Does Fintech Affect Bank Profitability? Empirical Insights from Malaysia

Abstract

Objectives: This study investigates the influence of Fintech on the profitability of Malaysian banks. It aims to assess both accounting measures, such as Return on Assets (ROA) and Net Interest Margin (NIM), and market performance measures, including Tobin's Q. The research utilizes bank-level metrics like the intangible asset ratio and the ATM-to-branch ratio, along with a country-level Fintech index that combines data on ATM, smartphone usage, and internet penetration. The study seeks to understand the complex dynamics between Fintech investments and bank profitability, providing insights for various stakeholders, including policymakers, banks, investors, and consumers. Methods: The research employs a panel regression analysis to explore the relationship between Fintech developments and bank profitability. The analysis covers publicly listed banks in Malaysia from 2010 to 2022. Key variables include the intangible asset ratio as a proxy for IT investment in Fintech, the ATM-to-branch ratio, and a comprehensive Fintech index at the country level. The study also considers market risk exposure, using Value at Risk (VaR) as an indicator. The approach is grounded in the resource-based view theory, suggesting that Fintech can provide competitive advantages through data analytics, mobile technology, and enhanced cybersecurity. Results: The findings reveal that Fintech investments at the bank level, indicated by the intangible asset ratio, have a positive impact on NIM. This supports the notion that technology-driven innovations can enhance profitability. However, the study also uncovers a contrasting effect at the country level, where broader Fintech development appears to negatively impact bank profitability. This suggests a more complex interplay between technological advancement and market dynamics, including increased competition from digital payment systems and peer-to-peer lending platforms. Additionally, the research highlights that banks with higher exposure to market risk, as indicated by VaR, tend to achieve better profitability metrics, such as ROA, NIM, and Tobin's Q. Conclusion: The study concludes that while Fintech investments at the bank level can enhance profitability, broader Fintech development in the country may pose challenges to traditional banking profitability due to increased competition and market disruption. The results underscore the importance of strategic agility, advanced risk management, and innovation in banking practices to navigate the evolving financial landscape. The findings offer valuable insights for stakeholders, emphasizing the need for tailored regulatory approaches, strategic investments in technology, and innovations that focus on consumer needs. This nuanced understanding of the Fintech-bank profit nexus can help guide more informed decision-making in the industry.