Fintech disruption in traditional banking and corporate finance

Abstract

Financial technology (fintech) has revolutionized the banking industry by changing the approach to delivering financial services, competition, and financing business. This study delves into the multifaceted aspects of fintech disruption on traditional banking institutions under the lens of financial intermediation, capital allocation, risk management, digital payments, peer-to-peer lending, robo-advisory, block chain, and artificial intelligence. The methodology used was a mixed methods approach, which included panel data regression analysis of 320 banks in 40 countries from 2015-2023 and qualitative analyses relating to key phases of the fintech development. The results show that higher use of fintech is strongly correlated with decreases in net interest margin, cost efficiency, and market shares of traditional banks in retail deposits, payments and commercial lending. In the corporate finance space, fintech has significantly cut time to fundraise and transaction costs and enabled SMEs to access credit, thanks to algorithmic underwriting and alternative data credit scoring. There are notable regional variations, with fintech penetration showing a marked increase in the Asia-Pacific region and competition for incumbent banks being relatively high in this region. There are risks and opportunities for smaller, less technologically advanced banks, and larger banks can bolster their market position by acquiring niche fintech firms, partnering with them and/or investing in digital innovation. The study highlights the need for adaptive regulation, banks and fintech partnerships and improved digitalization of corporate finance functions. The results offer some useful lessons for banking executives, corporate finance professionals, regulators and policy makers in a more technology-driven financial system.