Fintech and Commercial Banking

Conclusion and Policy Implications

Conclusion

In this study, we estimated the impact of financial technology on commercial banks' risk-taking and identified the transmission path through which financial technology affects commercial banks' risks. The fixed-effect model is used to analyze the impact of fintech on commercial banks' risk-taking. The results showed that both the full sample and all types of bank financial technology are significant and positively correlated with banks' risk-taking. Fintech can effectively reduce bank risk. The results of heterogeneity analysis revealed that state-owned banks have the highest risk prevention effect on banks, and rural commercial banks have a relatively insufficient effect. We also examined the impact of financial technology indicators on commercial banks' risk-taking and found that the impact of financial technology indicators on commercial banks' risk-taking is slightly different.

Based on the full sample data, the mediation effect model is used to analyze the impact of financial technology on various channels of bank risk. The results showed that the estimated coefficients of commercial banks' financial technology on cost-to-income ratio, noninterest income ratio, loan impairment, and total loan ratio are all significant and positive. It indicated that the improvement of financial technology significantly improved the financial efficiency and financial innovation level and risk management capabilities.

Furthermore, the results confirmed that financial efficiency, financial innovation, and risk management generated an intermediary effect for the impact of commercial banks' financial technology on risk reduction. To explain the improvement of banks' fintech, it is found that the three channels of financial efficiency, financial innovation, and risk management contributed 8.51%, 7.18%, and 5.77%, respectively, to the reduction of risk-taking.

We also constructed the commercial BRI and the commercial bank risk early warning index (RWI). The warming effect of the bank risk early warning index based on the data from China's banks has been found. The results showed that when the signal month is set to 12 months, the bank risk early warning index can play a warning effect in this period. In the process of building the bank risk early warning index, it is found that the early warning capabilities of each index are different.

Policy Implications

Commercial banks should use fintech to expand their customers and reject the "2 and 8 rule" as before. Although the number of tail customers is small, they require individualization and differentiation. If banks meet their individualized and differentiated needs, a huge market will be formed. For example, for typical long-tail customers such as small enterprises, if banks can launch consumer financial services that meet their needs, they can master more information on long-tail customers. By mining the value of the entire chain and exploring new profit channels, banks can reduce risks. Meanwhile, commercial banks cannot ignore the original customer groups.

We also need to guard against the risks posed by fintech. Fintech is also a double-edged sword for banks. While fintech promotes the transformation and upgrading of banks, it also brings certain risks. Fintech innovation has made financial risks more hidden and concealed in every corner of the financial industry. Once the risk is exposed, the systemic risk will be triggered due to the contagion of the risk. And, not only the banks will be hurt, but the entire financial system will be hit hard. Therefore, when the technologies are used, comprehensive risk prevention and control must be done.

Banks should also use effective risk early warning mechanisms and technologies. Although fintech brings benefits to banks, it also brings risks. A useful risk early warning system can identify financial risks in advance. Commercial banks should actively develop appropriate risk early warning technologies, test the early warning capabilities of these technologies, and use these warning indicators to monitor their business, which can minimize the impact and loss caused by risks.