Digitalization and the “Too Big to Fail” dilemma: mechanisms and asymmetric effects of banks’ Fintech innovation on total factor productivity
Abstract
Fintech is driving the revolution of finance and profoundly affecting the development of the financial sector. However, few studies examined how commercial banks’ fintech innovation affects total factor productivity (TFP). To build up the fintech index of commercial banks, we use web crawler technology to accumulate news related to the fintech innovation of commercial banks in Baidu news. We use the panel data of 72 banks in China from 2010 to 2020 to explore the impacts and mechanisms of fintech on commercial banks’ TFP. The results show that fintech innovation effectively improves TFP after a series of robustness tests. Further, we find that fintech innovation can improve commercial banks’ TFP by promoting innovations of financial products, increasing risk control capability, reducing cost, and improving profit. Also, the utility of fintech is more significant in banks with more assets, facilities, and human capital, which means that fintech innovation creates a “bigger is better” mindset. Meanwhile, the result of quantile regression shows that the higher the fintech innovation, the more significant the increase in TFP, which further reveals that there is ‘too big to fail’ among commercial banks under digitalization.
Keyword : fintech innovation, total factor productivity, commercial banks, too big to fail, digitalization dilemma, asymmetric effects, quantile regression, web crawler technology
How to Cite
Li, C., Zhang, Y., & Yu, H. (2024). Digitalization and the “Too Big to Fail” dilemma: mechanisms and asymmetric effects of banks’ Fintech innovation on total factor productivity. Technological and Economic Development of Economy, 30(2), 464–488. https://doi.org/10.3846/tede.2024.21299
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Adetutu, M. O., Odusanya, K. A., Ebireri, J. E., & Murinde, V. (2020). Oil booms, bank productivity and natural resource curse in finance. Economics Letters, 186, Article 108517. https://doi.org/10.1016/j.econlet.2019.07.002
Allen, F., Qian, J. Q., Shan, S. C., & Zhao, M. (2014). The IPO of Industrial and Commercial Bank of China and the ‘Chinese Model’of privatizing large financial institutions. The European Journal of Finance, 20(7–9), 599–624. https://doi.org/10.1080/1351847X.2012.671780
Ayandibu, A. O., & Houghton, J. (2017). The role of Small and Medium Scale Enterprise in local economic development (LED). Journal of Business and Retail Management Research, 11(2).
Bellstam, G., Bhagat, S., & Cookson, J. A. (2021). A text-based analysis of corporate innovation. Management Science, 67(7), 4004–4031. https://doi.org/10.1287/mnsc.2020.3682
Berger, A. N. (2003). The economic effects of technological progress: Evidence from the banking industry. Journal of Money, Credit and Banking, 35(2), 141–176. https://doi.org/10.1353/mcb.2003.0009
Buchak, G., Matvos, G., Piskorski, T., & Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks. Journal of Financial Economics, 130(3), 453–483. https://doi.org/10.1016/j.jfineco.2018.03.011
Chen, M. A., Wu, Q., & Yang, B. (2019). How valuable is FinTech innovation?. The Review of Financial Studies, 32(5), 2062–2106. https://doi.org/10.1093/rfs/hhy130
Cheng, M., & Qu, Y. (2020). Does bank FinTech reduce credit risk? Evidence from China. Pacific-Basin Finance Journal, 63, Article 101398. https://doi.org/10.1016/j.pacfin.2020.101398
Chiu, J., & Koeppl, T. V. (2019). Blockchain-based settlement for asset trading. The Review of Financial Studies, 32(5), 1716–1753. https://doi.org/10.1093/rfs/hhy122
Delis, M. D., & Kouretas, G. P. (2011). Interest rates and bank risk-taking. Journal of Banking & Finance, 35(4), 840–855. https://doi.org/10.1016/j.jbankfin.2010.09.032
Dynan, K. E., Elmendorf, D. W., & Sichel, D. E. (2006). Can financial innovation help to explain the reduced volatility of economic activity?. Journal of Monetary Economics, 53(1), 123–150. https://doi.org/10.1016/j.jmoneco.2005.10.012
Fuster, A., Plosser, M., Schnabl, P., & Vickery, J. (2019). The role of technology in mortgage lending. The Review of Financial Studies, 32(5), 1854–1899. https://doi.org/10.1093/rfs/hhz018
Goldfarb, A., & Trefler, D. (2018). AI and international trade (Working paper No. 24254). National Bureau of Economic Research. https://doi.org/10.3386/w24254
Gu, S., Kelly, B., & Xiu, D. (2020). Empirical asset pricing via machine learning. The Review of Financial Studies, 33(5), 2223–2273. https://doi.org/10.1093/rfs/hhaa009
Feng, G., Jingyi, W., Fang, W., Tao, K., Xun, Z., & Zhiyun, C. (2020). Measuring China’s digital financial inclusion: Index compilation and spatial characteristics. China Economic Quarterly, 19(4), 1401–1418.
Huang, Y., Lin, C., Sheng, Z., & Wei, L. (2018). FinTech credit and service quality (Working paper). Geneva Financial Research Institute, Geneva. http://matteocrosignani.com/site/wp-content/uploads/2018/05/Crosignani_Discussion_Cavalcade18.pdf
Glancy, F. H., & Yadav, S. B. (2011). A computational model for financial reporting fraud detection. Decision support systems, 50(3), 595–601. https://doi.org/10.1016/j.dss.2010.08.010
Kamarudin, F., Hue, C. Z., Sufian, F., & Mohamad Anwar, N. A. (2017). Does productivity of Islamic banks endure progress or regress? Empirical evidence using Data Envelopment Analysis based Malmquist Productivity Index. Humanomics, 33(1), 84–118. https://doi.org/10.1108/H-08-2016-0059
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
Lee, I., & Shin, Y. J. (2018). Fintech: Ecosystem, business models, investment decisions, and challenges. Business Horizons, 61(1), 35–46. https://doi.org/10.1016/j.bushor.2017.09.003
Levinsohn, J., & Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. The Review of Economic Studies, 70(2), 317–341. https://doi.org/10.1111/1467-937X.00246
Li, C., Li, D., He, S., Sun, S., Tian, Y., & Wang, Z. (2022a). The effect of big data-based digital payments on household healthcare expenditure. Frontiers in Public Health, 10, Article 922574. https://doi.org/10.3389/fpubh.2022.922574
Li, C., He, S., Tian, Y., Sun, S., & Ning, L. (2022b). Does the bank’s FinTech innovation reduce its risk-taking? Evidence from China’s banking industry. Journal of Innovation & Knowledge, 7(3), Article 100219. https://doi.org/10.1016/j.jik.2022.100219
Li, C., Huo, P., Wang, Z., Zhang, W., Liang, F., & Mardani, A. (2023a). Digitalization generates equality? Enterprises’ digital transformation, financing constraints, and labor share in China. Journal of Business Research, 163, Article 113924. https://doi.org/10.1016/j.jbusres.2023.113924
Li, C., Huang, Y., Wu, Y., Wang, X., Tian, Y., Wu, R., Qu, F., & Wang, Z. (2023c). Intelligent data sharing strategy supported by artificial intelligence and blockchain technology: Based on medical data. Annals of Operations Research. https://doi.org/10.1007/s10479-023-05423-1
Li, C., Wang, Y., Zhou, Z., Wang, Z., & Mardani, A. (2023b). Digital finance and enterprise financing constraints: Structural characteristics and mechanism identification. Journal of Business Research, 165, Article 114074. https://doi.org/10.1016/j.jbusres.2023.114074
Li, C., Li, D., Liang, Y., & Wang, Z. (2024). Underdog entrepreneurship in the digital era: The effect of digital servitization on household entrepreneurship in China. Heliyon, 10(2), Article e24154. https://doi.org/10.1016/j.heliyon.2024.e24154
Liu, J., Li, X., & Wang, S. (2020). What have we learnt from 10 years of fintech research? a scientometric analysis. Technological Forecasting and Social Change, 155, Article 120022. https://doi.org/10.1016/j.techfore.2020.120022
Luo, S., Sun, Y., Yang, F., & Zhou, G. (2022). Does fintech innovation promote enterprise transformation? Evidence from China. Technology in Society, 68, Article 101821. https://doi.org/10.1016/j.techsoc.2021.101821
Olley, S., & Pakes, A. (1992). The dynamics of productivity in the telecommunications equipment industry (Working paper No. 3977) National Bureau of Economic Research. https://doi.org/10.3386/w3977
Palmié, M., Wincent, J., Parida, V., & Caglar, U. (2020). The evolution of the financial technology ecosystem: An introduction and agenda for future research on disruptive innovations in ecosystems. Technological Forecasting and Social Change, 151, Article 119779. https://doi.org/10.1016/j.techfore.2019.119779
Pan, X., Pan, X., Song, M., Ai, B., & Ming, Y. (2020). Blockchain technology and enterprise operational capabilities: An empirical test. International Journal of Information Management, 52, Article 101946. https://doi.org/10.1016/j.ijinfomgt.2019.05.002
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, Article 101210. https://doi.org/10.1016/j.pacfin.2019.101210
Philippon, T. (2019). On fintech and financial inclusion (Working paper No. 26330). National Bureau of Economic Research. https://doi.org/10.3386/w26330
Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297–307. https://doi.org/10.1016/j.ejor.2009.02.030
Sheng, T. (2021). The effect of fintech on banks’ credit provision to SMEs: Evidence from China. Finance Research Letters, 39, Article 101558. https://doi.org/10.1016/j.frl.2020.101558
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94. https://doi.org/10.2307/1884513
Thakor, A. V. (2020). Fintech and banking: What do we know?. Journal of Financial Intermediation, 41, Article 100833. https://doi.org/10.1016/j.jfi.2019.100833
Thota, N., & Subrahmanyam, A. C. V. (2020). Bank total factor productivity convergence: Evidence from India. Finance Research Letters, 37, Article 101357. https://doi.org/10.1016/j.frl.2019.101357
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, Article 101338. https://doi.org/10.1016/j.ribaf.2020.101338
Wang, Z., Lu, J., Li, M., Yang, S., Wang, Y., & Cheng, X. (2022). Edge computing and blockchain in enterprise performance and venture capital management. Computational Intelligence and Neuroscience. https://doi.org/10.1155/2022/2914936
Xu, Y., & Li, C. (2023). Digital transformation, firm boundaries, and market power: Evidence from China’s listed companies. Systems, 11(9), Article 479. https://doi.org/10.3390/systems11090479
Yu, C., Jia, N., Li, W., & Wu, R. (2022). Digital inclusive finance and rural consumption structure –evidence from Peking University digital inclusive financial index and China household finance survey. China Agricultural Economic Review, 14(1), 165–183. https://doi.org/10.1108/CAER-10-2020-0255
Zhai, C., Ding, X., Zhang, X., Jiang, S., Zhang, Y., & Li, C. (2023). Assessing the effects of urban digital infrastructure on corporate Environmental, Social and Governance (ESG) performance: Evidence from the broadband China Policy. Systems, 11(10), Article 515. https://doi.org/10.3390/systems11100515
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, Article 102552. https://doi.org/10.1016/j.jimonfin.2021.102552
Allen, F., Qian, J. Q., Shan, S. C., & Zhao, M. (2014). The IPO of Industrial and Commercial Bank of China and the ‘Chinese Model’of privatizing large financial institutions. The European Journal of Finance, 20(7–9), 599–624. https://doi.org/10.1080/1351847X.2012.671780
Ayandibu, A. O., & Houghton, J. (2017). The role of Small and Medium Scale Enterprise in local economic development (LED). Journal of Business and Retail Management Research, 11(2).
Bellstam, G., Bhagat, S., & Cookson, J. A. (2021). A text-based analysis of corporate innovation. Management Science, 67(7), 4004–4031. https://doi.org/10.1287/mnsc.2020.3682
Berger, A. N. (2003). The economic effects of technological progress: Evidence from the banking industry. Journal of Money, Credit and Banking, 35(2), 141–176. https://doi.org/10.1353/mcb.2003.0009
Buchak, G., Matvos, G., Piskorski, T., & Seru, A. (2018). Fintech, regulatory arbitrage, and the rise of shadow banks. Journal of Financial Economics, 130(3), 453–483. https://doi.org/10.1016/j.jfineco.2018.03.011
Chen, M. A., Wu, Q., & Yang, B. (2019). How valuable is FinTech innovation?. The Review of Financial Studies, 32(5), 2062–2106. https://doi.org/10.1093/rfs/hhy130
Cheng, M., & Qu, Y. (2020). Does bank FinTech reduce credit risk? Evidence from China. Pacific-Basin Finance Journal, 63, Article 101398. https://doi.org/10.1016/j.pacfin.2020.101398
Chiu, J., & Koeppl, T. V. (2019). Blockchain-based settlement for asset trading. The Review of Financial Studies, 32(5), 1716–1753. https://doi.org/10.1093/rfs/hhy122
Delis, M. D., & Kouretas, G. P. (2011). Interest rates and bank risk-taking. Journal of Banking & Finance, 35(4), 840–855. https://doi.org/10.1016/j.jbankfin.2010.09.032
Dynan, K. E., Elmendorf, D. W., & Sichel, D. E. (2006). Can financial innovation help to explain the reduced volatility of economic activity?. Journal of Monetary Economics, 53(1), 123–150. https://doi.org/10.1016/j.jmoneco.2005.10.012
Fuster, A., Plosser, M., Schnabl, P., & Vickery, J. (2019). The role of technology in mortgage lending. The Review of Financial Studies, 32(5), 1854–1899. https://doi.org/10.1093/rfs/hhz018
Goldfarb, A., & Trefler, D. (2018). AI and international trade (Working paper No. 24254). National Bureau of Economic Research. https://doi.org/10.3386/w24254
Gu, S., Kelly, B., & Xiu, D. (2020). Empirical asset pricing via machine learning. The Review of Financial Studies, 33(5), 2223–2273. https://doi.org/10.1093/rfs/hhaa009
Feng, G., Jingyi, W., Fang, W., Tao, K., Xun, Z., & Zhiyun, C. (2020). Measuring China’s digital financial inclusion: Index compilation and spatial characteristics. China Economic Quarterly, 19(4), 1401–1418.
Huang, Y., Lin, C., Sheng, Z., & Wei, L. (2018). FinTech credit and service quality (Working paper). Geneva Financial Research Institute, Geneva. http://matteocrosignani.com/site/wp-content/uploads/2018/05/Crosignani_Discussion_Cavalcade18.pdf
Glancy, F. H., & Yadav, S. B. (2011). A computational model for financial reporting fraud detection. Decision support systems, 50(3), 595–601. https://doi.org/10.1016/j.dss.2010.08.010
Kamarudin, F., Hue, C. Z., Sufian, F., & Mohamad Anwar, N. A. (2017). Does productivity of Islamic banks endure progress or regress? Empirical evidence using Data Envelopment Analysis based Malmquist Productivity Index. Humanomics, 33(1), 84–118. https://doi.org/10.1108/H-08-2016-0059
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
Lee, I., & Shin, Y. J. (2018). Fintech: Ecosystem, business models, investment decisions, and challenges. Business Horizons, 61(1), 35–46. https://doi.org/10.1016/j.bushor.2017.09.003
Levinsohn, J., & Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. The Review of Economic Studies, 70(2), 317–341. https://doi.org/10.1111/1467-937X.00246
Li, C., Li, D., He, S., Sun, S., Tian, Y., & Wang, Z. (2022a). The effect of big data-based digital payments on household healthcare expenditure. Frontiers in Public Health, 10, Article 922574. https://doi.org/10.3389/fpubh.2022.922574
Li, C., He, S., Tian, Y., Sun, S., & Ning, L. (2022b). Does the bank’s FinTech innovation reduce its risk-taking? Evidence from China’s banking industry. Journal of Innovation & Knowledge, 7(3), Article 100219. https://doi.org/10.1016/j.jik.2022.100219
Li, C., Huo, P., Wang, Z., Zhang, W., Liang, F., & Mardani, A. (2023a). Digitalization generates equality? Enterprises’ digital transformation, financing constraints, and labor share in China. Journal of Business Research, 163, Article 113924. https://doi.org/10.1016/j.jbusres.2023.113924
Li, C., Huang, Y., Wu, Y., Wang, X., Tian, Y., Wu, R., Qu, F., & Wang, Z. (2023c). Intelligent data sharing strategy supported by artificial intelligence and blockchain technology: Based on medical data. Annals of Operations Research. https://doi.org/10.1007/s10479-023-05423-1
Li, C., Wang, Y., Zhou, Z., Wang, Z., & Mardani, A. (2023b). Digital finance and enterprise financing constraints: Structural characteristics and mechanism identification. Journal of Business Research, 165, Article 114074. https://doi.org/10.1016/j.jbusres.2023.114074
Li, C., Li, D., Liang, Y., & Wang, Z. (2024). Underdog entrepreneurship in the digital era: The effect of digital servitization on household entrepreneurship in China. Heliyon, 10(2), Article e24154. https://doi.org/10.1016/j.heliyon.2024.e24154
Liu, J., Li, X., & Wang, S. (2020). What have we learnt from 10 years of fintech research? a scientometric analysis. Technological Forecasting and Social Change, 155, Article 120022. https://doi.org/10.1016/j.techfore.2020.120022
Luo, S., Sun, Y., Yang, F., & Zhou, G. (2022). Does fintech innovation promote enterprise transformation? Evidence from China. Technology in Society, 68, Article 101821. https://doi.org/10.1016/j.techsoc.2021.101821
Olley, S., & Pakes, A. (1992). The dynamics of productivity in the telecommunications equipment industry (Working paper No. 3977) National Bureau of Economic Research. https://doi.org/10.3386/w3977
Palmié, M., Wincent, J., Parida, V., & Caglar, U. (2020). The evolution of the financial technology ecosystem: An introduction and agenda for future research on disruptive innovations in ecosystems. Technological Forecasting and Social Change, 151, Article 119779. https://doi.org/10.1016/j.techfore.2019.119779
Pan, X., Pan, X., Song, M., Ai, B., & Ming, Y. (2020). Blockchain technology and enterprise operational capabilities: An empirical test. International Journal of Information Management, 52, Article 101946. https://doi.org/10.1016/j.ijinfomgt.2019.05.002
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, Article 101210. https://doi.org/10.1016/j.pacfin.2019.101210
Philippon, T. (2019). On fintech and financial inclusion (Working paper No. 26330). National Bureau of Economic Research. https://doi.org/10.3386/w26330
Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297–307. https://doi.org/10.1016/j.ejor.2009.02.030
Sheng, T. (2021). The effect of fintech on banks’ credit provision to SMEs: Evidence from China. Finance Research Letters, 39, Article 101558. https://doi.org/10.1016/j.frl.2020.101558
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94. https://doi.org/10.2307/1884513
Thakor, A. V. (2020). Fintech and banking: What do we know?. Journal of Financial Intermediation, 41, Article 100833. https://doi.org/10.1016/j.jfi.2019.100833
Thota, N., & Subrahmanyam, A. C. V. (2020). Bank total factor productivity convergence: Evidence from India. Finance Research Letters, 37, Article 101357. https://doi.org/10.1016/j.frl.2019.101357
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, Article 101338. https://doi.org/10.1016/j.ribaf.2020.101338
Wang, Z., Lu, J., Li, M., Yang, S., Wang, Y., & Cheng, X. (2022). Edge computing and blockchain in enterprise performance and venture capital management. Computational Intelligence and Neuroscience. https://doi.org/10.1155/2022/2914936
Xu, Y., & Li, C. (2023). Digital transformation, firm boundaries, and market power: Evidence from China’s listed companies. Systems, 11(9), Article 479. https://doi.org/10.3390/systems11090479
Yu, C., Jia, N., Li, W., & Wu, R. (2022). Digital inclusive finance and rural consumption structure –evidence from Peking University digital inclusive financial index and China household finance survey. China Agricultural Economic Review, 14(1), 165–183. https://doi.org/10.1108/CAER-10-2020-0255
Zhai, C., Ding, X., Zhang, X., Jiang, S., Zhang, Y., & Li, C. (2023). Assessing the effects of urban digital infrastructure on corporate Environmental, Social and Governance (ESG) performance: Evidence from the broadband China Policy. Systems, 11(10), Article 515. https://doi.org/10.3390/systems11100515
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, Article 102552. https://doi.org/10.1016/j.jimonfin.2021.102552