Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-ups

Doina Caragea (), Theodor Cojoianu (), Mihai Dobri (), Andreas Hoepner (), Oana Peia and Davide Romelli
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Doina Caragea: Kansas State University
Theodor Cojoianu: University of Edinburgh Business School
Mihai Dobri: Kansas State University
Andreas Hoepner: University College Dublin

Journal of Financial Services Research, 2024, vol. 65, issue 1, No 4, 103-140

Abstract: Abstract This paper provides new evidence on the effects of entry on incumbents’ incentives to innovate by examining the rise of FinTech innovations over the period 2000-2016. We employ machine learning algorithms to classify a large sample of patent applications into five types of FinTech innovations. We then show that greater competition from innovators outside the financial sector increases the probability that incumbent financial firms will innovate. Our identification strategy exploits the variation over time in the share of FinTech patent applications by non-financial start-ups relative to incumbent financial firms, as a proxy for competitive pressures from outside the financial industry. We also find that this increased competition results in a higher number of FinTech patent applications by financial incumbents relative to non-financial ones, especially when the FinTech innovations are more important, as proxied by the number of their future patent citations.

Keywords: FinTech; Patents; Machine learning; Financial incumbents; Innovation (search for similar items in EconPapers)
JEL-codes: G20 G21 O31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10693-023-00413-7

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