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As China is a typical country where bank financing is the mainstay, and commercial banks are essential for indirect financing, improving commercial banks' ability to serve the real economy has become the key to deepening structural reform on the supply side of finance. Commercial banks' profitability is an essential indicator for evaluating their operational capacity; therefore, improving performance is necessary for enhancing their ability to serve the real economy.
As we enter a new era of economic development, the external environment has changed dramatically. Due to technology's rapid development, financial technology (“fintech”) has spread worldwide (Phan et al., 2020). Fintech is new business models, applications, processes, and products that apply advanced technologies to the financial sector, significantly impacting financial markets, institutions, and services (Zhongfei et al., 2020).
China has gradually emerged as a global center for fintech innovation and application (Zhao et al., 2022). It has become the world's largest fintech investment market since 2017.
However, fintech must also compete with traditional financial services. In 2015, the initial liberalization of deposit interest rates in China occurred, allowing all financial institutions to capture market share through their autonomy in deposit pricing. This has increased competition for access to funds from financial institutions, which has given rise to their competitiveness in lending activities (Li & Liu, 2019; Lv et al., 2022). Fintech's popularity has facilitated the marketization of interest rates (Hsu & Li, 2020), promoting competition between fintech and traditional financial services in the deposit and loan business (Xiaoping et al, 2023; Mirza et al., 2023).
Fintech's progress has brought uncertainty to commercial banks and posed new challenges to their ongoing reforms. Against this backdrop, a question remains whether the boom in fintech is an essential reason for the weakening profitability of Chinese commercial banks.
So, has the profitability of Chinese banks been reduced during the fintech boom? How does this impact change in different market environments?
The answers to the above questions can help commercial banks adapt to changes in the external environment, improve business performance, and deepen their supply-side reform of commercial banks to support the real economy of financial services.
Given this, this study uses panel data from 2011-2018 from 210 banks in China, including four large commercial banks and 12 joint-stock banks, which comprise urban commercial banks, rural commercial banks, rural credit cooperatives, and foreign banks. The data is analyzed to discuss fintech's impact on bank profitability from the external environment in which commercial banks operate, taking their profitability as the object of analysis.
Theoretically, commercial banks rely on deposit and loan spreads as their primary source of profit, and their asset and liability structures highly correlate with interest rate movements. Fintech has been shown to accelerate the interest rate marketization process, significantly increasing interest rate movement (Mansour, 2024), potentially affecting banks' profitability.
The literature generally agrees that fintech will impact the existing banking landscape and pose significant challenges to banks' traditional business models (Deng et al., 2021; Basdekis et al., 2022; Chi-Chuan et al., 2021; Chengming et al., 2022). However, only some scholars have specifically studied its impact on bank profitability (Deng et al., 2021; Basdekis et al., 2022; Chengming et al., 2022). Compared to the existing literature, the potential contributions of this paper are as follows. First, this paper adopts the Digital Inclusive Finance Index compiled by the Digital Finance Research Centre of Peking University to measure fintech's degree of development and explain the fundamental reasons for China's banking industry's year-on-year profit decline. Second, this paper considers the heterogeneity of the above relationship from the perspective of commercial banks' market structure and monetary policy, thus broadening the heterogeneous research on the relationship between fintech and bank performance (Nguyen et al., 2021; Chen et al., 2021; Cuadros-Solas et al., 2023).