Essays on Digital Credit, Banking Business Models, and Bank Innovation

Abstract

This thesis provides insights into financial technology development, and its interaction with banking institutions. To this end, three distinct research investigations are conducted. First, we examine the determinants of the global online lending market expansion, known as "digital credit". Next, we link the financial technology development with the banking sector through the examination of the role of banking business models in explaining the decision of banks to acquire fintech firms. Following this, we analyze the impact of bank-fintech collaboration through the equity investment channel on bank innovation capabilities.

Through the use of several econometric methodologies, this thesis presents robust findings. First, we find that digital credit provided by fintech and bigtech firms complements the credit provided by incumbents. Second, we find that diversified and investment banking business models are more likely to conduct acquisitions of fintech firms than wholesale and traditional banking business models. We further show that the structure of a bank's business model may explain both the propensity of a bank to acquire a fintech firm with a particular specialization and the motivations behind such acquisitions. Finally, we present results indicating that banks' investments in fintech firms' funding rounds increase their financial innovation output. We document that this positive impact holds even when we restrict the participation of banks to only the initial investment.

The results give rise to several important policy implications. We provide evidence demonstrating the positive impact of the advancement of financial institutions on digital credit volumes. As such, policymakers aiming to promote financial innovation in their jurisdiction should implement strategies that focus on developing the banking sector. Furthermore, our findings on the role of banking business models in banks' fintech acquisitions should inform policymakers about the significance of considering the intricate business model structures when formulating efficient and targeted policies to address the dynamics of bank-fintech partnerships. In addition, the results regarding the impact of bank-fintech equity investment on bank innovation suggest that when banks increase their participation in the funding rounds of fintech firms, it leads to a higher bank innovation output. Therefore, regulators aiming to foster financial innovation should ensure that the regulatory environment facilitates beneficial collaboration between banks and fintech firms, while simultaneously preserving the stability of financial markets.