Financial technology development and bank risk taking behavior
List of Authors
  • Ristiana Dewi Febriana , Viverita

Keyword
  • fintech services, fintech firms, risk taking, Z-Score

Abstract
  • The rapid development of technology has triggered the emergence of various innovation efforts in the financial sector, one of which is through the phenomenon of financial technology (fintech). This empirical research aims to investigate the effect of fintech development through fintech services adopted by banks and the growth of fintech firms on bank risk taking using a balanced panel of 37 Conventional Commercial Banks in Indonesia for the period 2017 to 2021. Estimates using fixed effect and random effect models, this study finds that fintech services adopted by banks and the growth of fintech firms reduce risk-taking behavior thereby increasing bank stability. These results indicate a complementary relationship between the development of fintech and traditional banking.

Reference
  • 1. Aaker, D. A., & Keller, K. L. (1990). Consumer Evaluations of Brand Extensions. 27–41.

    2. Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366. https://doi. org/10.1016/j.jfineco.2012.05.014

    3. Albaity, M., Mallek, R. S., & Noman, A. H. Md. (2019). Competition and bank stability in the MENA region: The moderating effect of Islamic versus conventional banks. Emerging Markets Review, 38, 310–325. https://doi.org/10.1016/j.ememar.2019.01.003

    4. Almulla, D., & Aljughaiman, A. A. (2021). Does financial technology matter? Evidence from an alternative banking system. Cogent Economics & Finance, 9(1), 1934978. https://doi. org/10.1080/23322039.2021.1934978

    5. Apostolik, R., Donohue, C., Went, P., & Global Association of Risk Professionals (Eds.). (2009). Foundations of banking risk: An overview of banking, banking risks, and risk-based banking regulation. John Wiley.

    6. Arner, D. W., Barberis, J. N., & Buckley, R. P. (2015). The Evolution of Fintech: A New Post-Crisis Paradigm? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2676553

    7. Awartany, A., & Alzubi, K. (2020). The Determinants of Bank Risk Taking: Evidence From Jordan. International Journal of Financial Research, 11(6), 100. https://doi.org/10.54 30/ijfr.v11n6p100

    8. Baltagi, B. H. (2008). Econometrics. Springer Berlin Heidelberg. https://doi.org/10.1007/978-3-540-76516-5

    9. Baltagi, B. H. (2021). Econometric Analysis of Panel Data. Springer International Publishing. https://doi.org/10.1007/978-3-030-53953-5

    10. Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581–1603. https://doi.org/10.1016 /j.jbankfin.2005.05.010

    11. BIS. (2017). Fintech credit: Market structure, business models and financial stability implications. https://www.bis.org/publ/cgfs_fsb1.htm.

    12. Brooks, C. (2014). Introductory econometrics for finance (Third edition). Cambridge University Press.

    13. Bruno, G. S. F., Marelli, E., & Signorelli, M. (2014). The Rise of NEET and Youth Unemployment in EU Regions after the Crisis. Comparative Economic Studies, 56(4), 592–615. https://doi.org/10.1057/ces.2014.27

    14. Buckley, R. P., & Webster, S. (2016). FINTECH IN DEVELOPING COUNTRIES: CHARTING NEW CUSTOMER JOURNEYS. 20.

    15. Chaarani, H. E. (2018). The Impact of Technological Innovation on Bank Performance. 23, 34.

    16. Chan, S.-G., Koh, E. H. Y., & Karim, M. Z. A. (2016). The Chinese banks’ directors and their risk-taking behavior: A corporate governance and finance perspective. Chinese Management Studies, 10(2), 291–311. https://doi.org/10.1108/CMS-10-2015-0226

    17. Cho, T.-Y., & Chen, Y.-S. (2021). The impact of financial technology on China’s banking industry: An application of the metafrontier cost Malmquist productivity index. The North American Journal of Economics and Finance, 57, 101414. https://doi.org/10.101 6/j.najef.2021.101414

    18. Dalwai, T., Singh, D., & S., A. (2021). Intellectual capital, bank stability and risk-taking: Evidence from Asian emerging markets. Competitiveness Review: An International Business Journal. https://doi.org/10.1108/CR-03-2021-0031

    19. Daly, M. C., Hobijn, B., Şahin, A., & Valletta, R. G. (2012). A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise ? The Journal of Economic Perspectives, 26(3), 3–26.

    20. Danisman, G. O., & Tarazi, A. (2020). Financial inclusion and bank stability: Evidence from Europe. The European Journal of Finance, 26(18), 1842–1855. https://doi.org/10.1080/ 1351847X.2020.1782958

    21. Deng, L., Lv, Y., Liu, Y., & Zhao, Y. (2021). Impact of Fintech on Bank Risk-Taking: Evidence from China. Risks, 9(5), 99. https://doi.org/10.3390/risks9050099

    22. Digital Banking: Permudah Akses Layanan Perbankan di Masa Pandemi. OJK.go.id. https://sikapiuangmu.ojk.go.id/FrontEnd/CMS/Article/40702

    23. Duvalova, E. P., Andreeva, O. V., Duvalova, Y. I., & Ivasiv, I. (2016). Development of Internet Banking on Banking Services Market. Academy of Strategic Management Journal, 15(Special Issue), 7.

    24. ElBannan, M. A. (2015). Do consolidation and foreign ownership affect bank risk taking in an emerging economy? An empirical investigation. Managerial Finance, 41(9), 874–907. https://doi.org/10.1108/MF-12-2013-0342

    25. Farnè, M., & Vouldis, A. (2021). Banks’ risk-taking within a banking union. Economics Letters, 204, 109909. https://doi.org/10.1016/j.econlet.2021.109909

    26. Gabor, D., & Brooks, S. (2017). The digital revolution in financial inclusion: International development in the fintech era. New Political Economy, 22(4), 423–436. https://doi. org/10.1080/13563467.2017.1259298

    27. Ge, R., Feng, J., Gu, B., & Zhang, P. (2017). Predicting and Deterring Default with Social Media Information in Peer-to-Peer Lending. Journal of Management Information Systems, 34(2), 401–424. https://doi.org/10.1080/07421222.2017.1334472

    28. Gujarati, D.N. (2004). Basic Econometric, Mc Graw Hill, New York.

    29. Gul, S., Irshad, F., & Zaman, K. (2011). Factors Affecting Bank Profitability in Pakistan. 39, 28.

    30. Gulamhuseinwala, I., Bull, T., & Lewis, S. (2015). FinTech is gaining traction and young, high-income users are the early adopters. 20.

    31. Guo, P., & Shen, Y. (2016). The impact of Internet finance on commercial banks’ risk taking: Evidence from China. China Finance and Economic Review, 4(1), 16. https://doi.org /10.1186/s40589-016-0039-6

    32. Haddad, C., & Hornuf, L. (2021). The Impact of Fintech Startups on Financial Institutions’ Performance and Default Risk. SSRN Electronic Journal. https://doi.org/10.2139/ ssrn.3837778

    33. Haque, F. (2019). Ownership, regulation and bank risk-taking: Evidence from the Middle East and North Africa (MENA) region. Corporate Governance: The International Journal of Business in Society, 19(1), 23–43. https://doi.org/10.1108/CG-07-2017-0135

    34. Harkati, R., Alhabshi, S. M., & Kassim, S. (2020). Does capital adequacy ratio influence risk-taking behaviour of conventional and Islamic banks differently? Empirical evidence from dual banking system of Malaysia. Journal of Islamic Accounting and Business Research, 11(9), 1989–2015. https://doi.org/10.1108/JIABR-11-2019-0212

    35. Hutauruk, DM. (16 Juni 2021). Kolaborasi antara bank dan fintech semakin meningkat.Kontan.co.id. https://keuangan.kontan.co.id/news/kolaborasi-antara-bank-dan-fintech-semakin-meningkat

    36. Kasman, S., & Kasman, A. (2015). Bank competition, concentration and financial stability in the Turkish banking industry. Economic Systems, 39(3), 502–517. https://doi.org/10.1016/ j.ecosys.2014.12.003

    37. Kaul, A. (2012). Technology and Corporate Scope: Firm and Rival Innovation as Antecedents of Corporate Transactions. Strategic Management Journal, 33(4), 347–367. https://doi. org/10.1002/smj.1940

    38. Khan, M. S., Scheule, H., & Wu, E. (2017). Funding liquidity and bank risk taking. Journal of Banking & Finance, 82, 203–216. https://doi.org/10.1016/j.jbankfin.2016.09.005

    39. Ky, S., Rugemintwari, C., & Sauviat, A. (2019). Is Fintech Good for Bank Performance? The Case of Mobile Money in the East African Community. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3401930

    40. Lee, C.-C., Li, X., Yu, C.-H., & Zhao, J. (2021). Does fintech innovation improve bank efficiency? Evidence from China’s banking industry. International Review of Economics & Finance, 74, 468–483. https://doi.org/10.1016/j.iref.2021.03.009

    41. Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature, 35(2), 688–726.

    42. Li, Y., Spigt, R., & Swinkels, L. (2017). The impact of FinTech start-ups on incumbent retail banks’ share prices. Financial Innovation, 3(1), 26. https://doi.org/10.1186/s40854-017-0076-7

    43. Liang, C., Wang, W., & Dawes Farquhar, J. (2009). The influence of customer perceptions on financial performance in financial services. International Journal of Bank Marketing, 27(2), 129–149. https://doi.org/10.1108/02652320910935616

    44. Lin, M., Prabhala, N. R., & Viswanathan, S. (2013). Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending. Management Science, 59, 20.

    45. Ekananda, Mahyus. (2016). Analisis Ekonometrika Data Panel. Jakarta: Mitra Wacana Media.

    46. Mateev, M., Moudud-Ul-Huq, S., & Sahyouni, A. (2022). Regulation, banking competition and risk-taking behavior in the MENA region: Policy implications for Islamic banks. Journal of Islamic Accounting and Business Research, 13(2), 297–337. https://doi.org /10.1108/JIABR-01-2021-0009

    47. McCahery, J., Schoenmaker, D., Stanisic, D., & de Silanes Molina, F. L. (2015). The European Capital Markets Study. 179.

    48. Merton, R. C. (1992). FINANCIAL INNOVATION AND ECONOMIC PERFORMANCE. Journal of Applied Corporate Finance, 4(4), 12–22. https://doi.org/10.1111/j.1745-662 2.1992.tb00214.x

    49. Navaretti, G. B. mname, Calzolari, G. mname, Mansilla-Fernandez, J. M. mname, & Pozzolo, A. F. mname. (2018). Fintech and Banking. Friends or Foes? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3099337

    50. Ozili, P. K. (2018). Impact of digital finance on financial inclusion and stability. Borsa Istanbul Review, 18(4), 329–340. https://doi.org/10.1016/j.bir.2017.12.003

    51. Panos, G. A., & Wilson, J. O. S. (2020). Financial literacy and responsible finance in the FinTech era: Capabilities and challenges. The European Journal of Finance, 26(4–5), 297–301. https://doi.org/10.1080/1351847X.2020.1717569

    52. Phan, D. H. B., Narayan, P. K., Rahman, R. E., & Hutabarat, A. R. (2020). Do financial technology firms influence bank performance? Pacific-Basin Finance Journal, 62, 101210. https://doi.org/10.1016/j.pacfin.2019.101210

    53. Raharja, S. J., Sutarjo, Muhyi, Herwan Abdul, & Herawaty, Tetty. (2020). Digital Payment as an Enabler for Business Opportunities: A Go-Pay Case Study. 9(1), 12.

    54. Saif-Alyousfi, A. Y. H., & Saha, A. (2021). Determinants of banks’ risk-taking behavior, stability and profitability: Evidence from GCC countries. International Journal of Islamic and Middle Eastern Finance and Management, 14(5), 874–907. https://doi.org/10.11 08/IMEFM-03-2019-0129

    55. Saif-Alyousfi, A. Y. H., Saha, A., & Md-Rus, R. (2020). The impact of bank competition and concentration on bank risk-taking behavior and stability: Evidence from GCC countries. The North American Journal of Economics and Finance, 51, 100867. https://doi.org /10.1016/j.najef.2018.10.015

    56. Sarkar, S., & Sensarma, R. (2015). The relationship between competition and risk-taking behaviour of Indian banks. 26.

    57. Setiawan, K., & Maulisa, N. (2020). The Evolution of Fintech: A Regulatory Approach Perspective. Proceedings of the 3rd International Conference on Law and Governance (ICLAVE 2019), Solo, Central Java, Indonesia. https://doi.org/10.2991/aebmr .k.200321.029

    58. Siek, M., & Sutanto, A. (2019). Impact Analysis of Fintech on Banking Industry. 2019 International Conference on Information Management and Technology (ICIMTech), 356–361. https://doi.org/10.1109/ICIMTech.2019.8843778

    59. Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The relationship between banking market competition and risk-taking: Do size and capitalization matter? Journal of Banking & Finance, 36(12), 3366–3381. https://doi.org/10.1016/j.jbankfin.2012.07.022

    60. Thakor, A. V. (2020). Fintech and banking: What do we know? Journal of Financial Intermediation, 41, 100833. https://doi.org/10.1016/j.jfi.2019.100833

    61. Vives, X. (2010), “Competition and stability in banking”, Working Paper No. 852, IESE Business School, Navara

    62. Vives, X. (2017). The Impact of Fintech on Banking. European Economy Banks, Regulation, and the Real Sector, 97–108.

    63. Vives, X. (2019a). Competition and stability in modern banking: A post-crisis perspective. International Journal of Industrial Organization, 64, 55–69. https://doi.org/10.1016/ j.ijindorg.2018.08.011

    64. Vives, X. (2019b). Digital Disruption in Banking. Annual Review of Financial Economics, 11(1), 243–272. https://doi.org/10.1146/annurev-financial-100719-120854

    65. Wang, R., Liu, J., & Luo, H. (2021). Fintech development and bank risk taking in China. The European Journal of Finance, 27(4–5), 397–418. https://doi.org/10.1080/1351847X .2020.1805782

    66. Wang, Y., Xiuping, S., & Zhang, Q. (2021). Can fintech improve the efficiency of commercial banks? —An analysis based on big data. Research in International Business and Finance, 55, 101338. https://doi.org/10.1016/j.ribaf.2020.101338

    67. Wooldridge, J. M. (2016). Introductory econometrics: A modern approach (Sixth edition, student edition). Cengage Learning.

    68. Xu, J. J., & Chau, M. (2018). Cheap Talk? The Impact of Lender-Borrower Communication on Peer-to-Peer Lending Outcomes. Journal of Management Information Systems, 35(1), 53–85. https://doi.org/10.1080/07421222.2018.1440776

    69. Zhao, J., Li, X., Yu, C.-H., Chen, S., & Lee, C.-C. (2022). Riding the FinTech innovation wave: FinTech, patents and bank performance. Journal of International Money and Finance, 122, 102552. https://doi.org/10.1016/j.jimonfin.2021.102552

    70. Zikmund, W. G. (2010). Business research methods. South-Western Cengage Learning.