Journal of International Money and Finance: Jinsong Zhao, Xinghao Li, Chin-Hsien Yu, Shi Chen, Chi-Chuan Lee

Journal of International Money and Finance 122 (2022) 102552
Contents lists available at ScienceDirect
Journal of International Money and Finance

journal homepage: www.elsevier.com/locate/jimf
Riding the FinTech innovation wave: FinTech, patents and bank

performance
Jinsong Zhao a, Xinghao Li a, Chin-Hsien Yu b, Shi Chen c, Chi-Chuan Lee b,⇑
a
School of Economics, Southwestern University of Finance and Economics, Chengdu, China
b
Institute of Development Studies, Southwestern University of Finance and Economics, Chengdu, China
c
School of Law, Southwestern University of Finance and Economics, Chengdu, China
a r t i c l e i n f o a b s t r a c t
Article history: This research examines the impact of financial technology innovation on Chinese banks’
Available online 14 November 2021 performance, using both patent data and FinTech development index, by applying a gener-
alized method of moments model to resolve potential endogeneity. While the results show
JEL classification: that FinTech innovation reduces banks’ profitability and asset quality in the aggregate, a
C33 finding more pronounced for large state-owned commercial banks, it improves banks’ cap-
G21 ital adequacy and management efficiency, though to a smaller degree for policy banks and
O32
state-owned commercial banks. Moreover, banks’ own specific FinTech capabilities, mea-
Keywords: sured by patent applications and claims, have similar effects on bank performance. The
FinTech implications are that when facing the development of FinTech, banks should focus more
Patents on the rising capabilities of FinTech technology than its difficulties and what the competi-
Bank performance tion is doing. Small banks can particularly achieve business process reengineering and
CAMEL innovation more reliably by actively cooperating with FinTech companies.
Ó 2021 Elsevier Ltd. All rights reserved.
1. Introduction
The recent rapid development of financial technology (hereafter, FinTech)1 is an important manifestation of financial
industry innovation and is having a profound impact on the banking industry (Cruz-García et al., 2021; Hasan et al., 2020;
Lee et al., 2021b). It has helped to mitigate the information asymmetry problem arising from distance barriers and has
decreased transaction costs (Grennan and Michaely, 2021). As banking is an information-intensive and technology-driven busi-
⇑ Corresponding author at: Room 1105, Gezhi Building, No. 555 Liutai Ave, Wenjiang District, Chengdu, China.
E-mail addresses: zhaojs@swufe.edu.cn (J. Zhao), lxh1995@smail.swufe.edu.cn (X. Li), evaniayu@gmail.com (C.-H. Yu), chens@swufe.edu.cn (S. Chen),
leechichuan@swufe.edu.cn (C.-C. Lee).
1
FinTech may denote emerging innovative information and automation technology in financial services, including third-party payments, money market
funds, insurance products, risk management, authentication and peer-to-peer lending (Barberis, 2014). Schueffel (2016) summarized commonalities in the
definition of FinTech in the existing literature and postulated that FinTech is an emerging financial industry that uses technological means to enhance financial
activities. Gomber et al. (2017) compared the similarities and differences between FinTech, digital finance and earlier E-finance. The Financial Stability Board
(FSB) defines FinTech as ‘technologically enabled financial innovation that could result in new business models, applications, processes or products with an
associated material effect on financial markets and institutions and the provision of financial services.’ (FSB, 2017) The Basel Committee on Banking Supervision
(BCBS) also adopted this definition. BCBS summarizes five core technologies behind FinTech, including big data, AI, distributed databases, cloud computing and
cybersecurity solutions (for more details, see Bank for International Settlements, 2018 at https://www.bis.org/bcbs/publ/d431.htm). We follow the FSB
definition in this study.
https://doi.org/10.1016/j.jimonfin.2021.102552
0261-5606/Ó 2021 Elsevier Ltd. All rights reserved.
J. Zhao, X. Li, Chin-Hsien Yu et al. Journal of International Money and Finance 122 (2022) 102552
ness, FinTech development helps banks further expand their businesses (Campanella et al., 2017), which in turn likely improves
bank performance. Nonetheless, FinTech development can also worsen bank performance as online lending and investment
platforms cut into their business, lowering their profitability (Buchak et al., 2018; Jagtiani and Lemieux, 2018; Thakor, 2019).
It is thus still unclear how the growth of FinTech start-ups impacts overall bank performance.
A strand of studies holds that FinTech innovation has a very complementary effect on traditional banking, as banks have
accumulated a large amount of customer information and transaction data (Dorfleitner et al., 2017). Compared to internet
microlending companies, this data advantage helps banks achieve better business performance (Begenau et al., 2018). For
example, ‘big data’ held by banks can be applied to seek out potential borrowers, reducing credit risk (Pérez-Martíet
et al., 2018; Gu et al., 2020; Sheng, 2021). Pérez-Martíet et al. (2018) analyze the role of big data in housing loans, finding
that banks can make better predictions about borrowers’ behavior through big data and in turn reduce risk. Yao and Song
(2021) argue that data mining techniques (cluster analysis, edge computing, automatic reasoning, high-frequency algo-
rithms, etc.) reduce the cyclicality of commercial banks.
Another string of studies argues that FinTech has a negative impact on banking business. Due largely to the strict regu-
lation of traditional banks, the latter typically cannot satisfy the demand for loans. The rise of online lending directly affects
banks’ lending business (Buchak et al., 2018; Jagtiani and Lemieux, 2018; Boot et al., 2021). For example, Buchak et al. (2018)
find that FinTech accounts for 30% of shadow bank growth in the U.S., and that both shadow bank and FinTech lenders have
grown in the residential mortgage market, cutting into the market share of traditional banks. Qiu et al. (2018) find that Fin-
Tech development raises debt costs, in turn increasing the risk of bank assets.
Since Ho and Saunders (1981) first presented their theoretical framework for evaluating bank performance, extensive
effort has been exerted in exploring its determinants. A strand of studies highlights the role of bank-specific characteristics
including size (Demirgüç-Kunt and Huizinga, 2000; Goddard et al., 2004; Huang and Chen, 2009), ownership (Berger et al.,
2009; Barth et al., 2013; Berger and Bouwman, 2013) and overall banking concentration (Hannan, 1991; Berger and Hannan,
1998; Efthyvoulou and Yildirim, 2014). Some macroeconomic factors such as GDP growth (Dietsch and Lozano-Vivas, 2000;
Lozano-Vivas et al., 2001, 2002) and inflation (Boyd et al., 2001; Pasiouras, 2008) are also important to bank performance.
But few studies explore the impact of FinTech development on bank performance and they mainly provide a descriptive
analysis of potential opportunities and threats (Anagnostopoulos, 2018; Drasch et al., 2018) and mostly focus on the rela-
tionship between specific technologies and banks’ financial performance. For example, Akhisar et al. (2015) investigate
banks in 30 European countries during 2005–2013 and showed that advanced internet banking practices significantly
improved banks’ return on equity (ROE) and return on assets (ROA) but the relationship in less developed European coun-
tries could not be determined. Campanella et al. (2017) postulate that banks’ relative ROE is associated with the develop-
ment of the Internet of Things (IoT). Uddin et al. (2020) state that investments in cybertechnology affect the variability of
net earnings and the capital buffer of a bank, both of which are found to decrease if investments have exceeded a threshold.
Rega’s (2017) study of 38 European banks for the period 2013–2015 examines the relationship between FinTech and prof-
itability, finding that bank profitability measured by ROE is significantly positively associated with FinTech innovation.
Cheng and Qu (2020) find that banks’ FinTech significantly reduces their credit risks. However, the research literature still
lacks a comprehensive empirical analysis of the impact of FinTech development on bank performance. Few studies have
yet discussed this issue from the perspective of overall FinTech industry development and patent innovations, nor using
the CAMEL rating system to measure bank performance.
We take China as an example to explore this relationship between FinTech development and bank performance for the
following reasons. China’s fast-growing economic development makes it more important in the global context (Lee et al.,
2021a). In recent years, China’s FinTech industry has boomed with a significant amount of capital entering the market. In
2015, China became the world’s largest online finance market with US $101.7 billion in registered transaction volume for
the year, almost 99% of the total volume in the Asia-Pacific region and 20 times that in the UK (only US $4.5 billion)
(Garvey et al., 2016). Direct investment in FinTech hit US $8.8 billion for the year 2016 and over 750 Chinese state-
owned funds reportedly invested that year in FinTech start-ups (Ernst and Young, 2016). In 2019, China had the highest Fin-
Tech adoption rate globally at 87%, versus rates across the 27 largest world markets averaging only 64% (Ernst and Young,
2019). China is home to four of the top five FinTech companies and eight of the top 50 (KPMG and H2 Ventures, 2016). The
annual FinTech 100 report published by KPMG and H2 Ventures (2015) says that China and the U.S. are the two leading
countries for fintech start-ups and companies, and China has the most top FinTech companies worldwide (Arner et al., 2015).
Previous studies usually took the view that demand-side financial services can illustrate the development of FinTech.
Ernst and Young (2019), for example, use the proportion of FinTech users in the financial market to construct their FinTech
development index. In China, the Peking University Digital Financial Inclusion Index is mainly focusing on reflecting the
actual use of financial services by users (Guo et al., 2020). However, other studies have argued that the scale of financing
and risky investment by FinTech companies can help measure FinTech industrial development (IMF, 2017; KPMG, 2017)
and that the diversity of financial services provided by FinTech companies also depicts the industry’s development (EBA,
2017). Looking at the supply side, we build a list of Chinese FinTech start-ups and their total registered capital, financing
rounds and amounts from 2003 to 2018, and principal components analysis (PCA) is applied to obtain an annual FinTech
development index.
In contrast with single financial indicator used in prior studies (Lee and Hsieh, 2013, 2014), we measure bank perfor-
mance using the CAMEL framework, the method adopted by the U.S.-based Uniform Financial Institution Rating System
(UFIRS) to evaluate bank performance, using five indicators: capital adequacy, asset quality, management efficiency, earning
2
power and liquidity ratio. This framework has been widely used to examine how exogenous shocks affect bank performance
(Sahut and Mili, 2011; Alqahtani et al., 2016; Lee and Lee, 2019). The advantages of CAMEL rating method are its multi-
dimensional indicators covering a wide range of performance characteristics and its enjoyment of wide usage in the
literature.
Besides considering the linear relationship between FinTech development and bank performance, this study also con-
ducts nonlinear estimations. FinTech’s development has aggravated inherent financial system risks and the emergence of
this financial innovation has also intensified individual bank risk (Philippon, 2016; Magnuson, 2018), which is highly depen-
dent on bank size (Demirgüç-Kunt and Huizinga, 2013; Scott et al., 2017). Large banks usually have the advantage of econo-
mies of scale and are more able to bear the cost of adopting FinTech (Wheelock and Wilson, 2012). Also, large banks are
better at dealing with liquidity risks as they can more easily acquire funds from domestic or international capital markets
(Zheng et al., 2019). We therefore apply the dynamic panel threshold model to investigate the possible nonlinear relation-
ship between FinTech development and bank performance.
We find that FinTech development in China has significant impacts on bank performance in multiple respects. FinTech
development improves both capital adequacy and management efficiency but lessens banks’ asset quality and earning
power. Such impacts became more significant after 2011, when the FinTech industry began its rapid growth. In addition,
there are also nonlinear effects in the relationship between FinTech development and bank performance. Large banks benefit
more from FinTech in profitability and risk control while leverage and liquidity risks are also lower in large banks, though
credit risk increased in recent years both in large and small banks. FinTech development meanwhile has significant hetero-
geneous effects among different types of banks along with a variety of dimensions.
This paper contributes to the existing research literature in the following three ways. First, we measure FinTech innova-
tion across different dimensions, including a FinTech development index and patents, making it the first study to use patent
data to measure FinTech innovation. Second, we apply CAMEL to measure bank performance and offer the first comprehen-
sive empirical analysis of FinTech development on bank performance. Finally, we consider the heterogeneity of banks and
financial technologies in the analysis to assess multiple different impacts on bank performance and fragility.
2. FinTech development and regulatory background
This section briefly reviews the development process and regulatory background of FinTech in China. Fig. 1 describes Fin-
Tech development by the cumulative total number of companies and amount of financing. Before 2003, the emergence of the
Internet and digital technology enabled traditional financial institutions to build information technology (IT) systems and
upgrade some basic financial services. Since 2004, the emergence of payment businesses enabled FinTech to move from
back-end support to front-end services, a prelude to contemporary FinTech development. In 2007, the establishment of Pai-
pai lending platform marked FinTech’s penetration into the core finance business. However, this early development stage
was still dominated by industrial funds.
The relationship between traditional banks and the FinTech industry has gradually evolved from competition to greater
cooperation. In the early stage of FinTech development, technology and platform companies were involved in the payment
business under a relaxed regulatory environment, which led to the rise of mobile payments and online financial services. In
2004, the launch of third-party payment product Alipay served as a landmark emergence of financial innovation driven by
technology companies and followed by traditional financial institutions. Various non-FinTech firms also used their advan-
tages to directly provide innovative financial products and services to both enterprises and consumers, which led to a sharp
decrease in the bank payment settlement business.
After the 2008 financial crisis, financial regulatory reforms and digital technology advancements jointly pushed FinTech
into a new stage of vigorous development worldwide. Through cooperation with non-bank technology companies, commer-
cial banks could use big data, cloud computing and other technologies to improve the processing and analysis of financial
data, based on which they also established effective big data risk control models and credit rating systems. With the rapid
development of the FinTech industry, some banks started to set up FinTech subsidiaries. For example, at the end of 2015,
Xingye Bank, through its subsidiary Xingye Wealth and another three companies including Gaoweida Software co-
founded Xingye Digital Finance, becoming the first bank in the industry to set up a FinTech subsidiary. In 2018, Construction
Bank, one of the six major state-owned banks, set up a wholly owned FinTech subsidiary. By 2021, 13 banks have established
FinTech subsidiaries.9 This illustrates that large banks with technical capabilities can develop FinTech on their own and there
are FinTech companies in the market that can provide services if small and medium-sized banks are temporarily unable to
develop their full-cycle FinTech solutions. The development of the FinTech industry has meanwhile contributed to continuous
improvement of the data infrastructure, enabling banks to improve their risk control capabilities for small and micro-
enterprises.
By 2011, new financial services such as peer-to-peer (P2P) lending and crowdfunding were introduced into the domestic
financial market. In 2013, China further relaxed policy restrictions on private investment in the financial sector (i.e., Pilot
Measures for the Administration of Consumer Finance Companies), leading traditional financial institutions to launch
internet-based strategies. In 2015, the People’s Bank of China (PBC) put forward a series of policies to encourage financial
9
See http://www.01caijing.com/article/278606.htm.
3
Fig. 1. FinTech development in China according to industry data.
innovation and support the steady development of internet finance in the ‘Opinions on Promoting Sound Development of
Internet Finance.’ From the end of 2014 to the beginning of 2016, peer-to-peer became a venture and investment outlet, driv-
ing the further rapid development of FinTech companies. During 2017–2018, as Fig. 1 shows, the number of FinTech com-
panies in China reached more than 12,000 in total, and their total financing increased from 44 billion in 2017 to 55 billion
RMB (Yuan) in 2018.
Along with FinTech development, relevant patent applications by FinTech companies and banks also increased. Since
2007, as Fig. 2 shows, the number of patent applications increased significantly each year with 2,000 applications in 2014
and more than 3,000 in 2015. Aside from the significant incremental rise in applications, patent quality has also been
improving, indicating that China’s transformation in the financial industry has deepened and technological and institutional
innovations have made great progress.
The year 2016 was a milestone for the development of the FinTech industry, with over 12,000 FinTech companies active
in the market, and their financing exceeded 60 billion RMB (see Fig. 1). In fact, the total amount of FinTech investment in the
Asia-Pacific region increased rapidly from US $5.2 billion in 2015 to US $11.2 billion in 2016, of which China’s was US$10.2
billion, 90% of total investment in the region.2 At the same time, the Chinese State Council issued the ‘Thirteenth Five-Year
National Science and Technology Innovation Plan,’ which proposed to promote innovation in science and technology financial
products and services and to build a national science and technology financial innovation center.
But in that year also, due to the outbreak of rising default rates of P2P platforms in 2015,3 there was a significant shift in
the government’s regulatory attitude to Fintech industry. China’s first regulatory policy for the P2P lending industry, ‘the
Interim Measures for the Management of Business Activities of Network Lending Information Intermediaries,’ was formally
implemented, and regulatory intervention caused the number of P2P platforms to begin to decline sharply (see Fig. 3). In the
same year, the government also officially implemented ‘the Measures for the Administration of Network Payment Business
of Non-Bank Payment Institutions’ to regulate the third-party payment business and prevent payment risks.
From the year 2016 onwards, regulation of internet finance was comprehensively tightened, the China Banking and Insur-
ance Regulatory Commission (CBIRC) and PBC issued regulatory measures such as ‘the Interim Measures for the Manage-
ment of Commercial Banks’ Internet Loans’ and ‘the Interim Measures for the Management of Network Microfinance,’
which include under regulation all the financial businesses of FinTech companies. Under the new rules, platform companies
had to acquire licenses as microfinance or consumer finance companies to lend. Microfinance companies operating online
needed to be established within their provincial administrative regions while doing national business required an applica-
2
See http://www.chinadaily.com.cn/business/2015-02/03/content_19476722.htm.
3
In its early stages of development, the P2P lending platforms attract investors to search for regulatory arbitrage. The absence of regulations and the highly
asymmetric information of the market led to many platforms becoming illegal financing and financial fraud tools, which cause several platforms failed, and the
default rate rose.
4
Fig. 2. FinTech patent development pattern.
Fig. 3. FinTech classification development (2013–2018).
5
Table 1
Descriptive statistics of the variables.
Variables N Mean Std. dev. Min. Max.

Panel A: Bank performance
Capital adequacy 1,010 13.11 14.16 2.07 62.62
Asset quality 970 1.81 2.69 0.00 41.86
Management efficiency 717 38.32 8.17 6.82 70.53
Earning power 1,116 0.94 0.43 –1.39 2.70
Liquidity ratio 725 22.57 14.33 2.28 182.44
Panel B: FinTech industry
FinTech development index 16 0.00 1.88 –1.67 3.97
Industrial patent applications(1000 s) 16 6.06 7.49 0.34 23.50
Industrial patent claim 16 6.92 2.23 3.95 10.09
Panel C: Control variables
Bank patent applications 1,920 1.52 12.09 0.00 240.00
Bank patent claims 1,920 0.76 3.01 0.00 36.00
Bank Asset (billion US dollars) 1,123 191.26 525.50 0.05 4,041.95
Herfindahl–Hirschman index 16 7.05 0.39 6.59 7.68
GDP growth rate 16 9.22 2.19 6.60 14.20
CPI 16 102.58 1.65 99.30 105.90
tion for a national microfinance company license. Overall, 2016 appeared to be a watershed year for China’s FinTech regu-
lation towards strict state supervision.
3. Data and empirical methodology
This section introduces the data and measures of bank performance, FinTech industry development and technological
capabilities. In this analysis, since banking concentration, macroeconomic environment and other factors influence bank
performance, we control for the impacts of macro-level factors, including gross domestic product (GDP), consumer price
index (CPI) and level of market competition, which is proxied by the Herfindahl-Hirschman Index (HHI), the sum of squared
market shares (multiplied by 100) of each sample bank in terms of total assets. Table A1 lists the variables, definitions and
data sources. We report summary statistics in Table 1, in which Panels A, B and C present bank performance, FinTech indus-
try and control variables, respectively.
3.1. Bank performance
We collected data for the five CAMEL indicator components from Bank Focus database. During 2003–2018, there were a
total of 120 banks in existence for the entire period, including twelve joint-stock commercial banks (JSCBs), three policy
banks (PBs), five state-owned commercial banks (SOCBs), and one hundred city commercial banks (CCBs). Their total assets
accounted for over 80% of China’s entire banking sector in 2017.
Following previous studies (Alqahtani et al., 2016; Beck et al., 2013a; Lee and Lee, 2019), we define CAMEL indicator com-
ponents by total capital ratio (CAR), non-performing loans to gross loans ratio (NPL), cost to income ratio (CTI), return on
assets (ROA) and liquid assets to total deposits ratio (LTD). CTI and ROA measure management efficiency and profitability.
CAR, NPL and LTD represent the bank’s asset structure risk, credit risk and liquidity risk, respectively, and are usually used in
combination to measure bank’s overall operational risk (Gropp et al., 2011). Information on capital adequacy, asset quality
and earning power is reported for the whole period of 2003–2018, resulting in 1,010, 970 and 1,116 observations. However,
the information on management efficiency and liquidity ratios are only reported for 2009–2018 due to data limitations,
resulting in 717 and 725 observations, respectively. Aside from the performance indicators, we collected data on total assets
(in billion US dollars) from Bank Focus to measure bank size, including controls for ownership (JSCBs, PBs, SOCBs, and CCBs).
We identified this information from a list of banking financial institutions launched by the CBIRC.
3.2. FinTech industry development
This study uses enterprise level data to build a FinTech development index. Data on FinTech companies was collected
manually from the China FinTech Enterprise Database (FinTech Beta).4 This database screens companies based on their busi-
4
Available at http://www.fintechdb.cn/. The database was developed by the Graduate School of People’s Bank of China, Tsinghua University, China, jointly
with Qixinbao, TalkingData and other institutions. Qixinbao is a big data platform for enterprise credit investigation in China. It provides users with services to
quickly query enterprise industrial and commercial information, court judgment information and related enterprise information. The source of enterprise data
covers more than 100 official websites including the National Enterprise Credit Information Publicity System. TalkingData was established in 2011 and is a
professional and independent mobile data service platform in China.
6
ness operations and classifies them into 14 categories: digital bank, online brokerages, online insurance, online fund sales,
online asset management, online microfinance, online consumer finance, P2P, financial information services, crowdfunding, dig-
ital currency, financial infrastructure, payments, credit assessment and credit scoring. These 14 classifications overlap with the
classifications of The Basel Committee on Banking Supervision (Basel Committee on Banking Supervision, 2018). As of 2019, the
database covers more than 15,000 FinTech companies nationwide, making it the most systematic collection of Chinese FinTech
companies available. We manually collected FinTech industry information including company name, founding date, registered
capital and financing events from FinTech Beta, and obtained 12,846 samples during 2003–2018.
FinTech development is measured here on four dimensions: total established companies, registered capital, number of
financing events and amount of financing. These components represent the degree of China’s FinTech development across
the industry. Because a multi-factor index will increase the complexity of the analysis, we construct the FinTech develop-
ment index by applying PCA, whose advantage is its reduction of the dimensions of highly correlated variables to a set of
uncorrelated variables though orthogonal transformation (Chiang et al., 2017; Suman and Das, 2019). This method allows
us to concentrate on the major information, simplify the index structure and make the analysis process simpler and more
intuitive.
The correlation matrix of the variables appears in Panel A of Table A2, showing that high correlations exist among the four
variables. Following Kaiser’s principle (eigenvalue is greater than 1), we keep the first principal component (PC1) as the
dimensionality reduction result. As shown in Panel B of Table A2, the first component with an eigenvalue of 3.8 and a vari-
ance of 94% strongly correlates with the high loadings of four variables. We also provide KMO values and Bartlett Spherical-
ness test values to verify the feasibility of PCA, referring to Kaiser (1970) and Bartlett (1950). The results show that the KMO
values are greater than 0.6 and the Bartlett test passed significantly, indicating strong correlation among the four considered
variables. This implies that the constructed FinTech development index is quite representative of FinTech development
generally.
Considering that this paper constructs a FinTech development index by using the FinTech Beta database for the first time
and that the latter may have omissions, we also use the Peking University Digital Financial Inclusion Index and the FinTech
Baidu Index for robustness checks. The former index measures user coverage of internet financial services based on under-
lying data of Ant Financial Services’ transaction accounts (Guo et al., 2020). The Ant Group is one of the most influential dig-
ital financial companies in China. Therefore, the Peking University index can illustrate the popularity of FinTech with this
data, which is also used more widely in the research literature to measure the level of FinTech development in China.
The FinTech Baidu Index, on the other hand, referred to Sheng and Fan (2020), is constructed based on FinTech-related key-
words and the Baidu search index. Baidu is the main search engine of the Chinese Internet, with more than 70% market share,
and the search data can therefore reasonably reflect public concern and demand for FinTech service.
3.3. FinTech capabilities and patents
We collected patent data mainly from the Chinese State Intellectual Property Office, which regularly publishes complete
patent documents and provides patent information.5 As we have specific names for both FinTech companies and banks, we
singled out all patent applications by name lists from 1985 to 2018. We eliminated design patents and obtained 23,606 and
2,848 patents granted to FinTech companies and banks, respectively. We first calculated the cumulative number of patent appli-
cations in each year, denoted as annual patent quantity, and transformed those values into log terms in the regression. We cal-
culated annual patent quality as the average patent claim, which is reported directly by the Chinese State Intellectual Property
Office.6
3.4. Empirical strategy
To account for potential endogeneity, heteroscedasticity and autocorrelation problems in the data, we started with the
two-step system with the dynamic GMM estimator. The basic model is:
CAMELi;tþ1 ¼ qCAMELi;t þ aFinTecht þ byt þ hzi;t þ gi þ ei;t ð1Þ
where i ¼ 1; ; Nidentifies the cross-sectional unit and t ¼ 1; ; Tdenotes the time period. The dependent variable
CAMELi;tþ1 comprises a set of performance indicators, such as capital adequacy, asset quality, management efficiency, earn-
ings, and liquidity. FinTecht represents both FinTech industry development and technological innovations, which are the
main explanatory variables of interest. The term yt includes a set of macroeconomic control variables, such as GDP growth
5
In accordance with the provisions of Chinese Patent Law and the rules for the its implementation, if the Chinese State Intellectual Property Office under the
State Council receives a patent application and considers it to meet the requirements for granting a patent after a preliminary examination, it publishes it at 18
months from the application. The office regularly publishes complete patent documents available to the public. Patent documents are available on the patent
retrieval and analysis website maintained by the State Intellectual Property Office. For more details, see http://www.psssystem.gov.cn/sipopublicsearch/portal/
uiIndex.shtml.
6
Every patent contains a set of patent claims. We can use the number of patent claims for each patent as an indicator of patent quality since it can measure
claim breadth (Tong and Frame, 1994; Lanjouw and Schankerman, 2004). The larger the number of patent claims is, the larger is the technical scope of the
patent, and thus the better quality that the patent has. Moreover, untimeliness limitations (Dang and Motohashi, 2015) do not influence or affect patent claims.
7
rate and CPI, while zi;t comprises a set of bank-specific control variables including bank size, bank type, bank concentration
and patent variables. Term a is the estimated persistence coefficient of bank performance. Finally, gi is the bank-specific
effect and, ei;t is the idiosyncratic error term.
We further apply the dynamic panel threshold model to explore the possible nonlinear relationship between FinTech
development and bank performance, and the model is as follows:

CAMELi;tþ1 ¼ qCAMELi;t þ a1 FinTecht I qi;t < c þ a2 FinTecht I qi;t c
þbyt þ hzi;t þ gi þ ei;t ð2Þ

where qi;t represents the threshold variable that is the size of the bank measured by the logarithm of the bank’s total assets,
and c is the threshold value; IðÞ is the corresponded indicator function, and the remaining variables are consistent with the
baseline regression. a1 and a2 are the coefficients that we are interested in, and the significant difference between a1 and a2
indicates that the impact of FinTech on bank risks does have a threshold effect.
4. Empirical results
4.1. The role of FinTech industry development
Table 2 presents the estimated results of the benchmark model by using the two-step system GMM technique. The results
in Columns 1–5 reflect five assessment areas of the CAMEL ratings system (capital, asset quality, management efficiency,
earning power, and liquidity ratios). The validity of the instruments is assessed by the Sargan test of over-identifying restric-
tions and the test of second-order autocorrelation. All specifications pass both tests, confirming that our instruments are
valid. For the persistence coefficient measures, all these equations present persistence of bank performance, confirming that
the previous period’s performance will last from one year to the next. For the sake of brevity, we report only the coefficients
of interest for each regression.
The results reveal that FinTech industry development does have a significant impact on each component within CAMEL,
but those influences differ. The evidence shows that FinTech development has a significantly positive effect on the capital
ratio, implying that FinTech innovations can be instrumental to increasing capital protection. However, we also find that
as FinTech industry development becomes greater, asset quality decreases and profitability worsens. This deterioration in
banks’ asset quality and earning power can be attributed to the excessive competition induced by FinTech innovation. For
example, the rapid expansion of FinTech lending and investment management platforms such as crowdfunding, marketplace
lending (MPL), and P2P lending erodes the small business and personal finance departments of traditional financial institu-
tions. The intensified competition not only erodes the level of banks’ deposits and investment products but also encourages
banks to lower their lending standards, leading to greater credit risk and thus lower profitability (FSB, 2017;
Anagnostopoulos, 2018).
Besides capital adequacy, asset quality, and liquidity ratio that reflect banks’ operational risk, we additionally construct
two risk indicators, leverage risk (the equity to asset ratio, ETA) and bankruptcy risk (Z-score), for robustness check. Z-score
is calculated as follows:
ROAi;t þ ETAi;t
Z i;t ¼ ð3Þ
r ROAi;t
where rðROAÞ is the standard deviation of the bank’s four-year ROAs before period t. The larger the Z-score, the lower the
probability of bank bankruptcy (Beck et al., 2013b; Lepetit and Strobel, 2015). The results of ETA and Z-score are provided in
the Appendix (Table A3). The results in Table 2 and Table A3 show that the FinTech development index has no significant
impact on LTD and Z-score. The results imply that the development of FinTech is likely to increase bank credit risk but reduce
asset structure and leverage risk.
Our results also indicate that FinTech industry development leads to better management efficiency, consistent with exist-
ing literature (Leong et al., 2017; Fuster et al., 2019). Facing the challenge stemming from competition with FinTech inno-
vations, banks must enhance their management efficiency nearly instantly by lowering operational and production costs.
This efficiency enhancement relies on the availability of infrastructure (Leong et al., 2017), digitalization of services delivered
(Makina, 2019) and potential to overcome information asymmetries (Vives, 2017). For example, applications of big data ana-
lytics, blockchain and financial service automation allow financial institutions to simplify their operations, thereby improv-
ing management efficiency.
Aside from FinTech industry development, we further test whether the number of bank-owned patents and their quality
affect bank performance. The results show that although the number of bank-owned patents leads to lowered asset quality,
these do at the same time have a beneficial effect on management efficiency. These impacts are consistent with the effects of
FinTech industry development. However, unlike the harmful effect of FinTech industry development on earnings, we find
that the quality of bank-owned patents potentially increases bank profitability.
8
Table 2
The overall impacts of FinTech industry development on bank performance
Performance measure under the CAMEL rating system

Capital adequacy Asset quality Management efficiency Earning power Liquidity ratio
CAMELt–1 0.276*** 0.161*** 0.642*** 0.530*** 0.714***
(0.054) (0.041) (0.147) (0.090) (0.148)
FinTech development index 0.253*** 0.186*** 1.030*** 0.037*** 0.139
(0.075) (0.031) (0.302) (0.012) (0.994)
Bank patent applications 0.001 0.001** 0.009* 0.001 0.007
(0.002) (0.000) (0.005) (0.001) (0.029)
Bank patent claims 0.022 0.012 0.008 0.004* 0.063
(0.019) (0.009) (0.058) (0.002) (0.108)
Asset 0.001 0.000 0.001 0.000** 0.006
(0.000) (0.000) (0.002) (0.000) (0.009)
lnHHI 0.125 1.423 22.412*** 0.110 22.240***
(0.687) (1.133) (6.365) (0.150) (7.742)
PBs 5.413 1.079 1.565 2.962 33.239
(4.902) (1.021) (13.221) (6.518) (55.653)
JSCBs 0.466 0.872 12.448 0.500 2.143
(2.499) (1.939) (11.555) (1.216) (13.372)
SOCBs 1.126 37.441 3.470 0.679 9.267
(12.205) (66.563) (8.081) (1.165) (12.964)
GDP 0.095 0.039 1.328* 0.034** 1.097
(0.097) (0.055) (0.706) (0.017) (1.292)
Inflation 0.093** 0.082 1.592*** 0.006 1.404***
(0.047) (0.075) (0.355) (0.009) (0.514)
Observations 695 795 483 955 605
AR(2) (p–value) 0.535 0.358 0.821 0.560 0.705
Sargan test (p–value) 0.534 0.074 0.112 0.127 0.210
Notes: The estimation method is the two–step GMM dynamic panel model. Standard deviations are in parentheses. ***, ** and * indicate statistical
significance at the 1%, 5% and 10% levels, respectively.
Table 3
Robust check: Alternative measure for active FinTech companies

CAMELt–1 0.275*** 0.161*** 0.642*** 0.530*** 0.715***
(0.054) (0.041) (0.147) (0.089) (0.148)
(0.075) (0.031) (0.303) (0.012) (0.997)
Bank patent applications 0.001 0.001** 0.009* 0.001 0.007
(0.002) (0.000) (0.005) (0.001) (0.029)
Bank patent claims 0.022 0.012 0.008 0.004* 0.063
(0.019) (0.009) (0.059) (0.002) (0.108)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.538 0.358 0.822 0.558 0.705
Sargan test (p-value) 0.537 0.074 0.111 0.127 0.211
Notes: The estimation method is the two-step GMM dynamic panel model. Standard deviations are in parentheses. ***, **, and * indicate statistical
significance at the 1%, 5%, and 10% levels, respectively.
The FinTech development index is constructed, however, by using the accumulated number of FinTech companies with-
out excluding exited firms, which is likely to overestimate FinTech development. Although the FinTech Beta Database pro-
vides the latest operational status of each company, we were unable to identify accurate times of discontinuation, and in
turn, the exact number of surviving companies per year. To be conservative, we deleted a total of 1,253 cancelled companies
and reconstructed the Fintech development index. Table 3 reports the estimate results, the effects of FinTech development
on banks’ performance is quite robust.
However, the FinTech Beta database lacks some needed information. For example, information about a company’s equity,
financing sources, and external cooperative partners might be missing. Technology companies and traditional financial insti-
tutions that have not established corresponding subsidiaries but run FinTech businesses might not be included in the data-
base. Hence, we use the Peking University Digital Financial Inclusion Index and the FinTech Baidu Index for further
9
Table 4
Heterogeneous effects of FinTech industry development

Panel A: Heterogeneity of state-owned banks
CAMELt–1 0.271*** 0.161*** 0.639*** 0.533*** 0.591***
(0.054) (0.040) (0.182) (0.087) (0.097)
FinTech development index 0.263*** 0.185*** –1.102*** –0.035*** –0.590
(0.079) (0.032) (0.328) (0.012) (0.489)
PBs FinTech development index –0.203* 0.030 0.982 –0.084* 1.492*
(0.119) (0.132) (1.012) (0.047) (–0.824)
SOCBs FinTech development index –0.346** 0.016 –1.132 –0.042 3.918
(0.157) (0.162) (4.481) (0.088) (4.159)
Bank patent applications –0.001 0.001** –0.011 –0.000 –0.001
(0.002) (0.001) (0.009) (0.000) (0.014)
Bank patent claims 0.022 –0.012 –0.037 0.004** 0.058
(0.019) (0.009) (0.060) (0.002) (0.097)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.548 0.361 0.695 0.567 0.839
Panel B: Sub-period (after 2011)
CAMELt–1 0.003 0.288* 0.495** 0.571*** 0.679***
(0.240) (0.174) (0.219) (0.140) (0.094)
FinTech development index 0.432** 0.298*** –1.801*** –0.053*** 1.411*
(0.199) (0.107) (0.529) (0.020) (0.823)
Bank patent applications 0.001 –0.000 –0.005 –0.000 –0.001
(0.001) (0.001) (0.003) (0.000) (0.004)
Bank patent claims 0.013 –0.007 –0.023 0.001 0.072
(0.020) (0.005) (0.038) (0.002) (0.111)
Controls
Observations Y Y Y Y Y
AR(2) (p-value) 435 298 437 372 560
robustness checks.7 Table A4 reports the results, consistent with those in Table 2.8 It should be emphasized that the Peking
University index mainly reflects the application degree of FinTech to individual users, while the Baidu index reflects public con-
cern and demand for FinTech. Neither of these two indices is a direct measure of anything produced by FinTech companies. As
enterprises are both providers of FinTech services and promoters of FinTech reforms, the FinTech development index con-
structed in this study is well representative of its development. Besides, the time span of the FinTech development index
(2003–2018) is longer than those of the other two indices (2011–2018) and thus the FinTech development index is better
for studying the effects of the early stage of FinTech development on bank performance in China.
As mentioned in Section 2, after 2016, the Chinese government not only strengthened its emphasis on and support for
FinTech development, but also began to conduct comprehensive FinTech regulation. We thus further examine the robustness
of our results considering the recent regulatory changes in China, and Table A5 reports the results. Panels A, B and C are the
estimates controlling dummy variable representing regulatory status, a sub-period analysis using samples before 2016 and
the interaction term between the FinTech development index, respectively. As shown in Table A5, the results are still con-
sistent with those in Table 2.
In general, the results imply a complex impact of FinTech development on the banking industry. FinTech development
promotes the capital ratio of the banking industry while weakening banks’ asset quality and earning power through its facil-
itation of the rise of online lending.
7
The correlation coefficient between Peking University digital financial inclusion index and the constructed FinTech development index is 0.828, while the
correlation coefficient between the FinTech Baidu index and the constructed FinTech development index is even greater at 0.971. These correlations are
significant at the 5% level or better and suggest that the two alternatives are highly correlated with the main FinTech development index, thus justifying the use
of these alternatives and increasing the comparability of the corresponding results.
8
It should be noted the consistent insignificance of the lagged CAMEL parameter in the capital adequacy column. One possible explanation for the consistent
insignificance of the lagged CAMEL parameter in the capital adequacy column may relate to the change of regulation on banks. After the 2008 financial crisis,
China applied strict supervision on the capital adequacy ratio of banks, which resulted in the indicator no longer showing continuity. In 2012, China Banking
Regulatory Commission issued the ‘‘Commercial Bank Capital Management Measures”, which regulates the accounting method of capital adequacy ratio. It also
requires commercial banks to increase the minimum threshold of various capital adequacy ratios year by year before 2018. Therefore, the variation of capital
adequacy only reflects the regulatory requirements, leading to the consistent insignificance of the lagged CAMEL parameter in the capital adequacy column.
10
Table 5
Overall impacts of FinTech capability on bank performance

Panel A: FinTech development depicted by patent applications
CAMELt–1 0.193*** 0.178*** 0.626*** 0.624*** 0.728***
(0.045) (0.048) (0.133) (0.081) (0.070)
Industrial patent applications 0.476** 0.373*** –4.374*** –0.006 0.454
(0.238) (0.090) (1.042) (0.026) (2.656)
Bank patent applications –0.000 0.002** –0.008 –0.001 –0.006
(0.002) (0.001) (0.007) (0.001) (0.009)
(0.024) (0.012) (0.050) (0.002) (0.106)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.622 0.524 0.860 0.656 0.696
Panel B: FinTech development depicted by patent claims
CAMELt–1 0.183*** 0.180*** 0.687*** 0.665*** 0.712**
(0.057) (0.051) (0.133) (0.084) (0.325)
Industrial patent claim 0.375** 0.152* –2.414*** 0.026 0.391
(0.184) (0.078) (0.712) (0.022) (4.492)
Bank patent applications 0.000 0.003** –0.012** –0.001 –0.003
(0.002) (0.001) (0.005) (0.001) (0.045)
(0.026) (0.011) (0.052) (0.003) (0.155)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.572 0.727 0.909 0.777 0.708
4.2. Heterogeneity of FinTech industry development
Banks with heterogeneous characteristics may respond differently in the face of FinTech innovation. The existing litera-
ture generally agrees that banks are likely to behave different ways under differing ownership structures (Berger et al., 2009;
Jiang et al., 2013; Huang et al., 2017). Unlike other commercial banks, PBs and SOCBs are burdened with certain social
responsibilities, especially that they are obliged to finance government projects and state-owned enterprises (Dong et al.,
2014; Lee and Huang, 2016, 2017, 2019). In this regard, we further incorporate the interaction terms of PBs FinTech and
SOCBs FinTech into our baseline regression to test whether FinTech innovation has different effects on bank performance
for these specific types of banks.
Panel A of Table 4 reports the estimation results for the heterogeneity of state-owned banks. The results show that the
effects of FinTech innovation are similar to those previously reported. However, the coefficient of the interaction term is sig-
nificantly negative for capital ratio and earnings. On the one hand, the beneficial effect of FinTech innovation on capital pro-
tection is smaller for PBs and SOCBs. On the other hand, the harmful effect of FinTech innovation on earning power is larger
for PBs. Given that the government exerts substantial influence and restrictions on their lending businesses, PBs and SOCBs
appear to be relatively disadvantaged in their performance when facing the challenges of FinTech innovation.
It is finally noteworthy that 2011 was a year of crucial importance to China’s FinTech development. After 2011, the Fin-
Tech industry experienced explosive growth in both the number of FinTech start-ups and the amount of their financing. To
provide a more accurate picture of the effect of FinTech innovation on performance, we replicate the analysis for the sub-
sample period after 2011. As Panel B of Table 4 shows, although the impacts of FinTech innovation are consistent with
our previous results, their intensities are different. The coefficients of FinTech innovation are larger in the latter period than
those in the full sample results for each CAMEL indicator component, implying that FinTech’s rapid development had a
greater impact on bank performance after 2011.
4.3. The role of FinTech capabilities
This subsection shifts our attention to the role of FinTech capabilities in bank performance. Panels A and B of Table 5 pre-
sent the estimation results of the overall impacts of FinTech capabilities when using the number of patents and patent qual-
ity in the analysis. The results for the main variables of interest are quite similar to those reported in Table 2. The greater the
patent number and quality are, the better are capital protection and management efficiency results. The ensuing excessive
11
Table 6
Heterogeneous effects of FinTech patent applications

CAMELt–1 0.192*** 0.177*** 0.639*** 0.620*** 0.663***
(0.045) (0.048) (0.203) (0.084) (0.092)
FinTech patent applications 0.403* 0.349*** –4.214*** 0.001 1.540
(0.245) (0.078) (1.561) (0.026) (2.310)
PBs FinTech patent applications –1.088 –0.463* 1.954 0.139 5.633
(0.725) (0.269) (6.150) (0.092) (17.548)
SOCBs FinTech patent applications –1.140* –0.156 –0.299 0.083* 15.531
(0.643) (0.230) (3.231) (0.043) (12.137)
Bank patent applications 0.000 0.002** –0.011 –0.001 –0.007
(0.002) (0.001) (0.018) (0.001) (0.014)
(0.023) (0.011) (0.063) (0.002) (0.126)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.673 0.530 0.965 0.659 0.775
CAMELt–1 0.051 0.288* 0.521** 0.571*** 0.695***
(0.196) (0.174) (0.219) (0.140) (0.087)
FinTech patent applications 1.169** 0.709*** –3.972*** –0.127*** 4.662*
(0.510) (0.254) (1.276) (0.047) (2.571)
Bank patent applications 0.001 –0.000 –0.004 –0.000 0.000
(0.001) (0.001) (0.004) (0.000) (0.005)
(0.020) (0.005) (0.040) (0.002) (0.113)
Controls Y Y Y Y Y
Observations 435 298 437 372 560
AR(2) (p-value) 0.370 0.742 0.690 0.813 0.456
competition still leads to worse asset quality, as mentioned earlier. In sum, these results suggest that FinTech capabilities do
have a considerable impact on bank operating performance.
To generate more informative disclosures, we next conduct some analyses of ownership structure and sub-sample peri-
ods. Tables 6 and 7 summarize estimation results when we use number of patents and patent quality to proxy FinTech inno-
vation. Panel A of Table 6 shows that the coefficients of SOCBs FinTech and PBs FinTech are significantly negative for
capital ratio and asset quality, respectively. The former result indicates that the beneficial effect of number of patents on cap-
ital protection is smaller for SOCBs while the latter results suggest that the harmful effect from the number of patents on
asset quality is mitigated for PBs. The above-mentioned heterogeneous characteristics are more obvious in the case of patent
quality.
Panel A of Table 7 reveals that the interaction terms are significantly negative for the capital ratio and asset quality and
significantly positive for management efficiency and earnings. The beneficial effect of patent quality on capital protection
and management efficiency is lower for PBs and SOCBs. In addition, the results show that patent quality improves banks’
asset quality and profitability.
Panel B of Tables 6 and 7 presents the results for the FinTech boom period. The findings also support the same conclusion.
We see that FinTech innovation strongly affects bank performance in each CAMEL indicator component. More specifically,
FinTech innovation leads to better capital protection, management efficiency and liquidity while resulting in lowered asset
quality and profitability. In addition, the magnitudes of the coefficients reveal that FinTech innovation had a greater impact
on bank performance after 2011.
4.4. Nonlinear impact of FinTech development
The role of nonlinear considerations is highlighted by recent experiences. Considering that banks’ levels of operating
activity are crucially affected by their sizes (Berger and Bouwman, 2013; Scott et al., 2017; Cheng and Qu, 2020), we also
broaden the scope of analysis by investigating the threshold effects of bank size on the nexus between FinTech development
and bank performance. Table 8 presents the corresponding results based on the estimation of the threshold regression. The
results demonstrate that different levels of bank size led to different effects of FinTech development on bank performance.
12
Table 7
Heterogeneous effects of FinTech patent claims

CAMELt–1 0.187*** 0.171*** 0.697*** 0.638*** 0.658***
(0.056) (0.045) (0.244) (0.088) (0.099)
FinTech patent claims 0.328* 0.094 –1.968** 0.033 1.393
(0.187) (0.070) (0.955) (0.023) (1.737)
PBs FinTech patent claims –0.868** –1.003*** 3.764* 0.266*** 1.736
(0.422) (0.265) (2.227) (0.080) (2.913)
SOCBs FinTech patent claims –0.625* –0.566*** 0.984 0.138** 9.984
(0.348) (0.183) (2.422) (0.055) (17.722)
Bank patent applications –0.011* 0.002* –0.014 –0.001 –0.002
(0.002) (0.001) (0.018) (0.001) (0.028)
(0.024) (0.012) (0.069) (0.003) (0.091)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p-value) 0.640 0.759 0.973 0.830 0.816
CAMELt–1 0.040 0.288* 0.516** 0.571*** 0.677***
(0.205) (0.174) (0.219) (0.140) (0.097)
FinTech patent claims 0.693** 0.430*** –2.465*** –0.077*** 2.233*
(0.305) (0.154) (0.775) (0.029) (1.171)
Bank patent applications 0.001 –0.000 –0.004 –0.000 –0.001
(0.001) (0.001) (0.004) (0.000) (0.004)
(0.020) (0.005) (0.039) (0.002) (0.105)
Controls Y Y Y Y Y
Observations 435 298 437 372 560
AR(2) (p-value) 0.310 0.742 0.677 0.813 0.413
Table 8
Nonlinear relationship between FinTech development and bank performance
Performance variable Threshold value Confidence interval a1 a2 AR(2) Sargan test

Capital adequacy (CAR) 16.229 [15.524, 19.286] 0.269 0.198*** 0.392 0.558
Asset quality (NPL) 18.489 [15.223, 19.999] 0.188*** 0.332*** 0.161 0.290
Management efficiency (CTI) 17.319 [16.128, 20.520] 1.702 1.768*** 0.183 0.712
Earning power (ROA) 16.902 [16.843, 17.016] 0.090*** 0.024 0.693 0.943
Liquidity ratio (LTD) 17.299 [15.981, 20.361] 0.079** 0.664 0.516 0.577
Equity to asset ratio (ETA) 17.205 [17.104, 18.055] 0.287** 0.201* 0.051 0.354
Z-score 20.142 [19.772, 20.258] 0.725 49.88 0.781 0.963
Note: 95% is the significance level for the confidence interval. a1 stands for the estimated coefficient on the independent variable when the threshold
variable is below the threshold value, and a2 denotes the estimated coefficient when the threshold variable is above the threshold value. ***, **, and *
indicate statistical significance at the 1%, 5%, and 10% levels, respectively.
The development of FinTech is more likely to inhibit bank performance when size is small. However, when the banks’ size
reaches a certain level, FinTech development tends to stimulate their performance. This trend is particularly noticeable in the
case of management efficiency, profitability and most dimensions of risk control. For example, evidence reveals that FinTech
development exerts a significant negative effect on CTI after achieving a certain level of bank size, suggesting that FinTech
development improves management efficiency for large banks. The results also show that FinTech exerts a significant neg-
ative effect on ROA when bank size is relatively small, indicating it inhibits profitability for small banks. These results can be
attributed to the potentially excessive competition induced by FinTech innovation. Large banks are more capable of devel-
oping FinTech due to their organizational structures and more capital (Cheng and Qu, 2020). In this regard, they are more
likely to adopt new information technologies and thus realize economies of scale.
When focusing on the capability of risk management, we find that FinTech development reduces risk derived from asset
structure and financial leverage if the bank scale is greater than a certain threshold level, while FinTech development will
13
also increase leverage and liquidity risks if the bank scale is smaller than that threshold. These findings suggest that large
banks are more adaptable to new technologies and more resistant to risks, consistent with the findings in the existing liter-
ature. By contrast, as far as asset quality is concerned, the results generally suggest FinTech development will increase credit
risk for both small and large banks. Given that many lending platforms in China increase systemic risk for the financial sys-
tem generally, this result seems reasonable. However, compared with large banks, this harmful effect is weaker for small
ones. The possible explanation is that small banks have more flexible modes of operation and management (Carter et al.,
2004), allowing them to more quickly respond to the shock of FinTech development on the credit loan picture through
strategic and business adjustments. Nonetheless, the FinTech index still has no significant impact on bank’s bankruptcy risk.
This is probably because the banking system in China is dominated by both central and local governments. For the sake of
controlling systemic financial risks and stabilizing social sentiment, governments will not easily allow bankrupt commercial
banks to exit the market. In summary, the impact of FinTech development on bank risk is complicated, depending not only
on bank size but also on the different types of risks involved.
5. Conclusions and implications
As longstanding methods of delivering financial services became insufficient to handle financial institutions’ technolog-
ical demands, specialized FinTech grew to fill this gap. In its earlier days, the financial industry introduced computer-based
applications to automate financial transactions and office chores to improve efficiency. Bank and stock market transactions
are usually now recorded in databases and retrieved through electronic terminals. ATM machines are widely used to with-
draw cash. Consequently, FinTech enjoyed great expansion through advantages provided by emerging technology.
The Internet and mobile devices have combined to provide a platform for hosting some of the most influential technolo-
gies increasingly entangled in daily lives and financial activities. New technologies have reformed traditional ways of con-
ducting financial activities via information sharing and business integration. Under the current network infrastructure,
online platforms such as those that offer mobile payments are built to improve and replace the traditional financial system.
Moreover, data on consumer activities is collected from internet and mobile devices to be used by and shared among various
financial services. Traditional financial institutions are reforming themselves to cope with FinTech’s rapid development.
We have found that FinTech development significantly affects various aspects of banks’ performance, including capital
adequacy, asset quality, management efficiency, earning power and liquidity ratios. Some banks may try to ignore FinTech’s
market disruptions while others may panic and overreact. We suggest that banks should adopt a more neutral attitude in the
face of FinTech development and instead focus on the rising capabilities of FinTech rather than the resulting competition and
challenges. As the IT infrastructure of traditional banks makes it difficult to meet the current needs of financial development,
banks should strengthen their cooperation with FinTech companies to expand their business models and realize their own
digital transformation and innovation.
All banks should naturally be vigilant to the risks of competition in their lending market. Small banks should take advan-
tage of their flexibility to actively use technologies such as the data clouds and infrastructure provided by FinTech companies
to achieve business process reengineering and enhanced innovation. Large banks with accumulated capital and technology
should use their assets to promote the deep integration of technology and financial services by either establishing their own
FinTech subsidiaries or at least vigorously developing their own FinTech capabilities.
CRediT authorship contribution statement
Jinsong Zhao: Conceptualization, Investigation, Writing – original draft, Funding acquisition. Xinghao Li: Investigation,
Data curation, Software, Writing – original draft. Chin-Hsien Yu: Supervision, Visualization, Writing – review & editing. Shi
Chen: Data curation, Writing – review & editing. Chi-Chuan Lee: Conceptualization, Visualization, Methodology, Writing –
review & editing, Funding acquisition.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
Acknowledgements
We would like to thank the editor and anonymous referees for their highly constructive suggestions. Jinsong Zhao is
grateful for the support from the 111 Project ‘Innovation and Talents Base of Financial Security and Development’ [grant
number B18] and the National Natural Science Foundation of China ‘Research of Capital Market Trading System and Stabil-
ity’ [grant number 71620107005].Chi-Chuan Lee is grateful for the support from the Fundamental Research Funds for the
Central Universities of China (JBK2102019).
14
Appendix A
Table A1
List of Variables, Definitions and Data Sources
Variable Definition Source

Panel A: Bank performance
Capital adequacy Total capital ratio (CAR) Bank Focus
Asset quality Non-performing loans to gross loans (NPL) Bank Focus
Management efficiency Cost to income (CTI) Bank Focus
Earning power Return on assets (ROA) Bank Focus
Liquidity ratio Liquid assets to total deposits ratio (LTD) Bank Focus
Panel B: FinTech industry
FinTech development index Extent of FinTech development FinTech Beta
Industrial patent applications Industrial accumulated patent applications as an indicator of The Chinese State intellectual property Office
patent quantity
Industrial patent claims Industrial average patent claims as an indicator of patent quality The Chinese State intellectual property Office
Panel C: Control variables
Bank patent applications Bank’s annual patent quantity The Chinese State intellectual property Office
Bank patent claims Bank’s annual patent quality calculated as the average patent The Chinese State intellectual property Office
claims
Bank size Total assets in hundred billion of US dollars Bank Focus
Herfindahl-Hirschman index Sum of the squared market shares (multiplied by 100) of each Bank Focus
bank in terms of total assets
GDP growth rate Growth rate of the value of all final goods and services National Bureau of Statistics
CPI Consumer price index National Bureau of Statistics
Table A2
Correlation matrix and results of principal component analysis
Panel A: Correlation matrix

Registered capital Established companies Amount of financing Financing events
Registered capital 1
Established companies 0.984 1
Amount of financing 0.841 0.888 1
Financing events 0.918 0.957 0.980 1
Panel B: Results of principal component analysis
Component Eigenvalue Proportion of variance Cumulative proportion
PC1 3.785 0.946 0.946
PC2 0.194 0.050 0.996
PC3 0.013 0.003 0.999
PC4 0.002 0.001 1.000
KMO values 0.648
Bartlett test 0.000
Table A3
The impacts of FinTech Industry development on bank risk
ETA Z-score
Riskt–1 0.512*** 0.659***
(0.062) (0.100)
FinTech development index 0.097** 0.011
(0.044) (0.024)
Bank patent applications 0.001 0.001
(0.002) (0.001)
Bank patent claims 0.004 0.012
(0.028) (0.011)
Controls Y Y
Observations 841 612
AR(2) (p–value) 0.069 0.129
Sargan test (p–value) 0.079 0.069
Notes: The estimation method is the two–step GMM dynamic panel model.
Standard deviations are in parentheses. ***, ** and * indicate statistical signifi-
cance at the 1%, 5% and 10% levels, respectively.
15
Table A4
Peking university digital financial inclusion index and the FinTech Baidu index

Panel A: Peking university digital financial inclusion index
CAMELt–1 0.079 0.288* 0.497*** 0.578*** 0.701***
(0.167) (0.174) (0.191) (0.139) (0.078)
Digital financial inclusive index 2.096** 1.199*** 6.612*** 0.237*** 6.642*
(0.905) (0.429) (1.934) (0.077) (3.737)
Bank patent applications 0.001 0.000 0.003 0.000 0.003
(0.001) (0.001) (0.004) (0.000) (0.005)
Bank patent claims 0.014 0.007 0.027 0.000 0.024
(0.020) (0.005) (0.039) (0.002) (0.137)
Controls Y Y Y Y Y
Observations 435 298 437 372 560
AR(2) (p–value) 0.564 0.743 0.665 0.797 0.508
Panel B: The FinTech Baidu index
CAMELt–1 0.135 0.288* 0.522*** 0.578*** 0.673***
(0.114) (0.174) (0.189) (0.139) (0.080)
FinTech Baidu index 1.642** 0.866*** 3.770*** 0.171*** 5.187*
(0.708) (0.310) (1.430) (0.055) (3.101)
Bank patent applications 0.001* 0.000 0.001 0.000 0.001
(0.001) (0.001) (0.005) (0.000) (0.004)
Bank patent claims 0.011 0.007 0.031 0.000 0.007
(0.022) (0.005) (0.044) (0.002) (0.114)
Controls Y Y Y Y Y
Observations 435 298 437 372 560
AR(2) (p–value) 0.888 0.743 0.699 0.797 0.463
significance at the 1%, 5% and 10% levels, respectively.
Table A5
Robustness checks: The role of regulation

Panel A: Adding regulation dummy
CAMELt–1 0.281*** 0.162*** 0.609*** 0.528*** 0.726***
(0.053) (0.042) (0.235) (0.091) (0.165)
(0.080) (0.040) (0.345) (0.013) (1.286)
Bank patent applications 0.000 0.001* 0.007 0.001 0.002
(0.002) (0.001) (0.007) (0.001) (0.033)
Bank patent claims 0.021 0.012 0.033 0.004** 0.031
(0.021) (0.009) (0.061) (0.002) (0.096)
Regulation 0.254 0.148 0.190 0.014 2.096*
(0.251) (0.128) (0.628) (0.027) (1.253)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p–value) 0.457 0.475 0.710 0.582 0.679
Panel B: Sub–period (before 2016)
CAMELt–1 0.277*** 0.179*** 0.594*** 0.501*** 0.742***
(0.058) (0.040) (0.208) (0.102) (0.252)
FinTech development index 0.195** 0.159*** 1.163*** 0.038*** 0.542
(0.078) (0.057) (0.310) (0.014) (1.685)
(0.002) (0.001) (0.009) (0.001) (0.035)
(0.024) (0.011) (0.067) (0.002) (0.109)
Controls Y Y Y Y Y
Observations 607 706 393 865 506
AR(2) (p–value) 0.675 0.341 0.968 0.551 0.718
16
Table A5 (continued)

Panel C: Adding interaction term between FinTech development and regulation

CAMELt–1 0.281*** 0.162*** 0.609*** 0.528*** 0.726***
(0.053) (0.042) (0.235) (0.091) (0.165)
(0.080) (0.040) (0.345) (0.013) (1.286)
(0.002) (0.001) (0.007) (0.001) (0.033)
(0.021) (0.009) (0.061) (0.002) (0.096)
FinTech Regulation 0.073 0.043 0.055 0.004 0.604*
(0.072) (0.037) (0.181) (0.008) (0.361)
Controls Y Y Y Y Y
Observations 695 795 483 955 605
AR(2) (p–value) 0.457 0.475 0.710 0.582 0.679
significance at the 1%, 5% and 10%.
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Contents lists available at ScienceDirect

Journal of International Money and Finance

Riding the FinTech innovation wave: FinTech, patents and bank

2. FinTech development and regulatory background

Fig. 1. FinTech development in China according to industry data.

Fig. 2. FinTech patent development pattern.

Fig. 3. FinTech classification development (2013–2018).

Variables N Mean Std. dev. Min. Max.

3. Data and empirical methodology

3.1. Bank performance

3.2. FinTech industry development

3.3. FinTech capabilities and patents

3.4. Empirical strategy

CAMELi;tþ1 ¼ qCAMELi;t þ aFinTecht þ byt þ hzi;t þ gi þ ei;t ð1Þ

þbyt þ hzi;t þ gi þ ei;t ð2Þ

4.1. The role of FinTech industry development

Performance measure under the CAMEL rating system

Performance measure under the CAMEL rating system

Performance measure under the CAMEL rating system

Performance measure under the CAMEL rating system

4.2. Heterogeneity of FinTech industry development

4.3. The role of FinTech capabilities

Performance measure under the CAMEL rating system

4.4. Nonlinear impact of FinTech development

Performance measure under the CAMEL rating system

Performance variable Threshold value Confidence interval a1 a2 AR(2) Sargan test

5. Conclusions and implications

CRediT authorship contribution statement

Declaration of Competing Interest

Variable Definition Source

Panel A: Correlation matrix

Performance measure under the CAMEL rating system

Performance measure under the CAMEL rating system

Performance measure under the CAMEL rating system

Panel C: Adding interaction term between FinTech development and regulation

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