Does FinTech lending moderate the competition-efficiency nexus in banking?

Salsa Dilla, Fauzi Zainir and Aidil Rizal Shahrin

Journal of Chinese Economic and Foreign Trade Studies, 2025, vol. 18, issue 2, 200-225

Abstract: Purpose - This study aims to investigate a possible transmission mechanism by which the coming of financial technology (FinTech) lending can contribute to enhance the competitiveness of commercial banks and considered to affect banks’ efficiency. In addition, this study also identifies the different responses among bank groups (based on their size, type and ownership) and the joint impact of COVID-19 on the FinTech lending-competition-efficiency nexus. Design/methodology/approach - Using an unbalanced panel data set of 118 commercial banks in Indonesia over the period 2018–2022, static panel (fixed and random effect model) and 2SLS/IV data analysis were used to accommodate possibility of endogeneity problem. Findings - The results, using the stochastic frontier analysis for cost efficiency, show that higher competition leads to cost efficiency, providing evidence to support the quiet life hypothesis. However, the emergence of FinTech lending enhanced bank competitiveness, reducing the cost efficiency of Indonesian commercial banks. The negative relationship between the FinTech lending expansion and the level of cost efficiency supports this finding. Furthermore, different responses were found to the impact of FinTech lending on bank efficiency among different bank groupings. The banks were found to be less efficient in the COVID-19 period due to the coming of FinTech lending. This study signals stakeholders, especially Indonesian commercial banks, to anticipate the impact of higher competition created by FinTech lenders, which leads to bank inefficiencies. Other variables, such as asset growth, profitability and liquidity, positively impact cost efficiency, while the nonperforming loan negatively affects cost efficiency. Finally, a higher bank credit growth and lower inflation rate boost cost efficiency. Practical implications - This study highlights some policy recommendations for commercial banks to be aware of the coming of FinTech lenders since they moderate the competition-efficiency nexus by reducing the efficiency level. Hence, the government should create a more collaborative ecosystem between banks and Fintech lending and provide legal authority for the FinTech industry to support the acceleration of digital transformation in the Indonesian banking industry. Originality/value - This study will contribute to the literature by carrying out the transmission from the emergence of FinTech lending to bank efficiency, which includes the moderating role of FinTech lending development on the competition-efficiency nexus in banking.

Keywords: Bank competition; Cost efficiency; Fintech lending; Indonesian commercial banks (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jcefts:jcefts-05-2024-0032

DOI: 10.1108/JCEFTS-05-2024-0032

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