,��−1 + �3 �𝐴𝑃��,𝑡 + �4 ���𝑍�𝑖 ,𝑡 + �5 ����𝑖 ,𝑡 + �6 𝐿𝐿𝑃𝑖 ,𝑡

+ �7 ����,𝑡 +

�8 𝐼𝐼���,𝑡 + �9 ����,𝑡 + �10 �����𝑡 + �11 ��𝑁�𝑡 + ����,𝑡

In this regression, ���� is measured by NIM, ROA, ROE, and YEA, and the description of the control variables
are
noted in Table I. The estimation method is the two-step GMM system dynamic panel estimator. The Arellano-
Bond (AB) test for serial correlation is based on the null hypothesis of second-order autocorrelation in the first
differenced residuals. The p-value associated with the Hansen test for determining the validity of the
overidentifying restrictions is reported. Finally, *, **, and *** denote significance at the 10%, 5% and 1%
levels, respectively.

NIM ROA ROE YEA

FinTech(-1) -0.026*** -0.037*** -0.165* -0.049***
(-2.86) (-3.74) (-1.83) (-4.47)
PER(-1) 0.174 0.072 0.151 0.375***
(1.49) (1.26) (1.37) (5.13)
CAP 0.006 0.084*** -0.774** -0.049
(0.20) (2.84) (-2.37) (-1.20)
SIZE -0.078 0.301*** -0.154 -0.089
(-0.61) (4.95) (-0.19) (-0.66)
CTI -0.110*** -0.024** -0.323*** -0.044**
(-6.39) (-2.31) (-3.77) (-2.49)
LLP -0.060 -0.537*** -0.277 0.108
(-1.63) (-8.87) (-0.50) (1.41)
DG -0.021*** -0.006* 0.023 -0.025***
(-4.20) (-1.73) (0.65) (-4.53)
IIS 0.065** -0.017 -0.072 0.121***
(2.31) (-0.96) (-0.34) (4.95)
FC -0.011* -0.001 0.033 -0.006
(-1.69) (-0.09) (0.76) (-0.44)
GDP -0.103*** -0.098*** -0.494** -0.243***
(-4.44) (-2.98) (-2.36) (-7.27)
INF 0.022*** 0.009** -0.042 0.022***
(2.97) (2.00) (-0.78) (3.52)
Constant 6.099* 1.969 44.205** 0.435
(1.88) (1.03) (2.00) (0.13)
AR(2) 0.466 0.182 0.459 0.882
Hansen 0.765 0.488 0.524 0.378
Observation 374 494 492 494
Table VI: Effect of FinTech firms on bank performance sorted by bank characteristics
This table reports regression results of the effect of FinTech firms on bank performance for panels sorted by
bank characteristics, such as market value (MV) and firm age (FA). MV1 and FA1 contain the bottom-half of
banks with the lowest MV and FA while MV2 and FA2 are the top-half of banks, those with the highest MV
and FA. These categorizations are based on the mean values of MV and FA. The regression models take the
following forms:
������,𝑡 = � + �1 ������𝑒𝑐ℎ𝑡 + �2 ������,��−1 + �3 �𝐴𝑃��,𝑡 + �4 ���𝑍�𝑖 ,𝑡 + �5 ������,𝑡 + �6 𝐿𝐿𝑃𝑖 ,𝑡 + �7 ����,𝑡

������,𝑡 =��
8 𝐼𝐼+��� ,𝑡 + �9 ����
�1 ������𝑒𝑐ℎ ,𝑡 + �10 �����𝑡 + �11 ��𝑁�𝑡 + ����,𝑡
𝑡 −1 + �2 ������,��−1 + �3 �𝐴𝑃��,𝑡 + �4 ���𝑍�𝑖 ,𝑡 + �5 ����𝑖 ,𝑡 + �6 𝐿𝐿𝑃𝑖 ,𝑡 + �7
����,𝑡 +

�8 𝐼𝐼���,𝑡 + �9 ����,𝑡 + �10 �����𝑡 + �11 ��𝑁�𝑡 + ����,𝑡

In this regression, ���� is measured by NIM, ROA, ROE, and YEA, and the description of the control variables are
noted in Table I. The estimation method is the two-step GMM system dynamic panel estimator. We report the
coefficient �1 of FinTech variable. Finally, *, **, and *** denote significance at the 10%, 5% and 1% levels,
respectively.

Panel A: Contemporaneous effect

NIM ROA ROE YEA
MV1 -0.014* -0.026** -0.121* -0.041***
(-1.86) (-2.50) (-1.93) (-3.05)
MV2 -0.024*** 0.000 -0.153* -0.139***
(-4.97) (-0.04) (-1.85) (-3.90)
FA1 0.052* -0.010 -0.042 0.020**
(1.87) (-0.75) (-0.31) (2.42)
FA2 -0.018* -0.028** -0.106 -0.037***
(-1.69) (-2.43) (-1.42) (-2.87)
Panel B: Lag effect
NI M ROA ROE YEA
MV1 -0.019** -0.032** -0.145* -0.051***
(-2.19) (-2.55) (-1.87) (-2.95)
MV2 -0.026** 0.000 -0.250*** -0.124***
(-2.55) (-0.02) (-3.19) (-4.00)
FA1 0.096 -0.008 -0.192 0.009
(1.38) (-0.29) (-0.99) (0.53)
FA2 -0.017 -0.034** -0.126 -0.043***
(-1.15) (-2.45) (-1.55) (-3.34)
 Table VII: Effect of FinTech firms on bank performance sorted by ownership
This table reports regression results of the effect of FinTech firms on the performance of state- and private-
owned banks. The regression models take the following forms:
������,𝑡 = � + �1 ������𝑒𝑐ℎ𝑡 ∗ ������𝑖 + �2 ������𝑒𝑐ℎ𝑡 ∗ (1 − ������𝑖 ) + �3 ������,��−1 + �4

�𝐴𝑃��,𝑡 + �5 ���𝑍�𝑖 ,𝑡 +

�6 ������,𝑡 + �7 𝐿𝐿𝑃��,𝑡 + �8 ����,𝑡 + �9�����𝑖 ,𝑡 + �10 ����,𝑡 +

������,𝑡 �
= 11������ 𝑡 + �12 ��
+ �1 ������𝑒𝑐ℎ 𝑁�𝑡 + ����,𝑡
𝑡 −1 ∗ ������𝑖 + �2 ������𝑒𝑐ℎ𝑡 −1 ∗ (1 − ������𝑖 ) + �3
������,��−1 + �4 �𝐴𝑃��,𝑡 +

�5 ���𝑍�𝑖 ,𝑡 + �6 ����𝑖 ,𝑡 + �7 𝐿𝐿𝑃𝑖 ,𝑡 + �8 ����,𝑡 + �9 𝐼𝐼���,𝑡 + �10

����,𝑡 + �11 �����𝑡 + �12 ��𝑁�𝑡 + ����,𝑡
The first regression estimates the contemporaneous effect (Panel A) of FinTech while the second regression
estimates
and YEA, the
andpredictive abilityof(Panel
the description B)variables
control of FinTech. In this
is noted in regression, ���� isismeasured
Table I. ������ a dummybyvariable
NIM, ROA, ROE,
that equals
1 if
the firm is state owned and 0 otherwise (private owned). The estimation method is the two-step GMM system
dynamic panel estimator. The Arellano-Bond (AB) test for serial correlation is based on the null hypothesis of
second-order autocorrelation in the first differenced residuals. The p-value associated with the Hansen test for
determining the validity of the overidentifying restrictions is reported. Finally, *, **, and *** denote
significance at the 10%, 5% and 1% levels, respectively.
 Journal Pre-proof

Panel A: Contemporaneous effect

NIM ROA ROE YEA
FinTech*STATE -0.008 -0.043** -0.276* -0.036***
(-0.35) (-2.20) (-1.79) (-2.65)
FinTech*(1-STATE) -0.020*** -0.026*** -0.100* -0.038***
(-2.87) (-3.21) (-1.79) (-2.94)
PER(-1) 0.173 0.057 0.151 0.363***
(1.55) (1.14) (1.35) (4.28)
CAP 0.006 0.082*** -0.823** -0.048
(0.19) (2.94) (-2.52) (-1.10)
SIZE -0.103 0.308*** 0.068 -0.097
(-0.77) (5.40) (0.09) (-0.69)
CTI -0.107*** -0.027** -0.340*** -0.044**
(-6.03) (-2.51) (-3.91) (-2.38)
LLP -0.067** -0.542*** -0.243 0.110
(-2.13) (-9.16) (-0.42) (1.29)
DG -0.022*** -0.006* 0.026 -0.026***
(-4.54) (-1.88) (0.69) (-4.43)
IIS 0.064** -0.016 -0.037 0.119***
(2.17) (-0.98) (-0.20) (4.72)
FC -0.012 -0.002 0.043 -0.007
(-1.55) (-0.29) (0.90) (-0.48)
GDPC -0.103*** -0.106*** -0.540*** -0.249***
(-3.94) (-3.14) (-2.70) (-7.45)
INF 0.024*** 0.011** -0.033 0.024***
(2.91) (2.37) (-0.69) (3.73)
Constant 6.146* 2.110 41.077** 0.840
(1.78) (1.16) (2.12) (0.26)
AR(2) 0.442 0.257 0.498 0.906
Hansen 0.764 0.525 0.451 0.364
Observation 374 494 492 494
Panel B: Lag effect
N IM ROA ROE YEA
FinTech(-1)*STATE -0.027*** -0.034*** -0.092 -0.050***
(-3.15) (-3.29) (-1.11) (-3.06)
FinTech(-1)*(1-STATE) -0.014 -0.052** -0.418 -0.051***
(-0.50) (-2.10) (-1.61) (-2.93)
PER(-1) 0.174 0.067 0.147 0.371***
(1.53) (1.19) (1.26) (4.45)
CAP 0.006 0.082*** -0.820** -0.049
(0.20) (2.87) (-2.48) (-1.18)
SIZE -0.092 0.302*** -0.213 -0.090
(-0.70) (5.04) (-0.24) (-0.65)
CTI -0.108*** -0.026** -0.343*** -0.044**
(-6.13) (-2.30) (-3.66) (-2.49)
LLP -0.066** -0.537*** -0.290 0.112
(-2.15) (-9.00) (-0.50) (1.29)
DG -0.022*** -0.006* 0.022 -0.025***
(-4.55) (-1.68) (0.58) (-4.52)
IIS 0.067** -0.018 -0.118 0.122***
(2.31) (-1.04) (-0.55) (4.63)
FC -0.011 -0.002 0.035 -0.006
(-1.57) (-0.18) (0.76) (-0.42)
GDPC -0.101*** -0.101*** -0.518** -0.244***
(-4.28) (-2.96) (-2.10) (-7.04)
INF 0.023*** 0.010** -0.034 0.022***

39
 (2.96) (2.12) (-0.69) (3.56)
Constant 5.794* 2.124 50.541** 0.458
(1.74) (1.17) (2.18) (0.14)
AR(2) 0.503 0.184 0.482 0.873
Hansen 0.789 0.537 0.644 0.377
Observation 374 494 492 494
 Table VIII: Robustness tests
This table reports results of robustness tests for the FinTech firms’ influence on bank performance. We employ two
additional tests. First, we control for the global financial crisis period and estimate the regression with GMM system
two-step estimator as before. Second, we estimate the model with panel fixed effects (firm and year effects). The
coefficient of FinTech and its t-statistic are reported, and ** and *** denote significance at the 5% and 1% levels,
respectively. The contemporaneous effects of FinTech are reported in Panel A while Panel B reports FinTech’s
ability to predict bank performance.

Panel A: Contemporaneous effect

NIM ROA ROE YEA
Control for global financial crisis -0.017** -0.030*** -0.137*** -0.036***
(-2.54) (-3.50) (-2.73) (-3.57)
Fixed effects -0.062*** -0.062** 0.267 -0.071***
(-3.02) (-2.38) (0.97) (-2.81)
Panel B: Lag effect
N IM ROA ROE YEA
Control for global financial crisis -0.023*** -0.038*** -0.177** -0.048***
(-2.69) (-3.64) (-2.33) (-4.36)
Fixed effects -0.047** -0.045** 0.272 -0.043**
(-2.52) (-1.99) (1.13) (-2.03)
 Table IX: Economic significance
This table reports the economic significance of all statistical results presented in earlier tables. It shows how NIM,
ROA, ROE and YEA sample means are affected by every new FinTech firm introduced into the market.

Panel A: Contemporaneous effect

NIM ROA ROE YEA
Main regression -0.38% -7.30% -1.73% -0.38%
MV1 -0.28% -6.55% -1.51% -0.41%
MV2 -0.49% 0.00% -1.92% -1.37%
FA1 1.05% -2.52% -0.53% 0.20%
FA2 -0.36% -7.05% -1.33% -0.37%
FinTech*STATE -0.16% -10.83% -3.46% -0.36%
FinTech *(1-STATE) -0.40% -6.55% -1.25% -0.38%
Control for global financial crisis -0.34% -7.56% -1.72% -0.36%
Fixed effects -1.25% -15.62% 3.34% -0.70%
GMM difference two-step -0.04% -16.62% -0.63% -0.48%
Panel B: Lag effect
NIM ROA ROE YEA
Main regression -0.53% -9.32% -2.07% -0.48%
MV1 -0.38% -8.06% -1.82% -0.50%
MV2 -0.53% 0.00% -3.13% -1.23%
FA1 1.94% -2.02% -2.40% 0.09%
FA2 -0.34% -8.56% -1.58% -0.43%
FinTech(-1)*STATE -0.55% -8.56% -1.15% -0.49%
FinTech(-1)*(1-STATE) -0.28% -13.10% -5.23% -0.50%
Control for global financial crisis -0.47% -9.57% -2.22% -0.47%
Fixed effects -0.95% -11.34% 3.41% -0.43%
GMM difference two-step -0.14% -12.59% -0.91% -0.74%
 Do financial technology firms influence bank performance?
HIGHLIGHTS
 We develop the hypothesis that FinTech negatively influences bank performance.
 We have a sample of 41 banks and data on FinTech firms
 We show that FinTech firms negatively influences bank performance.
 Multiple robustness tests are undertake to confirm our main finding.