Introduction
Over the past few decades, the operations of the banking sector have changed. The effect of the financial crisis of 2007–2008 ensured that banks install several measures to prevent the instability of the banking sector. The banks also proposed other innovations for security from risks arising from situations. The development in financial technological advancement (Fintech) has greatly improved the financial outreach tasks of the banking sector. Researchers refer to this advancement as the ‘Fintech Revolution’. Fintech originates from the ‘Financial Services Technology Consortium’, a Citi group project for the promotion of technological collaboration. Fintech is the integration of digital technologies with financial activities and services. The fintech revolution has greatly varied the conventional functions of banking services with the introduction of novel tasks like digital lending, crowdfunding, online payments, peer-to-peer lending, etc. These e-services collected from Big Data have added to the roles of non-banking financial services. The four principal areas of fintech are Artificial Intelligence, Blockchain, Cloud Computing and Big data. Big Data can be used to predict market changes and client investment, examine customer spending habits, enhance the detection of fraud and help in the creation of new marketing tactics. Some basic applications of fintech in real-time is the use of smartphones for mobile banking, borrowing, investing and dealing in cryptocurrency. The general aim of fintech is to make financial services more accessible and affordable to the general public. In recent times, fintech has been used to automate the processes of trading, insurance, risk management and other bank services. There even exists a subset of fintech that focuses on the insurance industry referred to as ‘insuretech’. As the use and adoption of fintech spreads, governments are slowly providing regulations to guide their transactions.
Despite the initial excitement of the development of fintech, it has faced several challenges. Data security is a primary challenge of fintech companies because of the threat of hacking, and the fear of leaking sensitive customer financial data. Fortifying their technology with multiple levels of defence would reduce this challenge. Another challenge of fintech companies is the high cost of starting up the company. The fintech revolution is believed by some researchers to be a double-edged sword— decreasing the cost of banking on one hand and increasing the cost of infrastructure to be set up for the development of fintech on the other. Ozili [
1] opined that fintech lending greatly accelerates the chances of Non-Performing Loans (NPLs). As a result of the fintech revolution, fintech lending has had massive growth. It has provided better chances of affordable loans for individuals and households. Magee [
2] stated that the reason fintech increases NPLs is because of the low collateral requirement and the weak legal support in fintech. On the other hand, Magee J [
3] argued that the possibility of a default fintech loan is relatively low compared to the traditional commercial bank because these loans are short-term and emphasize more on the retail segment than the commercial sector. These arguments are inconclusive about the effect of the fintech revolution on the performance of banks. Some studies have noted that the growing influence of fintech has made the banking sector more susceptible to competitive forces. For instance, the growth of fintech reduces banking market share, creates stricter regulations for bank functioning, and decreases profit margin. From these, we can infer that the competitive forces may have some negative impact on the banking sector, especially in developing countries.
Several scholars have explored the impact of the fintech revolution on the banking sector. Thakor [
4] and Zalan and Toufaily [
5] concluded that the fintech revolution negatively impacts the performance of banks by decreasing their market share and income. Other scholars, however, believe the fintech revolution has had positive impacts such as reduction of poverty, financial inclusion, assistance in sustainable development, and financial intermediation [
6,
7].
In this paper, we explored the effect of the fintech era on the stability of the Chinese banking sectors by dividing the fintech era into two different timelines— the first wave of the fintech era and the second wave [
8]. The following are reasons why China was used in our empirical analysis:
-
China has the second-largest economy in the world.
-
China operates a greatly diversified banking structure comprising private, public, and foreign banks.
-
The fintech market in China is developing at a fast rate.
According to CCID Consulting, as of 2019, China's fintech sector had a market value of RMB 375.3 billion (US$59.2 billion). Its fintech market size is projected to grow to RMB 543.4 billion (US$85.7 billion) by 2022. For this empirical analysis, we computed Z-score on the country-level data to measure banking stability and other factors that may affect it. As a result of the non-availability of fintech data, the analysis was performed based on the fintech era rather than fintech variables. In this study, we conduct several kinds of analyses to measure the effect of the fintech era on the stability of the Chinese banking sector. The motivation of this work is to help comprehend fintech development in modern society and the importance of its disruptive forces in developing and developed countries.
This study is organized as follows: Sect. 2 discusses the empirical literature available on the subject matter. Section 3 explains the methodology and the empirical framework. Section 4 analyzes and discusses the results of the analysis. Finally, Sect. 5 presents the policy recommendations and concluding remarks.
Methodology
In this section, we used the Z-score and percentage of NPLs to total loans as the proxy variables to measure the stability of the banking sector. Some other explanatory variables include economic growth rate, institutional legal framework, corruption, banking credit to deposit ratio, and government stability. For the measurement of the impact of the fintech era, we divided the total period of the study into the first wave and second wave as shown in Table
1. The [
1] and [
8] classification of the fintech era is used as a benchmark to determine if a particular year belongs in the first or second fintech wave.
Table 1
The Phase of Fintech Evolution from the Study of Arner in [
8]
Era | 1866–1967 | 1967–2007 | 2008-Present |
Geography | Global / Developed countries | Global / Developed countries | Developed countries | Emerging / Developed countries |
Key elements | Infrastructure / computerisation | Traditional / internet | Mobile / Start-ups / New entrants |
Shift Origin | Linkages | Digitalization | 2008 Financial Crisis/Smartphone | Last Mover Advantage |
The first wave of the fintech era was led by the evolution of commercial banks with fintech innovations. The second wave is characterized by more specialized and enhanced fintech lenders and institutions. We evaluated the stability of the Chinese banking sectors from 1995–2018, including the timelines of the two waves of the fintech era. The outcome variables and explanatory data were acquired from the International Financial Statistic Database from the International Monetary Fund. With the production of 8 fintech ‘unicorns’ worth $214.6 billion in China, Chinese fintech has had two main objectives: to increase the economic potential of the banked and integrate remaining China’s unbanked. Jack Ma’s platform ‘Ant’ derives over 39% of its revenue from its lending platform, CreditTech which uses AI algorithms deemed too risky for conventional banks (
https://www.csis.org/blogs/new-perspectives-asia/chinas-fintech-revolution).
Proposed framework
Here, we highlight the proposed framework used to examine the determinants of the stability of the banking sector. The following equations were used to measure the influence of the determinants:
$${NPL}_{i,t}= c+{\beta }_{1}{GDP}_{i,t}+{{\beta }_{2}Cor}_{i,t}+{{\beta }_{3}Ir}_{i,t}+{{\beta }_{4}Bc}_{i,t}+{{\beta }_{5}GS}_{i,t}{+\varepsilon }_{i,t}$$
(1)
$${ZScore}_{i,t}= {c+{\beta }_{1}GDP}_{i,t}+{{\beta }_{2}Cor}_{i,t}+{{\beta }_{3}Ir}_{i,t}+{{\beta }_{4}Bc}_{i,t}+{{{\beta }_{5}GS}_{i,t}+\varepsilon }_{i,t}$$
(2)
Equations (
1) and (
2) were extended to include the analysis of the interaction. After including the fintech second wave interaction variable, the equation below was formulated:
$${NPL}_{i,t}= c+{\beta }_{1}{GDP}_{i,t}+{{\beta }_{2}Cor}_{i,t}+{{\beta }_{3}Ir}_{i,t}+{{\beta }_{4}Bc}_{i,t}+{{\beta }_{5}GS}_{i,t}+{{{\beta }_{6}FIN2}_{https://fintechmagazine.com/financial-services-finserv/fintech-revolution-china-opportunities-and-threatsi,t}+{{\beta }_{7}GDP*FIN2}_{i,t}+{{\beta }_{8}Cor*FIN2}_{i,t}+{{\beta }_{9}Ir*FIN2}_{i,t}+{{\beta }_{10}Bc*FIN2}_{i,t}+{{\beta }_{11}GS*FIN2}_{i,t}+\varepsilon_{i,t}}$$
(3)
$${ZScore}_{i,t}= c+{\beta }_{1}{GDP}_{i,t}+{{\beta }_{2}Cor}_{i,t}+{{\beta }_{3}Ir}_{i,t}+{{\beta }_{4}Bc}_{i,t}+{{\beta }_{5}GS}_{i,t}+{{{\beta }_{6}FIN2}_{i,t}+{{\beta }_{7}GDP*FIN2}_{i,t}+{{\beta }_{8}Cor*FIN2}_{i,t}+{{\beta }_{9}Ir*FIN2}_{i,t}+{{\beta }_{10}Bc*FIN2}_{i,t}+{{\beta }_{11}GS*FIN2}_{i,t}+\varepsilon_{i,t}}$$
(4)
Z-score is used to measure the stability of the banking sector, NPL represents the nonperforming loans to total loans. Cor describes the corruption index, Lg describes the legal and regulatory framework, and BC represents the bank credit to deposit ratio. FIN2 describes the fintech second wave, GS represents government stability, and i stands for the country; t represents the period, ɛ shows the error term, and c is the constant.
In this analysis, we used five explanatory variables. Economic growth is included because prior literature states that growth in economic activities leads to increasing capital buffer and banking stability. More economic growth increases employment opportunities and income, thereby reducing debt obligations. Thus, we infer that there is a negative relationship between banking stability and economic growth.
The corruption index is included because countries with a higher level of corruption have higher chances of banking instability. Corruption causes internal conflicts and loan defaults and may impact banking stability [
30]. The institutional regulatory index was included because the quality of institutional regulation increases organizational productivity and efficiency. We can thus infer that there is a negative relationship between the stability of the banking sector and institutional regulation. Next, we used the bank credit to deposit ratio as an independent variable because of the conclusion of previous studies that economic development can lead to investment opportunities and higher credit. Growth in credit distribution without proper supervision could affect banking stability. Supervision may improve the stability of the banking sector by increasing the bank profitability and capital buffer. Murshed and Saadat [
31] stated that a stable government enhances low economic policy certainty, which enhances a country’s progress and leads to the stability of its various industries. From this, we can infer that there is a positive relationship between banking stability and government stability. FIN2 is a binary variable using values 1 from 2008–2018 and 0 from 1995–2008. It is used to illustrate the impact of fintech’s second wave on the stability of the banking sector. From this, we infer that FIN2 has a positive effect on the stability of the banking sector. Technological innovations and the development of fintech products with adequate supervision could lower banking instability long term. Table
2 below illustrates the description of the variables and their expected relationship.
Table 2
Variables and their Probable Sign with the Dependent Variable
GDP | + | Countries growth rate |
Cor | - | Corruption index |
Ir | + | Institutional regulatory index |
Bc | + | Bank credit to deposit ratio |
Gs | + | Government Stability |
FIN2 | + | Fintech Second Wave |
Conclusion
This study analyzes the impact of the fintech era on the stability of the Chinese banking sector and NPL. For this, the data was divided into the first and second waves of the fintech era following the work of Arner et al. [
8]. The results of this analysis show that the second wave had a significantly positive effect on NPLs and the stability of the Chinese banking sector. The progress of the fintech revolution creates an enhanced tracking and monitoring environment. It also aids traditional banking through the provision of easy credit by fintech lenders. Fintech innovation allows for the creation of new investment opportunities. After this analysis, we recommend the following policies. Policymakers in developing countries should ensure the growth of fintech services as it helps to increase banking stability. Sufficient measures should be put in place to avoid the apprehension of fintech lenders, borrowers, and the public at large. Also, we suggest that banks use more monitoring services for fintech credit to monitor and control NPL. Initiatives need to be taken by banking officials to include fintech lenders in the provision of loans to private sector borrowers because of the risky nature of private sector loans. Banking officials also need to consider how the disruption of fintech lenders could negatively impact traditional banks. Policymakers need to incorporate fintech innovations for the evaluation of the borrowers’ creditworthiness. While this study has its strengths, it also has its limitations. These limitations are the big data size [
32] and the fact that this study only focuses on the Chinese banking sector in detail. However, these limitations are a possible future direction for this research.
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.