An econometric understanding of Fintech and operating performance

Abstract

Purpose This study aims to develop a unique methodology to construct a bank’s financial technology (Fintech) score, which captures the degree of digitalization of a bank’s operations. Using the Fintech score as the proxy, this study investigates the effect of Fintech on the operating performance of the top largest Islamic bank. Design/methodology/approach The methodology used measures the link between the degree of digitization of a bank and its operational performance. This study applies the three-degree polynomial of regression to the largest Islamic bank in which the explanatory variable is the natural logarithm of Fintech score, and the response variable is common operating performance measure. To check the sensitivity of the estimates to the sample size and assumptions’ violation, this study has applied Bootstrapping and Bayesian processes to the three-degree polynomial regressions. Findings The study estimates from 2007 to 2021 show that the relationship between the operating performance of the Islamic banks and the Fintech is nonlinear and strongly significant: operating returns increase with the increasing level of Fintech, whereas the operating returns decrease with the increasing Fintech variance. At an aggregate level, this study attributes a significant rise in internet coverage to the emergence of Fintech in the Middle East region. Originality/value This study constructs an implicit measure of Fintech that measures the adoption of Fintech by the bank and, consequently, offers the technology to their customers for higher use satisfaction. This study finds that Fintech is linked to the operating performance in a nonlinear fashion, in which Fintech and Fintech variance have the opposite effect on operating performance: Fintech increases the operating profitability, whereas Fintech variance decreases the operating profitability of a bank.

Fintech and the Future of Banking: Collaboration and Innovation for Better Financial Services

“…It has been observed that government support positively influences consumer attitudes towards adopting FinTech. Additionally, the rate of adoption of FinTech is slower in Islamic banking compared to conventional banking (Bouheni et al, 2023). In conclusion, the adoption of FinTech by conventional banks is influenced by a combination of consumer behavior, market dynamics, regulatory support, and technological factors.…”

“…On the other hand, the rate of Fintech adoption is slower in Islamic banking compared to conventional banking (Bouheni et al, 2023). Islamic banks are observed to be slower in responding to the impact of Fintech (Yudaruddin, 2022).…”

“…Islamic Fintech and conventional Fintech differ in terms of Sharia compliance, transparency, and mutual benefit (Mansur et al, 2022). While Islamic banks may be slower in adopting Fintech compared to conventional banks (Bouheni et al, 2023), the impact of Fintech on customer retention and profitability is notable in both types of banks (Baber, 2019). Fintechs provide similar services to banks but with enhanced efficiency and convenience due to technological advancements (Baber, 2019).…”

“…Research indicates that banks are increasingly engaging with fintech startups, with a tendency to invest in smaller fintech firms while establishing product-related collaborations with larger ones (Hornuf et al, 2020). This trend is influenced by factors such as incomplete contract theory and the pursuit of structured digital strategies by banks (Bouheni et al, 2023). The presence of fintech lenders in the market has led to heightened competition between fintech lenders and banks, impacting areas such as earnings management and accounting practices within the banking sector (Ozili, 2020).…”

The Nexus Between Fintech Adoption & Bank Performance: A Role of Competitiveness

“…In Pakistan, where banking heavily relies on financial performance, challenges persist in achieving effective strategic positioning due to stakeholder issues, inadequate planning, resource constraints, weak leadership, and ideological complexities. While previous studies have explored strategic management in the banking sector, few have delved into the impact of technology adoption on commercial banks' strategic posture and financial performance (Ben Bouheni, Tewari, Sidaoui, & Hasnaoui, 2023). This study seeks to address this gap by investigating the impact of technology adoption on commercial banks' financial performance and strategic positioning.…”