Does FinTech change the market power of traditional banks in China?
Abstract
This study assesses the impact of the development of financial technology (FinTech) on the market power of traditional banks. We analyze the relationship between FinTech companies and traditional banks based on the barriers-to-entry theory, and verify the resulting hypothesis by using panel data from 155 Chinese commercial banks from 2013–2018. The benchmark results show that FinTech has a significant U-shaped effect on the market power of banks. Furthermore, the U-shaped effects remain robust when we focus on the technology and business innovation channels that affect banks. These effects vary across banks with different ownership structures and business segments. Specifically, municipal commercial banks are more likely to be influenced by business innovation than by technological innovation. By contrast, state-owned banks have advantages in using technological innovation to reacquire market power through loan services. Private banks, meanwhile, struggle to acquire any market power under intense competition from FinTech companies. Given that the FinTech may enable some banks overly dominate the banking industry at certain development stages, regulators and practitioners need to prevent monopoly-related problems and promote the digital transformation of small and medium-sized banks.
First published online 30 August 2022
Keyword : FinTech, traditional banks, market power, financial regulation, barrier to entry, Chinese banking
How to Cite
Qi, H., Yang, K., & Wang, W. (2022). Does FinTech change the market power of traditional banks in China?. Journal of Business Economics and Management, 23(5), 1060–1083. https://doi.org/10.3846/jbem.2022.17184
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Forssbæck, J., & Shehzad, C. T. (2015). The conditional effects of market power on bank risk – Cross-country evidence. Review of Finance, 19(5), 1997–2038. https://doi.org/10.1093/rof/rfu044
Freixas, X., & Rochet, J. C. (2008). Microeconomics of banking. The MIT Press.
Gai, K., Qiu, M., & Sun, X. (2018). A survey on FinTech. Journal of Network and Computer Applications, 103, 262–273. https://doi.org/10.1016/j.jnca.2017.10.011
Gao, H., Ru, H., Townsend, R., & Yang, X. (2019). Rise of bank competition: Evidence from banking deregulation in China (NBER Working Paper No 25795). https://doi.org/10.3386/w25795
Gehrig, T., & Stenbacka, R. (2004). Differentiation-induced switching costs and poaching. Journal of Economics & Management Strategy, 13(4), 635–655. https://doi.org/10.1111/j.1430-9134.2004.00026.x
Gomber, P., Koch, J. A., & Siering, M. (2017). Digital finance and FinTech: Current research and future research directions. Journal of Business Economics, 87(5), 537–580. https://doi.org/10.1007/s11573-017-0852-x
Guo, F., Wang, J., Wang, F., Cheng, Z., Kong, T., & Zhang, X. (2020). Measuring China’s digital financial inclusion: Index compilation and spatial characteristics. China Economic Quarterly, 19(4), 1401–1418 (in Chinese). https://kns.cnki.net/kcms/detail/detail.aspx?doi=10.13821/j.cnki.ceq.2020.03.12
Hirt, M., & Willmott, P. (2014). Strategic principles for competing in the digital age. McKinsey Quarterly.
Hodula, M. (2021). Does Fintech credit substitute for traditional credit? Evidence from 78 countries. Finance Research Letters, 102469. https://doi.org/10.1016/j.frl.2021.102469
Hung, J., & Luo, B. (2016). FinTech in Taiwan: A case study of a Bank’s strategic planning for an investment in a FinTech company. Financial Innovation, 2(1), 15. https://doi.org/10.1186/s40854-016-0037-6
Jagtiani, J., & Lemieux, C. (2017). Fintech lending: Financial inclusion, risk pricing, and alternative information (Working Paper No. 17-17 of Research Department). Federal Reserve Bank of Philadelphia. https://doi.org/10.21799/frbp.wp.2017.17
Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. American Economic Review, 80(5), 1183–1200. https://www.jstor.org/stable/2006769
Kerényi, Á., & Molnár, J., (2017). The impact of the fintech phenomenon – Radical change occurs in the financial sector? Hitelintézeti Szemle, 16(3), 32–50. https://doi.org/10.25201/FER.16.3.3250
Lacasse, R. M. (2021). A digital tsunami: FinTech and crowdfunding.
Landes, W. M., & Posner, R. A. (1981). Market power in antitrust cases. Harvard Law Review, 94(5), 937–996. https://doi.org/10.2307/1340687
Li, G. (2015). Estimation of the degree of competition in China’s bank loan market based on Boone indicator. The Journal of Quantitative & Technical Economics, 32(05), 131–146. (In Chinese). https://www.cnki.net/kcms/doi/10.13653/j.cnki.jqte.2015.05.009.html
Liu, L. (2014). Impact Analysis of Internet Financial Credit Reporting to China’s Commercial Bank Credit Monopoly. South China Finance, (8), 21–26 (in Chinese). https://kns.cnki.net/kcms/detail/detail.aspx?dbcode=CJFD&dbname=CJFD2014&filename=GDJR201408004&uniplatform=NZKPT&v=zeMWDIaTO7WKogzhAXi34jGncb-1xSoqopvynk8t_pbPg9iMSis0c-F6EFKbqBx_
Liu, L., Yu, J., Yang, J., & Zhu, X. (2017). Is competition a double-edged sword for the bank credit structure adjustment? Evidence from the Proccess of Interest Rate Liberalization in China. Economic Research Journal, 52(5), 131–145 (in Chinese). https://kns.cnki.net/kcms/detail/detail.aspx?dbcode=CJFD&dbname=CJFDLAST2017&filename=JJYJ201705018&uniplatform=NZKPT&v=-BUDyLuTJTpUDkKckp9F8_9Orn9C3qrJpWlMKhYY4L7NIJSYzUmUo9E9FuK0pMsq
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