Abstract
We examine the impact of FinTech formations on the default risk of incumbent financial institutions in South Africa and find that the development of FinTech startups reduces bankruptcy risk, credit risk and stock return volatility of banks and other financial institutions. FinTech startup formations is also associated with improvement in incumbent institutions’ performance. Further analysis shows that the risk reduction effect of FinTech is more pronounced in small banks than large banks. In fact, large banks experience initial increase in risk from FinTech development. Overall, our results are consistent with the assertion that FinTech improve the efficiency of risk management and consequently reduce default risk of incumbent financial institutions. However, the relationship is non-linear, suggesting that the initial collaboration which leads to a reduction in default risk can turn to increased competition as more FinTech startups enter the market. Given the central role of financial institutions in the nation’s development, the growth of FinTech firms might to some degree counteract the too systemic-to-fail phenomenon. From a policy standpoint, efforts to promote more collaboration should be encouraged but regulators should still be cautious of potential systemic risk which could result from possible data breach.
Details
Presentation Type
Theme
2024 Special Focus—People, Education, and Technology for a Sustainable Future
KEYWORDS
FinTech, Financial Institutions, Default Risk, Performance, Financial Stability, South Africa
