1.2.

Theoretical Background
According to existing studies, the impact mechanism of fintech on the risk taking of banks
can be simplified into the following two directions:
First, fintech forms a competitive relationship with commercial banks, crowding out the
traditional deposit and loan business from banks, increasing capital cost, and finally leading to
increased risk taking. For example, mobile payment has been widely used in offline
consumption scenarios (Kim et al, 2015). In 2018, China ranked first in the world with the
mobile payment scale of 277.4 trillion CNY. Fintech companies use new technology to tap
into credit markets, expanding the range of customers, especially small and micro loan
groups, and enriching the financial services that traditional commercial banks do not provide
or cannot provide adequately (Gomber et al., 2018). As a result, bank deposit and loan spreads
narrowed (Saunders and Schumacher, 2000).
Second, the integrated development of commercial bank and fintech improves the efficiency
of financial services, improves operation management and reduces management costs, finally
reducing the level of risk taking. The new consensus among fintech innovators is that future
collaboration and empowerment will deliver more value than competition. The proper
application of fintech will reduce the operation and management costs of commercial banks
and enhance their profitability, thus leading to a weakened motivation to take risks (Hellmann
et al.,2000). For example, big data can be applied to operation optimization, customer portrait,
precision marketing, investment management and risk control, etc. Big data technology can
quickly identify suspicious information and business violations. By integrating all information
systems within a bank, cloud computing can eliminate information islands and realize
centralized management of data. AI investment can help to overcome artificial subjective
defects
In addition, the risk-taking tendency of commercial banks is also influenced by bank’s
individual 8 characteristics such as business strategy and asset size, as well as external factors
such as macroeconomic environment, market structure and monetary policy (Ariss, 2010;
Jimenez et al., 2013; Hou et al., 2014). In conclusion, the influence mechanism of FinTech on
commercial banks' risk-taking is plotted in Figure 2.

2.1. Definitions of FinTech

In the past ten years, FinTech has been developing strongly and making great influence,
contributing to changing the appearance of the financial sector in the world. However, there is
no uniform meaning of FinTech. For instance, in 2016, the Financial Stability Board (FSB)
defined FinTech as innovation driven monetary advancement, while Navaretti et al. (2018)
characterize FinTech as FinTech as FinTech organizations and arrange FinTech as indicated
by the kind of business, for example, FinTech installment organizations and FinTech loaning
organizations. In China, Qiu et al. (2018) accepts that FinTech alludes to new FinTech items,
for example, Yu'e Bao, while Yang (2018) claimes that is another monetary biology shaped
external the customary monetary framework. Moreover, the “FinTech Development Plan
(2019-2021)” issued by the People's Bank of China (PBOC) in August 2019 defined FinTech
as the utilization of arising innovations.
2.2. Fintech Development Trend
The core of FinTech is the mix of monetary action and cutting edge innovation. Mechanical
advancements are the main thrust behind the improvement of FinTech. In this way, as
indicated by mechanical turn of events, we partition the advancement of FinTech in China
into three phases as follows.
In the recent years, the startup trend has spread everywhere in Vietnam. More and more
startups have been established, especially in fintech area. Vietnam had about 40 fintech
companies in 2016 and reached more than 150 companies by the end of June 2019. In
Vietnam, although fintech is still quite new, the number of fintech companies is increasing
quickly. In particular, most fintech companies are providing customers with online payment
tools (such as Onepay, 123 Pay, Vina Pay or MoMo). Also, some fintech companies are
providing the services of money transfer (such as Matchmove, Cash2vn or Remittance Hub),
mobilizing community capital (such as FundStart or Comiloca), and online lending (such as
LoanVi or Tima). With the growing trend of fintech development, Vietnam has attracted
many foreign investors in this field. For example, in early 2018, Lotte Card (belonging to
Lotte Group of Korea) spent nearly VND 1,700 billion to acquire Techcom Finance from
Vietnam Techcombank. Currently, this company (Lotte Finance) is providing consumer
lending services in Vietnam.
Fintech companies have provided customers with more options when accessing financial
services, instead of customers only accessing through the traditional banking model as before.
Moreover, the services provided by fintech companies are often creative so they will help
customers have more interesting and especially optimal experiences. Therefore, fintech has a
significant impact on the banking industry. If banks do not update this trend, it will become
lagging, not keeping up with global development trends, which will significantly affect the
long-term development of the bank. Recognizing this, in March 2017, the State Bank of
Vietnam established a Fintech Steering Committee to support the completion of the legal
framework and facilitate fintech companies’ development. Along with that, many commercial
banks are also actively cooperating with fintech companies to take advantage of the available
technological advantages of these companies. Indeed, the survey results of Ernst & Young
show that 85% of banks make the statement that the strategy of converting to digital banking
is their most important goal. By cooperating with fintech companies, banks will have a great
advantage when they take advantage of new technological innovations optimally, thereby
helping the bank to improve service quality, reduce cost, and increase productivity.
In recent years, the cooperation between banks and fintech companies in Vietnam has also
increased significantly, such as:
- Military Commercial Joint Stock Bank (MB) has cooperated with the Military Industry and
Telecommunications Group (Viettel) to offer modern technology application services.
Specifically, in 2010, MB launched the Bank Plus service market with many modern features,
Bank Plus has three main service packages: Bank Plus account, Bank Plus card, Mobile Bank
Plus. Through Viettel mobile network, MB introduced and connected modern banking
services to customers without necessarily expanding infrastructure and human resources.
After only one year, MB has more than 45,000 individual customers through this channel.
- In November 2012, the Online Mobile Services Joint Stock Company (M_Service) was
licensed by the State Bank of Vietnam to provide MoMo Remittance service, which was
coordinated by M_Service in cooperation with Joint Stock Commercial Bank for Foreign
Trade Vietnam (Vietcombank). In October 2015, the State Bank of Vietnam officially
licensed M_Service to provide MoMo E-wallet service
- In March 2018, Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank)
signed a cooperation agreement with Opportunity Network Company (ON), which is the
leading UK Fintech company. Currently, ON is a partner of UBS, Citizens Bank, Alfa-Bank,
London Stock Exchange Group, Intesa Sanpaolo, Caixabank, Eurobank, YPO, Dentons. This
partnership enables VietinBank’s business customers to connect with over 15,000 businesses
in 113 countries. With this cooperation, domestic businesses will have the opportunity to
expand the market with foreign partners. Along with that, VietinBank will accompany
customers in each connection business, providing financial solutions. Thereby, VietinBank
will help customers access to banking services optimally.
- At the end of 2018, Vietnam Prosperity Joint Stock Commercial Bank (VPBank) cooperated
with SAP SE Group to equip solutions for digital banking and mobile banking needs.
Accordingly, VPBank deployed SAP Omnichannel Banking (OCB) software, along with SAP
(PE) advanced support services and SAP application maintenance support (AMS) to improve
service quality.
- Besides, International Commercial Joint Stock Bank (VIB) has cooperated with FinTech
Weezi to launch MyVIB Keyboard, a social networking application. This application allows
customers using MyVIB mobile banking application to transfer money quickly within 5
minutes while chatting on social networks such as Facebook Messenger, Viber, Zalo,
Whatsapp, WeChat, Twitter, Snapchat.
- In addition, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) has
cooperated with FinTech Fastacash Company to launch F@st Mobile, which is a fast transfer
application via Facebook and Google+.
In general, fintech in Vietnam has developed very quickly in recent years. Fintech companies
also cooperate with banks to offer innovative products and services applying high technology.
Thereby, banks have favorable conditions to improve service quality, increase operational
efficiency. Fintech companies also benefit from cooperating to exploit, use data, and network
of available customers of the bank. In particular, fintech companies themselves are not
financial companies, so currency transactions still have to go through banks. In other words,
fintech companies need to work with banks to develop together. For customers, they will have
more options when accessing banking services, and they will save a lot of time and increase
efficiency when using banking services.
2.3. Regulations of FinTech
Fintech has been behind explosive growth in a whole range of financial services lately.
However, areas where fintech is causing massive changes aren’t really numerous: the bulk of
the financing (nearly 100%) goes to the payment industry, with only 1% being left for
blockchain-related sectors.
2.3.1. Regulators
Created & controlled by the government, the FTC is a centralized body charged with
regulating the fintech sector in Vietnam. Its efforts have resulted in the creation of direct
dialogue between the government & technical research companies, owing to which the latter
have been able to resolve the bulk of the legal issues they face on a daily basis. Another major
achievement has been the creation of a regulatory sandbox, a kind of a virtual environment in
which fintech-powered services can be tested for selected services.
2.3.2. Regulatory Framework
Recent years have seen an increase in the number of entrepreneurs & organizations wishing to
obtain an IPS license in Vietnam. To meet this demand, Vietnam’s government prepared a bill
on cashless payments whereby e-money is institutionalized & made a legitimate payment
instrument. Under the bill, foreign investors will only be able to own up to 50% of shares in
Vietnamese ISPs.
Though there are quite a few P2P lending platforms in Vietnam, P2P lending in Vietnam
remains basically unregulated. Therefore, the country’s central bank has been taking steps
recently to put in place a regulatory framework for P2P lending.
2.3.3 Specific Rules
Under recently amended legislation, high-tech transactions no longer include the requirement
to hold face-to-face meetings when establishing customer relationships. Opening an account
in Vietnam doesn’t require holding physical meetings either.
The country’s central bank is now busy implementing Open API in Vietnam’s banking sector.
Given that, The State Bank of Vietnam (SBV) is planning to apply on a pilot basis a
regulatory sandbox allowing fintech companies to provide some banking services from 2021.
Being an innovative legal mechanism, the sandbox allows lending institutions, providers of
fintech services & innovative companies to put their services/products to a test in a strictly
regulated legal environment. To join the sandbox, fintech companies are required to apply for
an incorporation certificate in Vietnam. Some of the services that can be tested in the sandbox
include systems of payments, Open API, P2P lending, support for KYC & other services that
rely on modern technology. Under Vietnamese legislation, setting up a fintech company in
Vietnam is a bit different from creating a banking institution. What makes it different is that it
is authorized to furnish certain banking services that are based on fintech solutions.
The seven sectors opened to fintech companies include payment, credit, peer-to-peer (P2P)
lending, customer identification support, open application programming interface (open API),
tech-based solutions, and other banking support services, according to a draft decree on the
pilot mechanism for controlling the operation of fintech companies in the banking sector
recently released by the SBV for public comment.
The central bank cited United Overseas Bank’s Fintech in ASEAN - From Startup to Scale up
Report 2019 that Vietnam saw an investment inflow worth USD 400 million into fintech last
year, accounting for 36 percent of the total investment poured in fintech in ASEAN and
ranking second in ASEAN, only after Singapore.
However, Vietnam still lacks a legal framework to regulate the operation of fintech
companies and consequently, is now facing risks resulting from these activities such as
security and data breach, usury, money laundering and terrorism financing.
3.1. Literature review
3.1.1. Literature on FinTech
We first distinguish between two related concepts: internet finance and FinTech. Internet
finance refers to the combination of finance and internet technology. FinTech refers to the
combination of finance and emerging technologies, including artificial intelligence
technology, blockchain technology, cloud computing technology, big data technology, and
internet technology. Internet finance is one type of FinTech. We first review internet finance
studies and then discuss the FinTech literature. The majority of the studies on internet finance
consist of two parts. The first part focuses on the definition of internet finance and its
characteristics. Some studies regard internet finance as a type of financial reform and believe
that the traditional finance pattern will benefit from it (Shahrokhi, 2008; Berger and Gleisner,
2009; Xie and Zou, 2012). The second group of these studies focuses on the economic and
financial results of internet finance. For example, Hou et al. (2016) show that internet finance
development alters the sensitivity of deposit growth ratios to some bank risk measures, and
the attenuation impact of internet finance development on market discipline for bank
capitalization, instead, relatively increases in non-state-owned banks. Stoica et al. (2015) find
that internet finance does not improve management efficiency. In addition, some studies also
show that internet finance destabilizes financial markets (Gottschalk and Dean, 2009;
Krueger, 2012; Syed and Nida, 2013). Existing FinTech studies explore mainly the
compositions and characteristics of FinTech. Bettinger et al. (1972) first introduced the word
FinTech, and since then, many studies have extended FinTech-related study. For example,
Christensen et al. (2003) state that FinTech includes two main categories: sustainable FinTech
and disruptive FinTech. Gomber et al. (2017) believe that there will be new business models
with the development of FinTech. Chen (2016) emphasizes that the technology of FinTech
refers mainly to communication technology, such as internet technology. In addition, some
studies explore the economic and financial consequences of FinTech. However, most of these
are only qualitative analyses. For example, Anagnostopoulos (2018) reviews the effect of
FinTech development on the broader FinTech environment. Buchak et al. (2018) discover that
to other shadow banks, FinTech lenders serve more creditworthy borrowers with better
financial services and are more active in the refinancing market. Qiu et al. (2018) argue that
the development of FinTech promotes interest rate liberalization at the depository side,
changes the bank's debt structure, reduces the proportion of banks' retail deposits, and
increases the proportion of wholesale financings, such as interbank liabilities. Fuster et al.
(2019) provide evidence that FinTech lenders process mortgage applications nearly 20%
faster than other lenders in lending markets. Tang (2019) and Vallee and Zeng (2019) also
analyze the effects of emerging technologies on the lending market. Foley et al. (2019)
suggest that cryptocurrencies are transforming black markets by enabling “black e-
commerce”. Chen et al. (2019c) find that most FinTech innovations yield substantial value to
innovators, with blockchain being particularly valuable. Zhu (2019) shows that the
introduction of big data increases price informativeness through decreased information
acquisition costs, particularly in firms in which sophisticated investors have higher incentives
to uncover information. Chiu and Koeppl (2019) argue that the U.S. corporate debt market
yields net gains from a blockchain in the range of 1–4 bps. In summary, although there have
been many studies on FinTech and internet finance in recent years, they are still limited to
discussions on the essence, characteristics, and categories of FinTech and internet finance. At
this stage, few studies examine the impact of FinTech development from the micro
perspective, such as bank FinTech. Therefore, this paper examines this issue.
3.1.2. Literature on bank credit risk
There are numerous studies on bank credit risk, and we focus on the literature regarding the
determinants of bank credit risk. This section discusses the existing studies on the macro
environment, market characteristics, and bank characteristics. First, some researchers argue
that the macroeconomic environment significantly affects bank risk. For example, Rajan
(1994) present a low-frequency business cycle theory to explain the changes in credit risk.
Borio and Zhu (2012) argue that the long-term loose monetary policy situation increases bank
credit risks. Additionally, Louzis et al. (2012) find that the same macroeconomic environment
has different effects on credit risks for different types of loans. Angeloni and Faia (2013)
shows that monetary expansion and positive productivity shock increase bank leverage and
credit risk. Finally, Antzoulatos and Chris (2014) find that a country's credit rating and
management quality also significantly affect bank credit risk. Second, some papers explore
the influence of market characteristics on bank credit risk. Boyd and De Nicolo (2005) show
that banks may enhance their risk-taking behaviors in less competitive markets. However,
Wagner (2010) finds that this impact of market competition on banks is reversed if banks can
adjust their loan portfolios. Furthermore, Martinez-Miera and Repullo (2010) argue that there
exists a U-shaped relationship between competition and bank risk, and Jiménez et al. (2013)
find that this U-shaped relationship exists only in the loan market. In addition, Hellmann et al.
(2000) state that banks will have fewer incentives to take risks in a more collusive market, and
Cheng et al. (2016) find that the market's attitude is a major factor influencing risk during the
M. Cheng and Y. Qu Pacific-Basin Finance Journal 63 (2020) 101398 4 financial reform
period. Finally, some studies investigate the effects of bank characteristics on bank credit risk.
For example, Saunders et al. (1990) investigate the relationship between bank ownership
structure and risk-taking and suggest that stockholder-controlled banks have incentives to take
a higher credit risk than managerially controlled banks. Kwan and Eisenbeis (1997) find that
inefficiency has a positive effect on credit risk, while Jeitschko and Jeung (2005) find that
credit risk increases first and then decreases as bank capitalization increases. Podpiera and
Weill (2008) prove that there is a significant time correlation between bank cost efficiency
and credit risk. Delis and Kouretas (2011) suggest that capital adequacy significantly affects
bank credit risk. Fiordelisi et al. (2011) find that changes in the capital structure affect credit
risk. Khan et al. (2017) examine the relationship between funding liquidity and bank risk-
taking and show that bank sizes and capital buffers usually limit banks from taking more
credit risk. Chen et al. (2019a) explore the impact of the capital adequacy requirement on
financial institutions' risk-taking behavior from a novel perspective and conclude that risk-
based capital plays an important role in this impact. Overall, the existing studies focus mainly
on the determinants of bank credit risk, including the macro environment, market
characteristics, and bank characteristics. In recent years, the application of bank FinTech has
become increasingly popular in China's banking industry. However, we find that existing
studies have paid less attention to the impact of bank FinTech on credit risk. Therefore, this
paper focuses on this issue.
2. Literature Review
FinTech advances development in monetary business sectors to an always expanding degree.
In any case, monetary development may likewise obscure the current business limits,
sabotage the current mechanical example, quicken monetary disintermediation, and present
new monetary dangers. For instance, since 2018, Lending Club, the biggest P2P online
Lending platform in the United States, illicitly sold loans. The bitcoin exchange Bitfinex has
been hacked and almost 120,000 units of bitcoins have been lost. Numerous P2P
organizations in China misuse client reserves. Counterfeit financing, unlawful raising support
and different marvels happen much of the time. Instructions to control the possible dangers of
FinTech and execute compelling guideline turns out to be progressively earnest. Significant
organizations and researchers have likewise started to examine the dangers brought by
FinTech and the issues identified with guideline. During the national "two sessions" in 2017,
Zhou Xiaochuan, the governor of the People's Bank of China, stressed that the central bank
actively encourages the development of financial technology and encourages technology
enterprises to develop in the direction of inclusive finance. However, it should not only
encourage progress, but also guard against risks and constantly regulate unhealthy behaviors
encountered in the process of development.
The impact of risk and regulation on the development of FinTech was and is most important,
perhaps as important as innovation itself (Navaretti and Pozzolo, 2017). Lakshmi Shyam-
Sund, the vice President and chief risk officer of the World Bank, pointed out that there are
three major risks of FinTech: the first is financial fraud by means of FinTech. The second is
operational risk. Due to the lack of understanding of the complex technology of FinTech
design by financial practitioners and consumers, it is easy to make operational mistakes and
cause the risk of capital loss. The third is the risk of customer privacy leakage (Zhang, 2018).
Yang (2019) believes that FinTech makes the sources of risks of financial institutions more
complex, aggravating the contagion and amplification effect of risks. FinTech business not
only increases the convenience and availability of financial services, but also lowers the entry
threshold for customers and introduces a large number of highrisk customers with uneven
qualification levels (Jiang et al., 2019). In addition, there are some problems in the credit
investigation system of China, such as incomplete credit data, and imperfect credit
investigation supervision, which easily lead to credit risks
Li and Ye (2019) also pointed out that innovation and development of FinTech will bring
about changes in risk types or risk characteristics, and various new risks and hidden dangers
will appear. New risks include information technology risks (data leakage, technology out of
control, technology change), operational risks, business risks and systemic risks (Yi et al.,
2019). Information technology has the characteristics of cross-border operation and complex
business models. While improving the quality and efficiency of financial services, it often
leads to the constant renovation of the forms and connotations of financial risks, and increase
the difficulty of risk identification and the speed of risk propagation (Cheng et al., 2017).
FinTech not only has technology risks but also financial risks, and it may even strengthen
financial risks (Zhong, 2018). From the perspective of actor network theory, Wang and Wu
(2018) analyzed the influence mechanism of fintech on the systemic risk of the banking
industry and empirically tested the influence degree, concluding that fintech aggravated the
systemic risk of the banking industry to some extent. Yang (2017) pointed out that financial
risks and challenges brought in progress of FinTech are as follows: data security and
information technology risk caused by the improper application, credit risk because of the
lack of information disclosure and information asymmetry, compliance risk because of the
impact of financial innovation on traditional legislation, as well as cross-industry and cross-
border financial fluctuations and contagion risks brought about by global connectivity. In
order to realize the healthy development of FinTech, it is necessary to analyze and identify the
potential risks of FinTech, and balance innovation and security (Yang, 2019).
Some scholars try to explore the root causes of fintech risks. FinTech leads to the
generalization of financial risks, making the sources of financial cross-industry risks more
dispersed and diversified (Zhou and Li, 2018). Zhu and Chen (2016) believes that FinTech
makes financial risks more obscure, information technology risks and operational risks more
prominent, and potential systematic and cyclical risks more complex. Take systemic risk as an
example. First, FinTech strengthens the multi-institutional connection between data and
business, increases the connection between various links in the financial industry, and
increases the possibility of risk transmission. Second, FinTech has lowered the threshold for
entry into the financial industry and strengthened the spread and spillover effects of risks.
Third, the inclusive nature of FinTech increases the availability of financial products and the
number of financial consumers, which are more likely to cause the "herd behavior" (Jin,
2019). Li (2019) also believes that the causes of systemic risk of FinTech 6 include being
more sensitive to economic fluctuations, information asymmetry and the sharp expansion of
scale of FinTech enterprises. The extensive use of FinTech in financial market also has a new
type of moral hazard hidden danger. The automation, coding and invisibility of FinTech lead
to the convenience and uncontrollability of adverse selection (Yuan and Deng ,2019). In order
to seize market share, some FinTech companies may improve user convenience by reducing
audit procedures or lowering customer threshold, bringing risks and hidden dangers of
operation and violation (Cheng et al., 2017). On the whole, the potential risks of FinTech
include traditional financial risks such as credit risk, liquidity risk, operational risk and legal
compliance risk, systemic financial risks, as well as new risks caused by non-financial factors
such as underlying information technology.
Some scholars also discussed the application of FinTech in risk management. Artificial
intelligence technology can optimize asset portfolio according to compliance requirements,
provide differentiated services for clients with different risk preferences, provide accurate
measurement for risk management departments, and provide diversified solutions for risk
identification, early warning and disposal (Li, 2018). Blockchain has the characteristics of
distribution, traceability, expansibility and non-tamper, which can greatly improve the
financing efficiency and control risks (Ma and Zhu, 2018). Quantitative models based on big
data expand the data scope of risk management, optimize the overall process, and enrich the
methods of risk data analysis (Lu and Xu, 2018). At present, AI, big data, block chain, such as
cloud computing technology have been widely used in commercial banks. Fintech is playing
an increasingly important role in payment and settlement, lending platform, intelligent
investment and customer identity authentication (Cao, 2017). It is conducive to the internet-
based transformation of traditional business, the upgrading of the original business model, the
implementation of precision marketing, the rapid entry into the “long tail” blue ocean, and the
expansion of non-interest income (Guo, 2017). It can help reduce the operating costs of
commercial banks, improve the prevention and control level of risks, and enhance the ability
to scenario-based financial services (Zhang and Jiang, 2018). Through the application of big
data, cloud computing and distributed ledger technology, FinTech can provide ways for
financial institutions to improve resource allocation efficiency, improve risk management
ability and reduce risk concentration (Zhu and Chen, 2016). Relevant regulatory authorities
use new concepts and methods such as regulatory sandbox and Regtech to optimize existing
regulatory means and finally realize digital supervision (Wang et al., 2018).
The existing literature has laid a foundation for our research, but as fintech is a relatively new
research field, relevant opinions and research conclusions are still controversial. Based on the
above research, the existing literature has carried out studies in terms of concept definition,
influence channel and risk source, and many beneficial conclusions have been obtained.
Vigorously developing FinTech has increasingly become the consensus of the banking
industry. But its drawbacks are also obvious. First, in terms of research content, most existing
literature focuses on 7 experience summary and introduction, while there is less literature
from a theoretical perspective exploring the mechanism whereby FinTech influences
commercial banks' risk-taking. Second, in terms of research methods, most scholars have
focused on normative analysis, and there were only a few relevant empirical studies. Third, in
terms of research objects, most of the existing studies focus on the comprehensive research of
national large commercial banks, but lack the comparative research on different types of
banks.
The main contributions of this article are as follows: (1) By constructing a local equilibrium
model of banks' risk-taking behavior under fintech constraints, we theoretically analyze the
influence mechanism of fintech on banks' risk taking. (2) Text mining technology combined
with factor analysis method is used to measure the development level of fintech in China. (3)
Based on the annual balance panel dataset of 130 commercial banks in China from 2007 to
2017, this paper conducts empirical analysis on the impact of fintech on risk-taking of
banking sector, and gives relevant policy suggestions.