Fintech and Commercial Banking

Theoretical Framework

Fintech

Definition of Fintech

We can regard financial technology as a combination of finance and technology. The definition of fintech is not uniform in academia.

According to the Financial Stability Board, fintech is financial innovation driven by the continuous development and advancement of technology. In addition, many scholars also conducted research and discussion on the definition of financial technology based on the existing definition and their understanding.

The Main Technology of Fintech

Artificial Intelligence

Artificial intelligence (AI) extends human intelligence to computer systems. In the financial field, due to the many manual links involved in the commercial banking business, diverse customers, coupled with unstructured financial data, complex business logic, and other factors. Artificial intelligence can be applied to all aspects of the financial industry with its advantages. Currently, the proportion of artificial intelligence in the investment of fintech enterprises is expanding and gradually increasing. It can be seen that the importance attached by financial technology companies to artificial intelligence also reflects the significant advantages of artificial intelligence. In the future, AI will occupy a larger market.

Big Data

Many processing methods have been used to capture the required data, manage the data, and process it into valuable information. In this way, the complex data are filtered and processed into a kind of data with great utilization value. Moreover, financial technology companies promote the innovation of financial products and services due to advanced technology, which allows more customers to choose. The consumption data of these customers is used by financial technology companies. After the collection of data by the financial technology companies, the banks can organize and analyze the data for personal credit investigation, credit extension, and risk control.

Cloud Computing

Cloud computing refers to the transfer of computations originally performed on local servers to the cloud for on-demand use. The method has low cost and high efficiency. Due to its unique advantages, many large network companies have joined the ranks of cloud computing, which has promoted the rapid development of cloud computing. In the financial field, commercial banks should also learn how financial technology companies use cloud computing to transfer computing to the cloud.

Blockchain

A blockchain is a distributed shared accounting mechanism that has various characteristics such as decentralization, immutability, and anonymity. This implies that it meets the business needs of the financial industry for data security, transaction authenticity, privacy, and confidentiality. In addition, many countries also strongly support the development of blockchain and have introduced many policies that are conducive to the development of blockchain.

Risk-Taking

The commercial bank risk refers to the difference between the actual income obtained by a commercial bank after a period of operation and the income predicted by various methods. Due to a certain gap, the commercial banks cannot make normal profits and it causes losses in additional income.

Risk-taking refers to the fact that a company actively chooses to take risks to obtain high returns. Many studies have focused on the risk-taking of commercial banks. We emphasized the studies that focused on the risk-taking of commercial banks from the perspective of competition and innovation. Based on an empirical analysis of the issue from the perspective of cross-industry competition and horizontal competition constraints, Ying and Zhang reported that if the banks actively pursue profits, they will increase risks. Commercial banks will reduce risk-taking because of the government's intervention.

In general, the risk tolerance of commercial banks will be affected by two forces in different directions, and its ultimate risk tolerance will depend on the strength of the two opposite forces. Some scholars believe that financial innovation can improve the risk-taking ability of commercial banks, while others contradict this opinion. In recent years, many scholars believe that the impact of financial innovation on the risk-taking ability of commercial banks is bidirectional or even nonlinear. Chen et al. used the systematic GMM estimation method to judge the statements in the above literature. They concluded that there is a very obvious "inverted U"-shaped relationship between the degree of financial innovation and the risk-taking ability of commercial banks.

Impact of Financial Technology on the Risk-Taking Mechanism of Commercial Banks

Information technology is a key factor driving the continuous development of banks and has significant technological spillover effects on the banking industry. According to the technology spillover theory, technology has external characteristics, and financial technology companies can empower commercial banks with their comparative advantages in information technology. Then, commercial banks adjust business thinking to upgrade their technology, transform their business, and improve the bank's ability to deal with risks.

On the one hand, the empowerment of financial technology can gain insight into the potential needs of users, achieve more accurate product pricing and more in-depth product development, and reduce the risk of product development failure. On the other hand, the development of financial technology can alleviate the problem of information asymmetry faced by commercial banks, improve the availability and accuracy of information when banks lend, increase information channels and sources, reduce information friction between banks and borrowers, and reduce loss of risk. 

However, the use of fintech by banks may also have the potential to increase their risk-taking, mainly due to technical risks and internal management risks. The development of financial technology is not long, and many banks have limited strength and lack core technical strength, which may lead to theft, leakage, and tampering of data and information. However, with the gradual improvement of the financial technology risk control system of China's commercial banks and the increasing supervision of financial technology risks by the regulatory authorities, the advantages of China's commercial banks' development of financial technology outweigh the disadvantages. Based on the above analysis, we propose hypothesis 1 (H1).

When commercial banks and financial technology are integrated, the risks from financial technology are inevitably integrated. The risks of financial technology are transmitted through innovative financial products, customer experience, capital flow, and other channels and affect commercial banks' risk-taking through operational efficiency, financial innovation, and risk-management effects.

Operational Efficiency

According to the theory of the technology spillover effect, the technology and technical talents of fintech spill over into the field of traditional commercial banks, promoting the development of traditional commercial banks. Fintech has technical spillovers from the demonstration effect, linkage effect, personnel flow effect, and competition effect, which will increase the operational efficiency of commercial banks and reduce the experience risk of commercial banks.

According to Schumpeter's innovation theory, the development of financial technology can save or replace basic production factors such as labor, capital, and land to reduce the operating cost of commercial banks and narrow the gap between the actual and expected cost.

The development of financial technology can also innovate business models and embed banking products and services into the online life scenarios of the public so that financial services can cover remote areas that are difficult to reach by physical outlets, open up new markets, and expand channels for banking business. Meanwhile, fintech can enhance customer acquisition capabilities, expand business scale, and directly increase the operating income of commercial banks, which is conducive to improving the revenue efficiency of commercial banks.

The development of financial technology is not only conducive to improving the cost efficiency of commercial banks but also to improving their revenue efficiency. When the cost efficiency and revenue efficiency of commercial banks are improved, their operating efficiency will improve, ultimately reducing their costs and risk-taking. Therefore, we propose hypothesis 2 (H2).

Financial Innovation

Fintech is essentially a technological innovation, and the most significant feature that distinguishes it from traditional finance is "technicization." The integration of fintech companies and commercial banks based on digitization, automation, and intelligence provides commercial banks with a new service model. This change creates opportunities for commercial banks to carry out off-balance sheet business and promote diversified operations.

Meanwhile, it greatly improves the business model of traditional commercial banks and enhances their level of financial innovation. With the advancement of technology, banks can not only improve the management efficiency of the entire internal capital market by financial innovation but also make it easier for other higher-yielding assets to be converted into money as a means of payment, which is very important for businesses that rely on the source of income from deposit and loan spreads. It is very attractive for banks.

The improved level of banking financial innovation will help banking institutions to transfer risks and reduce their risk-taking. Gu and Zhou also found that the rising level of financial innovation in banks is beneficial to increasing the bank's cumulative net income and reducing its willingness to provide risk capital. It can be seen that the use of financial technology by banks can improve their financial innovation level, increase their diversification, and reduce their risk-taking. Therefore, we propose hypothesis 3 (H3).

Risk Management

From the perspective of risk management, fintech, especially big data and technology supervision, will change the risk-management model of commercial banks and improve their risk-management capabilities, which will reduce the ultimate risk. Risk management is an important factor affecting the risk-taking of banks. Relying on financial technology, commercial banks can effectively enhance the effectiveness, accuracy, timeliness, and stability of risk management, especially in risk identification and risk assessment. 

First, in risk identification, traditional commercial banks have a single information acquisition channel. While relying on financial technology, traditional commercial banks can break through the limitations of time and space, expand the coverage of customers to the greatest extent, and diversify data dimensions. Then, banks can effectively solve the problems such as insufficient information and untimely updates.

Second, in risk assessment, traditional commercial banks are limited by technology and compliance, and the utilization rate of external data is relatively low, coupled with the high proportion of manual review. It is difficult to accurately describe the "exposure level" of risks, while the application of artificial intelligence and big data can promote the intelligentization of bank risk assessment. For example, big data risk control models can conduct multidimensional analyses of risk-measurement indicators, which are helpful to capture the interaction effects between different variables and can more accurately describe the default characteristics of users, and then improve risk management and control capabilities. Based on the above discussion, we may propose hypothesis 4 (H4).