Differential Impact of Fintech and GDP on Bank Performance: Global Evidence

Round 1

Reviewer 1 Report

The paper tries to analyse Fintech and GPD as factors influencing banks’ performance. Unfortunately, it does not refer to theory and previous research referring to a bank’s performance and its determinants. As a result, the model is based on wrong assumptions, which makes the results unreliable. Analysing the factors that influence banks’ performance will surely lead to the conclusion that the Fintech level and GDP can be at least treated as moderating variables.

The title and abstract promise to analyse the fintech level, while the proposed index includes only one proxy – “made or received a digital payment”. The index measuring the fintech level should refer to all areas of fintech activities. Additionally, it is not clear whether the fintech level and the fintech development should be treated as synonyms. Those terms are not defined. It is also unclear if Fintechs are defined from the objective (as a product or service) or subjective (as a provider) perspective. The decision concerning the perspective influences the model rationale. The studies referred to in the introduction section use mostly the subjective perspective (the number of Fintechs), while this study refers to digital payments. Some other studies refer to mobile payments provided by banks. I can agree that providing mobile payments by a bank can influence its financial performance. But proving that offering such a product by any competitor influences, as the only factor, the performance, measured by selected efficiency ratios, requires solid rationale.

As mentioned before, the Fintech index should include all aspects of the Fintech phenomenon and refer to all banks’ operating activities, not only payments. It is extremely important due to the fact that still, the core source of banks’ revenues are credits and loans’ interest rates, fees, and other charges. Otherwise, the index should be referred to rather as the Digital Payment Index.

Minor inaccuracies also concern the definition of indicators. For example, the C/I ratio does not equal the cost structure in the bank’s balance sheets. Thus it should not be denoted as cost structure.

It would be valuable to add a table with information on what countries are in particular clusters. There is a huge probability that some market conditions as the banking sector model, market concentration, competition, regulations, etc., influence banks’ performance more than GDP and willingness to use digital payments. For example, comparing the Chinese banking sector with the European or Anglo-Saxon banking market seems to be irrelevant due to differences in those models’ basic assumptions.

I appreciate the authors’ statistical skills, but the model must be based on correct merit assumptions and rationale. If it simplifies reality too much, the results cannot be accepted.

Author Response

1. The paper tries to analyse Fintech and GPD as factors influencing banks’ performance. Unfortunately, it does not refer to theory and previous research referring to a bank’s performance and its determinants. As a result, the model is based on wrong assumptions, which makes the results unreliable. Analysing the factors that influence banks’ performance will surely lead to the conclusion that the Fintech level and GDP can be at least treated as moderating variables.

Response: We reviewed the literature on bank performance determinants and identified other variables (bank-, industry-, and country-specific determinants) that affect bank performance in various markets (Dietrich and Wanzenried 2011, 2014; Trujillo-Ponce 2013; Köster and Pelster 2017). However, we could not include those variables due to data unavailability in the World Bank Database. The World Bank data series are all country-level macro variables. The macroeconomic factors considered in the existing literature include GDP growth and inflation, so we had these variables in our analyses.

2. The title and abstract promise to analyse the fintech level, while the proposed index includes only one proxy – “made or received a digital payment”. The index measuring the fintech level should refer to all areas of fintech activities. Additionally, it is not clear whether the fintech level and the fintech development should be treated as synonyms. Those terms are not defined. It is also unclear if Fintechs are defined from the objective (as a product or service) or subjective (as a provider) perspective. The decision concerning the perspective influences the model rationale. The studies referred to in the introduction section use mostly the subjective perspective (the number of Fintechs), while this study refers to digital payments. Some other studies refer to mobile payments provided by banks. I can agree that providing mobile payments by a bank can influence its financial performance. But proving that offering such a product by any competitor influences, as the only factor, the performance, measured by selected efficiency ratios, requires solid rationale. As mentioned before, the Fintech index should include all aspects of the Fintech phenomenon and refer to all banks’ operating activities, not only payments. It is extremely important due to the fact that still, the core source of banks’ revenues are credits and loans’ interest rates, fees, and other charges. Otherwise, the index should be referred to rather as the Digital Payment Index.

Response: We thoroughly examined the World Bank Database again to see if we could find additional fintech measures. As mentioned in the original manuscript, there are other fintech variables. However, these variables have serious issues such as missing values, many zero values, or data unavailable in the entire three years of our sample period. Despite the problems in the additional data, we attempted to create a new fintech proxy by taking a simple average of our original fintech measure (‘Made or received a digital payment’) and a variable with relatively fewer problems (‘Made a utility payment using a mobile phone’). Then, we estimated AbFintech2 by regressing the fintech proxy on GDP per capita and government effectiveness and replicated the analyses in the original manuscript. We obtained qualitatively similar results to the ones in the original manuscript (mentioned in footnote 3 of the revised manuscript).

Appendix 1 details the process. Please note that we do not include the replicated results in the revised manuscript to avoid unnecessary redundancies in the paper. Instead, we report the replication results in Appendix 1 to answer your comments.

3. Minor inaccuracies also concern the definition of indicators. For example, the C/I ratio does not equal the cost structure in the bank’s balance sheets. Thus it should not be denoted as cost structure.

Response: We replaced ‘cost structure’ with ‘cost-to-income ratio’ to avoid confusion per your comments.

4. It would be valuable to add a table with information on what countries are in particular clusters. There is a huge probability that some market conditions as the banking sector model, market concentration, competition, regulations, etc., influence banks’ performance more than GDP and willingness to use digital payments. For example, comparing the Chinese banking sector with the European or Anglo-Saxon banking market seems to be irrelevant due to differences in those models’ basic assumptions.

Response: We added a new table in the revised manuscript as Appendix B. Please find “Appendix B. Countries by income group based on the current year’s GDP per capita” in the revised manuscript.

Author Response File: Author Response.docx

Reviewer 2 Report

Based on a comprehensive review of this research article, I render my opinion that the author has studied Differential Impact of Fintech and GDP on Bank Performance on global basis. Overall my recommendation of this manuscript is positive. However, the manuscript needs further improvement. The author should incorporate the following suggested changes with due diligence e.

1.    Policy implication statement is missing in the abstract.

2.    Emphasis on big general ideas including originality and clearer contribution in relation to the literature: Making your research appealing to a broad audience is an important goal of this journal. Related to my previous comment, please highlight whether the proposed econometric approach is best one matching with the question addressed in this paper. Try to put out this issue in abstract as well as in the introduction. 

3.    The authors should highlight the significance of banking industry towards economic growth in the introduction section. The following study may serve as a guide.

https://doi.org/10.1002/ijfe.2115  

4.    The authors have written literature review in an old fashion i.e., examined, analyzed etc. Please write it in a critical fashion and highlight your research gap at the end if literature review section. They should include a table summarizing the summary the literature. They can take guidance from the following article in this regard.

https://doi.org/10.1016/j.physa.2019.124106

5.    The results and discussion part needs significance improvement. The author should back their research with the available pertnent literature.

6.    The conclusion section weak. It should be improved based on the study's findings. 

7.    Policy implications of the study are missing.  The author should clearly outline policy implications based on the results.

8.    Some paragraphs especially in the literature review section are too short align them.

9.    Remove typos. Please refer to first paragraph of the intro section.

Author Response

1. Policy implication statement is missing in the abstract.

Response: We included a policy implication statement in the abstract. Please see the last sentence in the abstract, stating “The resulting policy implication is that banks in less developed countries benefit most from investing in fintech innovation since they can provide a broader customer base, including formerly unbanked or underbanked customers, with more convenient services at lower costs.” (Abstract)

2. Emphasis on big general ideas including originality and clearer contribution in relation to the literature: Making your research appealing to a broad audience is an important goal of this journal. Related to my previous comment, please highlight whether the proposed econometric approach is best one matching with the question addressed in this paper. Try to put out this issue in abstract as well as in the introduction.

Response: We included an additional sentence in the introduction to that effect. Please find a sentence stating, “Further, we make improvements over the existing studies on measuring fintech levels. Prior research uses various metrics for fintech levels that potentially have multicollinearity issues in the regression analyses.” (p.3)

3. The authors should highlight the significance of banking industry towards economic growth in the introduction section. The following study may serve as a guide.

https://doi.org/10.1002/ijfe.2115 

Response: We added a paragraph in the conclusions and future research section on financial deepening and economic growth. Please find a paragraph stating, “For our subsequent research, we plan to investigate how fintech affects financial deepening and, in turn, influences economic growth. Economists have been debating the role of finance in economic development for decades. Earlier studies show that financial deepening fosters economic growth (King and Levine 1993; Levine and Zevos 1998; Levine et al. 2000; Beck et al. 2000). However, some of the more recent studies report there is a nonlinear relationship between financial development and economic growth, suggesting there can be too much finance (Cecchetti and Kharroubi 2012; Arcand et al. 2015; Sahay et al. 2015). These studies provide evidence that once financial depth exceeds an optimal level, additional financial deepening reduces rather than increases growth. By considering fintech’s effect on financial deepening, we hope to contribute to the research on the link between financial development and economic growth.” (pp. 16-17)

4. The authors have written literature review in an old fashion i.e., examined, analyzed etc. Please write it in a critical fashion and highlight your research gap at the end if literature review section. They should include a table summarizing the summary the literature. They can take guidance from the following article in this regard.

https://doi.org/10.1016/j.physa.2019.124106

Response: We created a table of literature summary. Please find “Table 1. Summary of literature on fintech and bank performance” (p.4). We also added a new paragraph for the differences between previous studies and our approach. Please find a paragraph stating, “All these previous studies examine the relationship between fintech development and bank performance for individual countries or multiple countries in aggregate. However, unlike the existing literature, we segment our sample into four groups based on GDP per capita and investigate if fintech’s effects on bank performance vary depending on the levels of economic development. To the best of my knowledge, we are the first to provide global evidence on the differential effects of fintech in countries with different income levels.” (p.7)

5. The results and discussion part needs significance improvement. The author should back their research with the available pertinent literature.

Response: We added a sentence to that effect in the results section. Please find a paragraph stating, “Our analysis results lead to important policy implications. Banks in less developed countries benefit the most by investing in fintech innovation, particularly in digital payments, since banks can provide a broader customer base, including formerly unbanked or underbanked customers, with more convenient services at lower costs. Various studies indicate fintech can potentially increase financial inclusion (Alliance for Financial Inclusion 2018; Makina 2019; Arner et al. 2020; Beck 2020; Hollanders 2020-21; Chen and Yoon 2022; Sahay et al. 2022).” (pp. 13-14)

6. The conclusion section weak. It should be improved based on the study’s findings.

Response: We strengthened the conclusion section by adding more details of the findings. Please find sentences stating, “Also, the coefficient and significance of the AbFintech declines as income levels rise from the first, second, and third quartile countries, indicating that the marginal benefit from adopting fintech innovation wears out as the fintech application setting moves to the richer countries. Compatible with these results,  AbFintech significantly decreases the cost-to-income ratio (i.e., improves bank efficiency) in less wealthy countries, while significantly increasing the ratio (i.e., worsening bank efficiency) in the richest countries.” (p.16)

7. Policy implications of the study are missing. The author should clearly outline policy implications based on the results.

Response: We added policy implications in the abstract and results section. Please see the last sentence in the abstract, stating “The resulting policy implication is that banks in less developed countries benefit most from investing in fintech innovation since they can provide a broader customer base, including formerly unbanked or underbanked customers, with more convenient services at lower costs.” (Abstract) Also, please find sentences stating, “Our study provides a policy implication that banks in less developed countries benefit most from investing in fintech innovation. It is because fintech provides a broader customer base, including formerly unbanked or underbanked customers, with more convenient services at an affordable cost of financing.” (p.16)

8. Some paragraphs especially in the literature review section are too short align them.

Response: We merged some short paragraphs.

9. Remove typos. Please refer to first paragraph of the intro section.

Response: We made sure there are no typos.

Author Response File: Author Response.docx

Reviewer 3 Report

The paper analyses the effect of financial technology (fintech) on the performance of banks in 91 countries using World Bank data. The researchers developed a unique metric called "abnormal fintech" (AbFintech), which essentially measures fintech levels beyond what GDP per capita would typically predict. The paper finds that fintech innovation significantly boosts bank performance, particularly in less developed countries, with a noticeable increase in Return on Assets (ROA) in the least developed countries and in net interest margins in 75th percentile countries. The paper emphasizes the significant role fintech plays in reshaping the global banking industry and advancing financial inclusion.

The article as a whole is well-structured, but requires minor revisions:

1. While the current study provides a broad overview of the effects of fintech on banking performance, the suggestion to examine the topic in more detail is well-taken. The study relies solely on World Bank data, which started providing fintech development indices only from 2014, potentially limiting the scope of the analysis.

2. The paper proxies fintech using the percentage of the population aged 15+ that made or received a digital payment. However, this presents a rather narrow view of fintech, which encompasses a wide range of technologies, services, and products beyond just digital payments. Furthermore, the paper does not explore the implications of fintech on banking security measures, a significant aspect of fintech's impact on banking.

3. While the concept of "AbFintech" is innovative, it is derived by regressing fintech levels solely on GDP per capita. Other socioeconomic factors might also be relevant for deriving a more accurate measure of "abnormal" fintech development.

4. To ensure alignment with the most recent findings and theories, it's crucial to include references from the latest research papers. Doing so can provide a broader understanding of the topic and reveal new insights or hypotheses that could be tested. Furthermore, the design of the references could be improved by adopting a consistent citation style.

5. Any non-academic content, such as HTML links in the text, should be removed to maintain the professional format and integrity of the paper.

6. It's important to suggest areas for further study based on the findings, especially considering the rapid evolution of fintech. A more detailed analysis of specific fintech indicators or aspects can provide deeper insights and extend the contribution of the research

The paper may be accept after minor revision 

Minor grammar and scientific style adjustments are needed.

Author Response

The article as a whole is well-structured, but requires minor revisions:

1. While the current study provides a broad overview of the effects of fintech on banking performance, the suggestion to examine the topic in more detail is well-taken. The study relies solely on World Bank data, which started providing fintech development indices only from 2014, potentially limiting the scope of the analysis.

Response: We did our best to thoroughly examine the topic with the data available to us. When more data is available in the future, we plan to revisit the topic.

2. The paper proxies fintech using the percentage of the population aged 15+ that made or received a digital payment. However, this presents a rather narrow view of fintech, which encompasses a wide range of technologies, services, and products beyond just digital payments. Furthermore, the paper does not explore the implications of fintech on banking security measures, a significant aspect of fintech’s impact on banking.

Response: The World Bank Findex series provides numerous fintech-related metrics. However, the reported items and reporting methods by the World Bank keep changing over time, possibly reflecting the dynamic and varying nature of technology changes. For example, many new fintech-related items are added starting in 2017 or 2021. Please go to Appendix 1 to see the series available from 2017 and 2021.

In addition, even for the available fintech-related metrics, many missing values and high correlations plague those data’s usability. For example, the correlation coefficient between ‘made or received a digital payment’ and ‘made a utility payment using mobile phone’ is 0.616. Plus, ‘made a utility payment using mobile phone’ has many zero values, which makes the variable unsuitable as a proxy for fintech. However, please note that we did analyses using the variable and estimated AbFintech3 and found qualitatively similar results.

Banking security measures, such as authentication, encryption, anti-virus and anti-malware firewall and others, are not publicly available. We mentioned in the implications and limitations section that we did not address the banking security measures and this is one of our limitations. When data is available in the future, we plan to examine this issue.

3. While the concept of “AbFintech” is innovative, it is derived by regressing fintech levels solely on GDP per capita. Other socioeconomic factors might also be relevant for deriving a more accurate measure of “abnormal” fintech development.

Response: We have tried another measure of AbFintech subject to data availability. Per your suggestion, we looked at governance indicators, which we mentioned as potential control variables but were not included in the paper due to high correlation with GDP per capita. The governance indicators we considered are government effectiveness, control of corruption, regulatory quality, and rule of law. We also examined one more variable (Individuals using the internet) but did not use it since it has 71% missing values in 2021. Therefore, we were technically limited to the four governance indicators. To show how closely the governance indicators correlated, we show the correlation matrix of them with the proxy for fintech as follows:

Correlation matrix of governance indicators with ‘Made or received a digital payment’

[Note] 1. Made or received a digital payment (%), 2. GDP per capita (US$, LN), 3. Government effectiveness (percentile rank), 4. Control of corruption (percentile rank), 5. Regulatory quality (percentile rank), 6. Rule of law (percentile rank)

As shown in the correlation matrix, all the variables are significantly positively correlated with correlation coefficients ranging from 0.79 to 0.95.

The World Bank states that ‘government effectiveness’ captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. We believe government effectiveness is a comprehensive measure of how effectively the integrated systems in a country are administered to achieve the quality objectives of public and civil services. Therefore, we can use it as an additional representative socioeconomic factor of a country.

Therefore, we use the following model to estimate AbFintech2:

Y = β₀ + β₁GDP per capita + β₂Government effectiveness + e

Please note that we report the replicated results only in the responses to your comments but not in the revised manuscript to avoid unnecessary, redundant reporting. We reported a summary of the replicated results in footnote 5 in the revised manuscript.

The regression result of 2014 data is as follows:

The model’s goodness of fit is very high, with an adjusted R-square of 0.798, 0.787, and 0.681, respectively, in 2014, 2017, and 2021. Both explanatory variables are highly significant. The correlation coefficient between AbFintech and AbFintech2 is 0.917. Then, we replicated analyses and prepared applicable tables, which are not reported in the revised manuscript to avoid unnecessary, redundant duplication (Appendix 2 details the results.). The results are qualitatively the same as those reported in the original manuscript. Hence, we mentioned in footnote 5 of the revised manuscript that we obtained qualitatively very similar results when we replicated the analyses with the alternative measure of AbFintech.

4. To ensure alignment with the most recent findings and theories, it’s crucial to include references from the latest research papers. Doing so can provide a broader understanding of the topic and reveal new insights or hypotheses that could be tested. Furthermore, the design of the references could be improved by adopting a consistent citation style.

Response: In this revised manuscript, we added twenty-four more references. We made sure the references were consistent with the JRFM style.

5. Any non-academic content, such as HTML links in the text, should be removed to maintain the professional format and integrity of the paper.

Response: We removed the links from the text.

6. It’s important to suggest areas for further study based on the findings, especially considering the rapid evolution of fintech. A more detailed analysis of specific fintech indicators or aspects can provide deeper insights and extend the contribution of the research

Response: We added a future research topic and changed the section title from Conclusions to “Conclusions and future research.” Please find a paragraph stating, “For our subsequent research, we plan to investigate how fintech affects financial deepening and, in turn, influences economic growth. Economists have been debating the role of finance in economic development for decades. Earlier studies show that financial deepening fosters economic growth (King and Levine 1993; Levine and Zevos 1998; Levine et al. 2000; Beck et al. 2000). However, some of the more recent studies report there is a nonlinear relationship between financial development and economic growth, suggesting there can be too much finance (Cecchetti and Kharroubi 2012; Arcand et al. 2015; Sahay et al. 2015). These studies provide evidence that once financial depth exceeds an optimal level, additional financial deepening reduces rather than increases growth. By considering fintech’s effect on financial deepening, we hope to contribute to the research on the link between financial development and economic growth.” (pp. 16-17)

Author Response File: Author Response.docx

Round 2

Reviewer 2 Report

The authors have incorporated the suggested comments; however they are still required to highlight the importance of fintech and banks in economic growth in the intro section.

Author Response

We thank reviewer 2 for carefully reading our revised manuscript and thoughtful suggestions. We made additional revisions to the manuscript to address the referee’s comments. Please see below how we addressed the reviewer’s suggestions.

Reviewer 2 (Round 2)

Comments and Suggestions for Authors

The authors have incorporated the suggested comments; however they are still required to highlight the importance of fintech and banks in economic growth in the intro section.

Response: As suggested, we added the following paragraph to the introduction section (footnote 1). The references have been updated accordingly by adding four more.

“Another important research question related to fintech, more broadly financial deepening, is how fintech-induced financial development affects economic growth. The effects of financial development on economic growth have been examined by researchers for decades (King and Levine 1993; Levine et al. 2000; Cecchetti and Kharroubi 2012; Sahay et al. 2015). Fintech can help the economy grow by facilitating faster and cost-effective financial transactions, enhancing efficiency in distributing financial resources, encouraging innovation and entrepreneurship, and expanding financial access for individuals and businesses. These benefits potentially lead to increased trade and investment, resulting in economic growth. Recently, studies on the nexus of fintech, green finance, and sustainable growth are emerging (Deng et al., 2019; Yang et al., 2021; Zhou et al., 2022; Awais et al., 2023).”