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The impact of FinTech firms The impact

of FinTech
on bank performance: firms

evidence from the UK

Apostolos Dasilas
Department of Applied Informatics, University of Macedonia,
Thessaloniki, Greece, and Received 4 April 2023
Revised 22 July 2023
Goran Karanovi
c 12 August 2023
Accepted 8 September 2023
Faculty of Tourism and Hospitality Management,
University of Rijeka, Opatija, Croatia

Abstract
Purpose – This study examines the impact of financial technology (FinTech) on bank performance employing
data from the United Kingdom (UK) banking sector for a period spanning from 2010 to 2019.
Design/methodology/approach – This study employs static as well as dynamic panel data regression
analysis to assess the impact of FinTech on the profitability of UK banks.
Findings – The results show that FinTech firms positively impact bank performance. For every new FinTech
firm introduced into the UK market, net interest margin (NIM) and yield on earning assets (YEA) increase by
6.385 and 3.192% of their sample means, respectively.
Practical implications – Cooperating with FinTech firms, UK banks can broaden their portfolio of financial
services offered to their customers and optimize their profit margins.
Originality/value – This is the first study that examines the impact of FinTech on bank profitability
employing data from a developed market.
Keywords Financial technology, UK banks, Bank performance
Paper type Research paper

1. Introduction
For decades, banks have been the sole providers of financial services worldwide. However,
technological advancements in telecommunications and information technology altered the
landscape of financial services. New financial services providers emerged trying to reduce the
costs of financial intermediation. These providers are known as financial technology
(FinTech) firms operating at the intersection of financial services and technology. Taping into
technology, FinTech firms can reduce transaction costs and information asymmetry,
mitigate moral hazard and adverse selection and improve the efficiency of financial
operations (Wang et al., 2023). Moreover, FinTech companies can offer a wide range of
financial services at less cost compared to banks. This certainly makes the lives of banks
harder, as it is simply impossible for a large organization to achieve sustainable growth in
every niche of the financial services sector (Chishti and Barberis, 2016).
The rapid expansion of FinTech firms is mainly attributed to the development of practical
solutions provided by the Internet, smartphones, mobile communications and cloud
computing capabilities that enabled the emergence of new business models and
organizational forms (Drasch et al., 2018). With the generation of new business models
based on the use of digital technologies, FinTech firms have the potential to disrupt
established financial intermediaries and banks in particular (Das, 2019; Li, 2020).

EuroMed Journal of Business

The authors thank all anonymous referees, the Editor-in-Chief and the Associate Editor for the helpful © Emerald Publishing Limited
1450-2194
comments and suggestions. DOI 10.1108/EMJB-04-2023-0099
EMJB Consequently, the use of information technologies enables FinTech firms to offer more
efficient and customer-centric financial services compared to those provided by traditional
banks (Dapp, 2014).
While banks and FinTech firms appear to compete for the same share of the pie, they are
not subject to the same regulatory regimes. In particular, FinTech firms encounter
substantially lower regulation for financial services allowing FinTech firms to unbundle
financial service offerings through the use of innovative technologies because they appear to
be unaffected by regulatory restrictions and are likely to undertake more risk than regulated
banks (Kumar, 2016). As a result, the relatively lax regulatory environment enabled FinTech
firms to adapt to a changing business and technology environment than banks (Elsaid, 2021).
There are ongoing discussions in the FinTech literature on how the lighter regulatory
requirements as well as the ability of FinTech firms to provide innovative financial services
at lower cost vis-a-vis banks make the former more competitive and efficient. Furthermore, it
is argued that the implementation of technological innovation to finance adopted by FinTech
firms disrupts financial intermediation and adversely affects bank profitability. In line with
this argument, Phan et al. (2020), using data from the Indonesian market, found that the
growth of FinTech firms negatively affects bank performance. They explained this negative
effect through the lens of the consumer and disruptive innovation theories. According to
consumer theory (Aaker and Keller, 1990), new services that meet the same consumer
demand can replace the old services. Consequently, FinTech firms can provide innovative
financial services at low costs that challenge the services provided by the existing financial
institutions. The disruptive innovation theory (Christensen, 1997) asserts that new entrants
(such as FinTech firms) apply innovative technology to provide more accessible and cost-
effective goods and services (i.e. lending, payments and investments) that create competition
in the market. Based on these two theories, there is a substitution effect for the financial
services provided by FinTech firms and banks.
The high competition from non-banks has instigated banks to invest more in enhancing
the value of their relationship loans (Boot and Thakor, 2000). Moreover, Goetz (2018) found
that increased banking competition can bring about banking stability, higher profitability
and better asset quality. This result suggests that competition forces banks be more efficient
by adopting advanced technology to remain as competitive as FinTech firms. The
digitalization of banking operations can offer several opportunities for banks, including the
enhancement of customer interactions, the improvement of management decisions and
permit the development of new value chains and business models (Paulet and Mavoori, 2020).
Moreover, Chen et al. (2019) advocated that large banks with high market shares have
substantial financial capabilities and enjoy technical economies of scale by investing heavily
in their innovation activities to protect themselves from the adverse effects of disruption.
Therefore, an investment in innovation appears to help large banks avoid harm from FinTech
firms’ disruptive innovation (Chen et al., 2019).
The above mixed evidence on the impact of FinTech firms on bank profitability calls for
more scholarly attention and the current study aims at contributing to the debate on the role
of FinTech in banking research. Therefore, the main research objective of the current study is
to examine the effect of FinTech on bank performance using United Kingdom (UK) bank-level
data for a period spanning from 2010 to 2019. Using both static and dynamic panel data
regressions, we empirically test whether the existence of FinTech firms positively or
negatively affect bank performance. We examine the UK market because of its growth and
development in FinTech. In specific, the UK FinTech is ranked second in the world and first in
Europe according to the Global FinTech Index in 2021. Moreover, the UK FinTech is
estimated to grow with a Compound Annual Growth Rate (CAGR) of 16% until 2027 with the
transaction value of digital payments projected to amount to $810.9 billion (Statista, 2022).
Despite the significant growth of the UK FinTech market, there is a dearth of studies
investigating the impact of FinTech on banking performance. To the best of our knowledge, The impact
this is the first study that aims at filling this research gap using data from the UK. of FinTech
In contrast to Phan et al. (2020), our panel models of the determinants of banking sector
performance suggest that FinTech firms have a positive effect on UK bank performance. In
firms
particular, with every new FinTech firm introduced into the UK market, we find that FinTech
positively predicts NIM and YEA by 6.385 and 3.192% of their sample means, respectively.
These results imply that FinTech firms challenge conventional banks through their digitally
optimized cost structure and access to new technology (Brandl and Hornuf, 2020). However,
FinTech firms do not fully replace banks, but rather they operate supplementarily to banks.
Moreover, the UK banks have long established strategic partnerships with FinTech firms
that help banks retain clients who might otherwise seek alternative financial services
providers (i.e. check-cashing outlets, payday loan stores, pawnshops, rent-to-own stores and
car title lenders).
The main contribution of this paper is two-fold. This is the first study that empirically
tests the impact of FinTech firms on bank profitability using data from the UK banking and
FinTech industries. Moreover, this study contributes to the discourse of FinTech literature by
assessing the interplay of FinTech and banks using both static as well as dynamic panel data
regression models. This helps to address effectively the endogeneity problem that is often
encountered in banking and finance literature.
The rest of the article is organized as follows: Section 2 presents the institutional setting of
FinTech. Section 3 presents the pertinent literature. Section 4 describes the research design,
while section 5 presents and discusses the empirical results. Section 4 provides concluding
remarks and discusses managerial implications.

2. Institutional setting
2.1 FinTech regulation in the UK
The UK FinTech market was ranked second only to the USA as the most popular destination
for FinTech investment globally. Despite its “fintech-friendly” environment, the UK market
still lacks a regulatory framework that specifically governs FinTech businesses. This means
that FinTech firms are subject to the regulatory framework as most other businesses offering
financial services, such as provision of banking, consumer credit and insurance services as
well as certain areas more typically associated with FinTech start-ups, such as
crowdfunding. The regulatory framework is set to expand, moreover, to encompass a wide
range of cryptoasset activities where these mirror, or closely resemble, regulated activities
performed in traditional financial services [1].
In early 2021, the Kalifa report was published and proffered five strategic
recommendations for how to regulate and manage the FinTech sector moving forward [2].
First, the report proposed establishing a policy and regulatory approach that both protects
consumers and encourages competition. Second, FinTech firms should ensure that have a
sufficient supply of domestic and international talent and the means to train and upskill
current and future workforce. Third, the investment environment should facilitate FinTech
firms to go public through free float reduction, dual-class shares and relaxation of pre-
emption rights. Fourth, FinTech firms should seek international collaboration through the
center for finance, innovation and technology and launch an international FinTech task-force.
Finally, the goal of national connectivity could be achieved by leveraging the output of
FinTech firms across the UK and facilitating connectivity amongst them (through further
investment, such as in research and development) [3].
In December 2021, following the Kalifa report, new listing rules were introduced for
FinTech companies looking for going public. By allowing “dual-class share structures within
the premium listing segment”, the new listing rules seek to stimulate innovation by coaxing
EMJB companies to list sooner, thus diversifying the investment market. Additionally, FinTech
companies now only have to issue 10% of shares to public hands [4].

2.2 The UK FinTech market

The UK FinTech industry has seen impressive growth in the last decade, especially in the
areas of digital payments, personal finance, alternative lending and alternative financing.
According to Statista (2022), digital payments amounted to $253.2 bn in 2022 from $120.4 bn
in 2017, while personal finance was $35.6 bn in 2022 from $6.8 bn in 2017. Moreover, the
average FinTech transaction value per user in 2017 (2022) was $3,337 ($5,615), $28,311
($56,267), $673 ($5,028) and $12,095 ($12,211) for digital payments, alternative financing,
personal finance and alternative financing, respectively. During the same period, the
traditional banking industry has undergone significant changes, especially in the areas of
payments, lending, wealth management and retail banking as a result of technological
advancements, the emergence of novel solutions for transactions and saving and changes in
cybersecurity and digitization (Murinde et al., 2022).
Given the ever-growing market share of FinTech firms, many UK banks have been
mobilized to incorporate financial services into their portfolios such as digital payments,
personal lending, crowdfunding, trading and capital markets, insurance, personal financing
and wealth management. The UK banking has considerably evolved and transitioned
through many shapes and forms; however, recent technological advancements have changed
the DNA of UK banks. Consequently, the UK banks are at the forefront of technological
innovation by providing less expensive and more efficient services similar to those provided
by FinTech firms.

3. Literature review
FinTech firms are classified into two groups: those providing services complementary to
bank services (i.e. providing technologies used by banks to offer financial services) and those
providing services traditionally covered by banks (i.e. payments) (Romanova and Kudinska,
2016, p. 28). Therefore, depending on the services provided by FinTech firms, their impact on
bank profitability remains inconclusive. Below, we discuss the two strands of literature
regarding the impact of FinTech on bank performance.

3.1 The positive impact of FinTech on bank profitability

A strand of studies holds that FinTech firms can provide financial services at a lower cost
than conventional banks. In particular, Dietz et al. (2016) showed in their report that banks
can reduce their cost savings up to 60% using FinTech solutions. Collaborating with FinTech
firms, banks can earn additional revenues by providing access to new user segments and
offering new financial products and services (Omarini, 2018). FinTech firms can also offer
new products, like mobile payments, peer-to-peer lending, and robo-advisory services, which
can enhance banks’ revenues (Puschmann, 2017). FinTech firms place much emphasis on
user-friendly interfaces, which significantly impact user experience. Hence, partnering with
FinTech firms banks can improve their user experience and enhance user loyalty. As a result,
banks will augment their profitability over the long term (Chen et al., 2017). Another way that
FinTech firms can help banks is through risk management practices that provide access to
new data sources and make use of advanced analytics and machine learning algorithms (Leo
et al., 2019). Finally, cooperating with FinTech firms, banks can benefit from disruptive
technologies and innovative solutions that improve bank efficiency, lower operating
expenses and increase bank profitability (Lee and Shin, 2018).
3.2 The negative impact of FinTech on bank profitability The impact
Another string of studies finds that FinTech adversely impacts banking business. Typically, of FinTech
FinTech firms do not meet strict banking regulation and cannot satisfy the demand for loans
(Zhao et al., 2022). The rise of online lending directly affects banks’ lending business (Buchak
firms
et al., 2018; Boot et al., 2021). According to Buchak et al. (2018), the operation of FinTech firms
is responsible for 30% of shadow bank growth in the US. Shadow bank and FinTech firms
have grown in the residential mortgage market and reduced the market share of traditional
banks (Zhao et al., 2022). A survey conducted by Van Loo (2018) showed that FinTech firms
provide consumers access to other financing sources (i.e. peer-to-peer lending), thus lowering
the demand for bank loans and reducing banks’ profitability. Phan et al. (2020) revealed that
FinTech firms decrease bank market share and raise risk which both adversely affect bank
profitability. More recently, Wang et al. (2021) asserted that FinTech firms can decrease bank
lending and enhance competition which combined may adversely affect bank profitability.
So far, very few studies have explored the impact of FinTech development on bank
performance and the empirical evidence is inconclusive. Anagnostopoulos (2018) asserted
that traditional banks offer high-quality products and services to satisfy the needs of
customers with high profitability. In contrast, FinTech firms attempt to serve the less
profitable segments that conventional financial institutions are neglecting. Consequently,
FinTech firms challenge the dominance of the existing financial institutions by providing
high-quality innovative financial services at low cost. As a response to the challenges coming
from FinTech firms, banks are forced to heavily invest in cutting-edge technology (i.e. cloud
computing and blockchain) and be able to meet the changing customer needs in the financial
services sector (Anagnostopoulos, 2018). Particularly, large banks are more likely to adopt
digital innovations and cooperate with FinTech firms thus offering a greater range of
financial services together. Therefore, the outcome will depend on whether the investment in
digital innovation makes a bank tough or soft in the competition and on whether competition
in the marketplace involves strategic substitutes or complements. At the individual level, the
outcome will also depend on how banks incorporate technology as a way to enhance their
business and keep flexible.
The existing literature has investigated the effect of the number of FinTech firms on bank
performance. However, there is a dearth of studies examining the channels through FinTech
influences bank performance. In particular, the financial services provided by FinTech firms
that either positively or adversely affect bank profitability have not yet investigated.
Moreover, how the degree of technological development symmetrically affects FinTech firms
and banks has not yet examined.

4. Research design
4.1 Data
To examine the impact of FinTech firms on bank profitability, we consider all listed and
unlisted banks that operate in the UK from January 1, 2010 to December 31, 2019. We proxy
bank performance using net interest margin (NIM) and yield on earning assets (YEA).
Following prior studies (i.e. Dietrich and Wanzenried, 2011; K€oster and Pelster, 2017; Shaban
and James, 2018; Phan et al., 2020), we use a gamut of bank-specific control variables that have
been proven to determine bank performance such as total assets (SIZE), equity to total assets
ratio (CAP), cost to income ratio (CTI), loan loss provisions (LLP), annual growth of deposits
(DG), interest income share (IIS), funding cost (FC) and two macroeconomic variables, that is,
gross domestic product growth rate (GDP) and inflation rate (INF). Bank-specific variables
were obtained from Orbis, while macroeconomic variables were obtained from the Global
Financial Database. Table 1 provides definitions for all variables.
EMJB Variable Definition Expected sign

NIM Ratio of net interest income to total assets

YEA Yield on earning assets
FinTech Number of financial technology companies
CAP Capital ratio equals equity over total assets þ/
SIZE Log of total assets (V million) þ/
CTI Cost-to-income ratio equals total expenses over total generated revenues –
LLP Loan loss provisions equals loan loss provisions over total assets –
DG Annual growth of deposits þ/
IIS Interest income share equals total interest income over total income –
FC Funding cost equals interest expenses over average total deposits –
GDP UK annual GDP growth rate þ
Table 1. INF UK Inflation þ/
Variable description Source(s): Phan et al. (2020)

Table 2 reports the number of FinTech firms and banks (commercial, cooperative and
savings) in the UK per annum. In 2010, the number of banks was 111 (107 commercial banks,
1 cooperative bank and 3 savings banks), while that of FinTech was only 11. Until 2015,
banks (120) outnumbered FinTech firms (78) in the UK Since 2016 there was a dramatic
increase in the number of FinTech firms amounting to 229 at the end of 2019, while the
number of active banks remained constant (123).
Table 3 presents descriptive statistics. The average (median) NIM is 1.427% (1.025%),
while the mean (median) YEA is 0.031% (0.027%). The average CAP is 13.179% and that of
CTI is 55.339%. The mean LLP is 0.367% and the growth of deposits is 12.541%. Finally, the
average funding cost (FC) is 0.444%.

4.2 Methodology
We examine the impact of FinTech expansion on UK bank performance by adopting an fixed
effect OLS static regression model as follows:
PERi;t ¼ a þ β1 FinTechi;t þ β2 CAPi;t þ β3 CAPi;t þ β4 SIZ Ei;t þ β5 CTIi;t þ β6 LLPi;t
þ β7 DGi;t þ β8 II Si;t þ β9 FCi;t þ β10 GDPi;t þ β11 IN Fi;t þ εi;t (1)

Number of Number of Number of Number of Number of

Year banks commercial banks cooperative banks savings banks FinTech firms

2010 111 107 1 3 11

2011 114 110 1 3 17
2012 115 111 1 3 19
2013 118 114 1 3 24
2014 118 114 1 3 42
2015 120 116 1 3 78
2016 121 117 1 3 127
2017 123 118 2 3 181
Table 2. 2018 123 118 2 3 243
Number of UK banks 2019 123 118 2 3 229
and FinTech firms Source(s): Table created by authors
 Mean Median St. Deviation Max Min
The impact
of FinTech
NIM (%) 1.427 1.025 2.307 22.039 22.064 firms
YEA (%) 0.031 0.027 0.024 0.233 0
SIZE (log) 14.481 14.225 2.694 21.348 6.648
CAP (%) 13.179 7.381 19.171 100 0
CTI (%) 55.339 52.484 68.076 851.197 0
LLP (%) 0.367 0.026 2.420 61.714 3.917
DG (%) 12.541 0.010 101.163 1490.884 100
IIS (%) 3.133 0.343 24.806 520.664 0
FC (%) 0.444 0.011 6.255 107.692 0.006
GDP (%) 2.030 2.011 0.477 2.991 1.458
INF (%) 2.205 2.480 1.215 4.460 0.040 Table 3.
Source(s): Table created by authors Descriptive statistics

One potential source of endogeneity may come from the reverse causality between bank
performance and FinTech. In such a case the coefficient estimates in Equation (1) can be
biased. To address this potential reverse causality problem, we re-estimate the baseline
Equation (1) using the generalized methods of moments (GMM) dynamic estimator developed
by Arellano and Bover (1995) and Blundell and Bond (1998). Using instrumental variable (IV)
techniques, the GMM is used to overcome the problem of endogeneity, heteroscedasticity and
autocorrelation due to its dynamic panel data estimation. The dynamic model is specified as
follows:
PERi;t ¼ a þ β1 PERi;t−1 þ β2 FinTechi;t þ β3 CAPi;t þ β4 CAPi;t þ β5 SIZ Ei;t þ β6 CTIi;t
þ β7 LLPi;t þ β8 DGi;t þ β9 II Si;t þ β10 FCi;t þ β11 GDPi;t þ β12 IN Fi;t þ εi;t (2)

The variable of interest is FinTech, that is, the number of firms that provide financial services
related to the banking sector, such as lending, payments, personal finance management,
crowdfunding and cryptocurrencies (Phan et al., 2020). The dependent variable (PER) is
proxied with net interest margin (NIM) and yield to earning assets (YEA). We consider bank
size (SIZE) measured by the log of total assets. Prior evidence is inconclusive on the effect of
bank size. On the one hand, large-sized banks are alleged to enjoy both economies of scale
(greater operational efficiency) and economies of scope (greater diversification concerning
product and loan) compared to small banks. Moreover, large banks have access to cheaper
capital (Short, 1979) and can reduce their level of risk by diversifying their products and
services, which contributes to higher operational efficiency and profitability (Djalilov and
Piesse, 2016). On the other hand, Berger et al. (1987) and Pasiouras and Kosmidou (2007)
document a negative effect of size on bank performance due to bureaucracy. Finally, Shaban
and James (2018) found mixed evidence on the relationship between bank size and bank
performance.
The second control variable is CAP, measured as equity scaled by total assets. According
to the bankruptcy cost hypothesis, banks with a higher capital ratio increase their expected
profits by lowering interest expenses on uninsured debt. Moreover, the signaling hypothesis
posits that an increase in bank capital sends a positive signal to the bank’s prospects (Berger,
1995). Banks with higher CAP are less likely to use external funding, which can positively
influence profitability. In contrast, Osborne et al. (2012) reveal that a higher CAP is related to
lower bank performance because capital is considered more expensive than debt due to
market imperfections and tax-shield savings associated with debt. Therefore, the capital–
bank performance nexus remains inconclusive.
EMJB The third control variable is CTI, defined as operating costs scaled by total generated
revenues (Pasiouras and Kosmidou, 2007; Dietrich and Wanzenried, 2011; Phan et al., 2020). A
higher CTI is linked with lower bank efficiency and performance. This negative relationship
between CTI and bank performance is documented in prior empirical studies such as
Athanasoglou et al. (2008), Pasiouras and Kosmidou (2007), Dietrich and Wanzenried (2011)
and Phan et al. (2020).
The fourth control variable is LLP, computed as loan loss provisions over total assets. LLP
is a measure of credit risk indicating a bank’s asset quality and can be used to judge changes
in future performance (Thakor, 2020). Miller and Noulas (1997) asserted that when banks are
exposed to high-risk loans, they are very likely to end up with unpaid loans and lower
profitability. Athanasoglou et al. (2008) and Dietrich and Wanzenried (2011) suggested that
increased exposure to credit risk is associated with decreased bank profitability since bad
loans are expected to reduce profitability. Therefore, a negative effect of LLP on bank
performance is conjectured.
Another control variable is DG which measures the annual growth of deposits. It is supposed
that a bank with high growth of deposits can use deposits for business expansion that may result
in greater profits. However, an increase in deposit growth per se does not necessarily lead to
higher profits because converting deposits into loans granted to borrowers with lower credit
quality may jeopardize bank profitability. In addition, higher growth of deposits enhances
competition in the market which can potentially reduce bank profitability (Phan et al., 2020).
Naceur and Goaied (2001) found a positive relation, while Demirg€ uç-Kunt and Huizinga (1999)
found a negative relation. Therefore, the effect of DG on bank profitability is unpredictable.
IIS, computed as total interest income over total income, is also used as a control variable. In
general, commercial banks earn higher margins from asset management activities than from
interest operations. Dietrich and Wanzenried (2011) found that banks are less profitable if the
share of interest income relative to total income is high. Therefore, we expect a negative effect of
IIS on bank performance. The last firm-specific control variable is FC, which equals interest
expenses over average total deposits. As FC increases, bank profits are expected to be lower.
Dietrich and Wanzenried (2011) documented a negative impact of FC on bank performance.
In addition to firm-specific variables, we employ two macroeconomic variables which are
gross domestic product growth rate (GDP) and inflation rate (INF). The impact of GDP on
bank performance is largely dependent on the business cycle. During a prolonged downturn
in economic activity (recession), the quality of the loan portfolio worsens driving down bank
profitability. On the other hand, in an economic uptrend, the demand for lending increases as
well as net interest rate margins (Dietrich and Wanzenried, 2011). However, prior literature
documents a positive impact of GDP growth on bank profitability (e.g. Demirg€ uç-Kunt and
Huizinga, 1999; Athanasoglou et al., 2008). The impact of INF on bank profitability depends
on whether the rate of increase in inflation is slower compared to wages and other operating
expenses (Phan et al., 2020). Therefore, the impact of inflation is apriori unknown.
Table 4 presents the correlation matrix, which measures the relationship between the
variables used in the regression models. It is noted that all the correlation coefficients are
moderate and the predictor variables are far from being perfectly or highly correlated.
Consequently, the data do not suffer from multicollinearity problems.

5. Results
5.1 Static regression results
As our dataset includes panel data, we employ the Hausman test to choose between fixed
effects (FE) and random effects (RE) models. Based on the Hausman test, we adopt fixed
effects models. Moreover, the fixed effects models partially address the issue of unobservable
firm characteristics (Frondel and Vance, 2010). Columns 1 and 3 in Table 5 show the impact of
 NIM YEA SIZE CAP CTI LLP DG IIS FC GDP INFL

NIM 1.000 0.911 0.192 0.135 0.063 0.278 0.071 0.092 0.042 0.032 0.095
YEA 0.911 1.000 0.153 0.122 0.114 0.336 0.003 0.097 0.047 0.009 0.063
SIZE 0.192 0.153 1.000 0.473 0.061 0.028 0.054 0.680 0.066 0.055 0.072
CAP 0.135 0.122 0.473 1.000 0.147 0.031 0.032 0.208 0.010 0.024 0.066
CTI 0.063 0.114 0.061 0.147 1.000 0.126 0.020 0.017 0.079 0.031 0.069
LLP 0.278 0.336 0.028 0.031 0.126 1.000 0.001 0.016 0.048 0.091 0.095
DG 0.071 0.003 0.054 0.032 0.020 0.001 1.000 0.054 0.036 0.045 0.055
IIS 0.092 0.097 0.680 0.208 0.017 0.016 0.054 1.000 0.023 0.000 0.003
FC 0.042 0.047 0.066 0.010 0.079 0.048 0.036 0.023 1.000 0.069 0.073
GDP 0.032 0.009 0.055 0.024 0.031 0.091 0.045 0.000 0.069 1.000 0.631
INF 0.095 0.063 0.072 0.066 0.069 0.095 0.055 0.003 0.073 0.631 1.000
Source(s): Table created by authors
of FinTech
The impact
firms

Correlation matrix
Table 4.
EMJB FinTech and bank-specific variables on NIM and YEA, respectively, while Columns 2 and 4
expand the specification model including macroeconomic variables. In contrast to Phan et al.
(2020), our results show that the slope coefficient on FinTech is statistically positive in all
regressions. In particular, FinTech positively impacts NIM (0.002, t-statistic 5 2.12 and 0.002,
t-statistic 5 2.16) and YEA (0.001, t-statistic 5 1.85 and 0.001, t-statistic 5 2.44). These slope
coefficients imply that with one extra FinTech firm entering the financial services industry,
NIM and YEA increase by 6.385 and 3.192% of the mean value (NIM 5 1.427 and
YEA 5 0.031), respectively. The above results imply that FinTech enhances the competition
in the banking industry by accelerating the pace that banks adopt digital innovations (i.e.
Internet and mobile banking), which promote financial inclusion and improve the relationship
between banks and customers resulting in increased bank performance. In other words, these
findings suggest that UK banks are more adaptable to new technologies and more resistant to
competition induced by FinTech firms, consistent with the argument that banks and FinTech
firms can operate supplementarily in providing novel financial services to their customers.
In line with the predictions of bankruptcy and signaling hypotheses, CAP has a positive
and significant effect on NIM (0.158, t-statistic 5 6.75 and 0.149, t-statistic 5 6.33) and YEA

NIM NIM YEA YEA

Intercept 4.482 1.941 0.008 0.016

(1.12) (0.46) (0.17) (0.35)
FinTech 0.002** 0.002** 0.001* 0.001**
(2.12) (2.16) (1.85) (2.44)
CAP 0.158*** 0.149*** 0.001*** 0.001***
(6.75) (6.33) (5.23) (4.93)
SIZE 0.297 0.143 0.001 0.001
(1.17) (0.55) (0.45) (0.07)
CTI 0.004 0.005 0.001 0.001
(1.38) (1.59) (0.45) (0.57)
LLP 0.262 0.381 0.240* 0.252*
(0.62) (0.80) (1.86) (1.94)
DG 0.189** 0.178** 0.001 0.001
(2.41) (2.27) (0.68) (0.56)
IIS 0.001 0.001 0.001 0.001
(0.29) (0.35) (1.12) (1.21)
FC 0.146 0.174 0.001 0.001
(1.16) (1.38) (0.84) (1.02)
GDP 0.072 0.002
(0.34) (0.71)
INF 0.112 0.002
(1.41) (1.63)
Firm FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
Adjusted-R2 0.589 0.592 0.537 0.538
F-statistic 7.79*** 7.74*** 6.50*** 6.42***
No. of Obs 494 494 494 494
Note(s): Static panel data regressions are employed using ordinary least squares (OLS). The model has the
following form
PERi;t ¼ a þ β1 FinTechi;t þ β2 CAPi;t þ β3 CAPi;t þ β4 SIZ Ei;t þ β5 CTIi;t þ β6 LLPi;t þ β7 DGi;t þ β8 II Si;t
þβ9 FCi;t þ β10 GDPi;t þ β11 IN Fi;t þ εi;t
In this regression, PER is measured by NIM and YEA, and the description of the control variables are noted in
Table 5. Table 1 t-statistics based on White’s (1980) heteroscedasticity-consistent standard errors are in parentheses
Static regression beneath coefficient estimates. ***significant at 1% level, **significant at 5% level and *significant at 10% level
results Source(s): Table created by authors
(0.001, t-statistic 5 5.23 and 0.001, t-statistic 5 4.93). LLP has a statistically negative sign The impact
when YEA is used to assess bank performance (0.240, t-statistic 5 1.86 and 0.001, of FinTech
t-statistic 5 4.93). This result is congruent with Athanasoglou et al. (2008) and Dietrich and
Wanzenried (2011) who found that increased exposure to credit risk is related to decreased
firms
bank profitability. DG has a statistically positive influence on NIM, but an insignificant effect
on YEA. Therefore, a growth of deposits widens net interest margins and therefore bank
profits. Finally, the two microeconomic variables (GDP and INF) do not appear to influence
bank performance. Following Phan et al. (2020) and Saadaoui and Ben Salah (2022) among
others, we use return on equity (ROE) and return on assets (ROA) as alternative measures of
bank performance [5]. The regression results remain qualitatively unaltered.

5.2 Dynamic regression results

In this sub-section, we perform a further layer of regression analysis to address the endogeneity
problem that might confound the results. In specific, our panel data regression is estimated using
the two-step GMM system dynamic panel estimator. Table 6 shows that the lagged NIM has a
statistically significant and positive influence on bank performance (0.309, t-statistic 5 4.94 and
0.261, t-statistic 5 5.60), while the lagged YEA has no explanatory power. Similar to static
regression results, FinTech positively affects bank performance no matter the measure used. In
specific, the coefficient of FinTech is positive and statistically significant either using NIM as bank
performance measure (0.006, t-statistic 5 2.54 and 0.002, t-statistic 5 2.36) or YEA (0.001,
t-statistic 5 2.12 and 0.001, t-statistic 5 2.27). The above results suggest that prior bank
performance (lagged NIM) and FinTech jointly enhance current bank performance. The rest of the
bank-specific variables (i.e. CAP, SIZE, LLP and DG) present qualitatively similar signs as those
reported in Table 5. Finally, GDP seems to positively affect NIM and YEA, while INF is negatively
correlated with the two bank performance measures. As a further layer of empirical analysis, we
replaced NIM and YEA with ROE and ROA. The results remain qualitatively similar.

6. Conclusions and policy implications

The growing pervasiveness of FinTech has changed the scene of financial services provided
by traditional banks. On the one hand, prior literature demonstrates that FinTech firms,
using new technologies, disrupt traditional banking systems and gain significant market
share. On the other hand, it is argued that when banks face higher competition from non-
banks, they invest more funds to modernize their core business activities, provide more novel
services to their customers and be more efficient to deal with the challenges emanating from
FinTech firms. Whether FinTech firms and banks share a symmetrically beneficial
relationship remains an open question.
In this paper, we attempted to assess the impact of FinTech on bank performance using
data from the UK market which has witnessed unprecedented growth in the FinTech
industry. Employing both static and dynamic regression models, we found that
FinTech firms positively affect bank performance. This result suggests that the operation
of FinTech firms helps UK banks expand their customer interactions, improve their decision-
making and apply new business models more cost-effectively and innovatively. Moreover,
this result demonstrates that banks and FinTech firms can operate supplementarily in
providing novel financial services to their customers, spurring innovation and opening new
avenues for growth and collaboration in the banking sector. As the financial services system
evolves, there is more room for cooperation between FinTech firms and banks.
Our findings have some managerial implications for banks, policymakers and bank
customers. Banks should carry on partnering with FinTech firms as long as this relationship
is beneficial for both parties. In specific, banks should pursue cooperation with FinTech firms
EMJB NIM NIM YEA YEA

PER(1) 0.309*** 0.261*** 0.011 0.044

(4.94) (5.60) (0.20) (0.89)
FinTech 0.006*** 0.002** 0.001** 0.001**
(2.54) (2.36) (2.12) (2.27)
CAP 0.355*** 0.099** 0.004*** 0.001***
(8.04) (2.10) (10.07) (3.28)
SIZE 3.407*** 1.191*** 0.033*** 0.010*
(5.84) (3.04) (5.36) (1.66)
CTI 0.006 0.017*** 0.001 0.001*
(1.21) (3.03) (0.42) (1.94)
LLP 0.726*** 0.664** 0.240*** 0.917***
(2.77) (2.51) (2.89) (5.12)
DG 0.524*** 0.028 0.001 0.008***
(3.91) (0.21) (0.22) (5.37)
IIS 0.003 0.012 0.001 0.001
(0.56) (0.35) (0.61) (0.75)
FC 0.587 0.846** 0.023 0.002
(1.53) (2.30) (0.98) (0.15)
GDP 0.024*** 0.205*
(2.69) (1.93)
INF 0.034** 0.186*
(2.28) (1.77)
AR(2) 0.708 0.278 0.483 0.374
Hansen 0.681 0.784 0.516 0.448
No. of Obs 350 350 350 350
Note(s): This table reports regression results from the bank performance determinants model augmented
with the FinTech variable. The regression model has the following form
PERi;t ¼ a þ β1 PERi;t−1 þ β2 FinTechi;t þ β3 CAPi;t þ β4 CAPi;t þ β5 SIZ Ei;t þ β6 CTIi;t þ β7 LLPi;t þ β8 DGi;t
þβ9 II Si;t þ β10 FCi;t þ β11 GDPi;t þ β12 IN Fi;t þ εi;t
In this regression, PER is measured by NIM and YEA, and the description of the control variables are noted in
Table 1. The estimation method is the two-step GMM system dynamic panel estimator. The Arellano-Bond
(AB) test for serial correlation is based on the null hypothesis of second-order autocorrelation in the first
differenced residuals. The p-value associated with the Hansen test for determining the validity of the
Table 6. overidentifying restrictions is reported. ***significant at 1% level, **significant at 5% level and *significant at
Dynamic GMM 10% level
regression results Source(s): Table created by authors

to broaden their portfolio of financial services offered to their customers which will help them
optimize profit margins. Moreover, partnering with FinTech firms, banks could better cater
to customer needs, identify new business opportunities and advance risk management.
Policymakers should facilitate the cooperation between banks and FinTech firms by
lifting regulatory constraints and offering incentives for mergers and acquisitions that will
bring about significant synergies in the banking sector. In this direction, a flexible regulatory
framework will promote innovation and maintain stability in the financial sector. Moreover,
policymakers should establish policies that will improve FinTech infrastructure services and
facilitate the penetration and convenience of fintech innovation services.
The co-existence of FinTech firms and banks will allow bank customers to enjoy a wider
range of innovative and cost-effective products and services such as personal lending,
alternative financing, digital payments robo-advising etc.
Our paper paves the way for researchers to further examine the relationship between FinTech
and bank performance. In specific, future research could be directed to study the impact of
FinTech on bank performance using data from both developed and developing countries that
would allow us to make appropriate comparisons. Moreover, future research could expand the The impact
period of investigation of this study beyond 2019 and take into account the effect of the Covid-19 of FinTech
pandemic on the relationship between FinTech and bank performance. Finally, future research
could examine the financial services provided by FinTech that mostly affect bank performance.
firms

Notes
1. https://iclg.com/practice-areas/fintech-laws-and-regulations/united-kingdom
2. https://www.360businesslaw.com/en/blog/fintech/
3. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/971371/KalifaFintechReview_ExecSumm.pdf
4. https://www.360businesslaw.com/en/blog/fintech/
5. The regression results are available upon request.

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Corresponding author
Apostolos Dasilas can be contacted at: dasilas@uom.gr

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