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Contents lists available at ScienceDirect Pacific-Basin Finance Journal journal homepage: Does bank FinTech reduce credit risk? Evidence from China Maoyong Cheng , Yang Qu School of Economics and Finance, Xian Jiaotong University, Xian, China ARTICLE INFO Keywords: Bank FinTech Credit risk Commercial banks China ABSTRACT Using data from Chinese commercial banks between 2008 and 2017, this paper explores the effects of bank FinTech on credit risk. We first construct and measure a bank FinTech index using web crawler technology and word frequency analysis. The results show that the development of bank FinTech is faster in state-owned banks than in other banks. Moreover, among the five subareas of bank FinTech, the development of internet technology is ahead of artificial in- telligence technology, blockchain technology, cloud computing technology, and big data tech- nology. Then, the impacts of bank FinTech on credit risk are examined. We find that bank FinTech significantly reduces credit risk in Chinese commercial banks, and further analyses show that the negative effects of bank FinTech on credit risk are relatively weak among large banks, state-owned banks, and listed banks. 1. Introduction The objective of our study is to examine how bank FinTech affects credit risk. Using hand-collected data, we construct a bank FinTech index and examine the effects of bank FinTech on credit risk measured by the ratio of non-performance loans. In contrast to the existing literature (Nicoletti and Weis, 2017; Anagnostopoulos, 2018; Buchak et al., 2018; Goldstein et al., 2019), this paper not only focuses on the development of bank FinTech and its effects on credit risk but also questions whether bank heterogeneity moderates these effects. Generally, FinTech refers to the combination of finance and technology, which is an emerging industry that uses technology to improve activities in the finance industry. In the past ten years, FinTech has become prominent in global financial markets, and FinTech enterprises have proliferated. The rapid development of FinTech is attracting much academic attention. Many studies have welcomed the rise of FinTech, claiming that newly emerging technologies have the potential to radically transform financial services by making transactions less expensive, more convenient, and more secure (Begenau et al., 2018; Fuster et al., 2019; Chen et al., 2019c; Zhu, 2019; Chiu and Koeppl, 2019). With the rapid development of FinTech, the banking sector has also been affected by FinTech. Generally, the impacts of FinTech on the banking sector come from two aspects, i.e. outside FinTech and bank FinTech. Outside FinTech refers to FinTech outside the banking industry, such as FinTech companies. Outside FinTech affects commercial banks mainly through competition effects and technology spillover effects, among others. Some studies (Shen and Guo, 2015; Hou et al., 2016; Qiu et al., 2018; Guo and Shen, 2019) explore the effects of outside FinTech on the banking industry. Bank FinTech refers to the application of emerging technologies in the banking industry, including artificial intelligence tech- nology, blockchain technology, cloud computing technology, big data technology, and internet technology. In recent years, the development of bank FinTech has been the general trend in the FinTech industry. An increasing number of commercial banks employ doi/10.1016/j.pacfin.2020.101398 Received 31 December 2019; Received in revised form 1 July 2020; Accepted 22 July 2020 Corresponding author. E-mail address: (M. Cheng). Pacific-Basin Finance Journal 63 (2020) 101398 Available online 29 July 2020 0927-538X/ 2020 Elsevier B.V. All rights reserved. Tbank FinTech in their operational processes. For example, the Industrial and Commercial Bank of China (ICBC) proposed a new development strategy named E-ICBC 2.0 based on big data technology and internet technology in 2015. With the help of artificial intelligence technology, the China Construction Bank (CCB) began to promote the application of robo-advisers in 2016. In addition, the Bank of China (BOC) and Tencent Technology Corporation established a joint FinTech laboratory based on artificial intelligence technology, blockchain technology, and big data technology in 2017 to promote its FinTech development. Against this background, how these applications affect bank credit risk becomes an interesting question that motivates us to explore this issue. In addition, policy considerations motivate this research. Although bank FinTech has become increasingly popular in Chinas banking industry, laws and regulations about bank FinTech remain scarce. The lack of bank FinTech regulations not only results in regulatory in- efficiency but also creates many risks. Therefore, for FinTech regulators and policymakers, improving FinTech-related legislation is a top priority. In this paper, we explore the effects of bank FinTech on credit risk, which could provide empirical evidence for pol- icymakers. Finally, existing studies further motivate this paper. Although some papers examine the effects of FinTech on the banking industry (Shen and Guo, 2015; Hou et al., 2016; Qiu et al., 2018; Guo and Shen, 2019), these studies focus mainly on the influence of outside FinTech. To the best of our knowledge, little research analyzes the impact of bank FinTech. Therefore, our research focuses on this academic gap and complements the existing literature. We argue that bank FinTech affects credit risk based on the following two aspects. On the one hand, bank FinTech may reduce credit risk. First, bank employing emerging technologies contributes to improving bank risk management efficiency and thus reduces bank credit risk. Second, bank FinTech improves banks internal governance and internal control and thus reduces bank credit risk. Finally, bank FinTech could increase bank diversification and produce diversification effect, which contributes to reducing bank credit risk. On the other hand, bank FinTech brings technical risk and regulatory risk, which could increase bank credit risk. Using hand-collected data from China from 2008 to 2017, we construct a bank FinTech index and explore its effects on credit risk, and we find the following results. First, the development of bank FinTech and its subareas present an increasing trend from 2008 to 2017. Moreover, the development of bank FinTech is more rapid in state-owned banks than in other banks. Among the subareas of bank FinTech, internet technology is the fastest-growing, while artificial intelligence technology is the slowest growing. Second, our basic results show that bank FinTech and bank FinTech subareas are all negatively associated with bank credit risk, indicating that the development of bank FinTech reduces credit risk. Third, we also find that the negative effects of bank FinTech on credit risk are weaker in large banks, state-owned banks, and listed banks. This paper makes two main contributions to the existing literature. First, it constructs a bank FinTech index that measures the development of FinTech in the banking industry. Although some papers have studied the development of FinTech, these studies explore this issue mostly from the macro-level perspective (Hou et al., 2016; Qiu et al., 2018). They examine mainly the development of FinTech in a country or region. To the best of our knowledge, little research measures the development of bank FinTech at the bank-year level. Therefore, this paper constructs bank FinTech indexes by using web crawler technology and word frequency ana- lysis. Second, this paper explores the effects of bank FinTech on credit risk and examines whether these effects differ in different banks. Although some papers examine the effects of FinTech on the banking industry (Shen and Guo, 2015; Hou et al., 2016; Qiu et al., 2018; Guo and Shen, 2019), these studies focus mainly on the influence of outside FinTech. Little research examines the impact of bank FinTech. We construct the remainder of this paper as follows. Section 2 provides the institutional context. Section 3 shows the related literature and hypothesis development. Section 4 presents our sample, variables, and methodology. Section 5 discusses the empirical results. Section 6 presents further analyses. Section 7 concludes. 2. Institutional context 2.1. Definitions of FinTech In the past ten years, FinTech has received increasing worldwide attention and has become a global topic. However, there is no uniform definition of FinTech. For example, in 2016, the Financial Stability Board (FSB) defined FinTech as technology-driven financial innovation, while Navaretti et al. (2018) define FinTech as FinTech companies and classify FinTech according to the type of business, such as FinTech payment companies and FinTech lending companies. In China, Qiu et al. (2018) believe that FinTech refers to new FinTech products, such as Yue Bao, while Yang (2018) claims that FinTech is a new financial ecology formed outside the traditional financial system. In addition, the “FinTech Development Plan (2019-2021)” issued by the Peoples Bank of China (PBOC) in August 2019 defined FinTech as the application of emerging technologies. For the bank FinTech definition, there is no clear statement among academic studies to date. In this paper, we follow the “FinTech Development Plan (2019-2021)” to define bank FinTech. Specifically, we define bank FinTech as the application of emerging technologies in the banking industry, including artificial intelligence technology, blockchain technology, cloud computing tech- nology, big data technology, and internet technology. 2.2. Development process of FinTech The core of FinTech is the integration of financial activity and advanced technology. Technological innovations are the driving force behind the development of FinTech. Therefore, according to technological development, we divide the development of FinTech in China into three stages as follows. M. Cheng and Y. Qu Pacific-Basin Finance Journal 63 (2020) 101398 22.2.1. First stage: Internet finance (before 2010) The first stage is the internet finance stage, represented by the initial combination of finance and internet. In this stage, the rapid development of internet technology led to the combination of the financial industry and internet technology. Specifically, some simple traditional financial businesses realized electronization through the application of internet technology. Meanwhile, traditional financial institutions also realized office automation. These combinations increased the efficiency of financial institutions. Regarding bank FinTech in this stage, the most representative was online banking. Especially after the establishment of Alipay in 2004, the development of FinTech attracted more attention from commercial banks. 1 Many commercial banks began to accelerate the development of online banking. For example, ICBCs online banking business achieved remarkable development during this period. In 2009, the number of online banking customers exceeded 1.6 million, and the transaction volume accounted for 34.2% of the total online banking transactions. 2 In short, Chinas bank FinTech, especially online banking, obtained rapid development during this stage. 2.2.2. Second stage: mobile internet finance (20112015) The second stage is the mobile internet finance stage. At this time, the emergence of smartphones greatly improved the efficiency of internet technology, improving the development of mobile internet technology. The penetration of mobile internet technology in the financial industry has gradually increased, and traditional financial institutions began to transform traditional financial channels and promote the development of mobile internet finance. In addition, some internet companies began to financialize. For example, the PBOC issued a third-party payment license to Alipay and Tenpay in June 2011. 3 Since then, the Alibaba Group and Tencent Technology Corporation have obtained licenses to begin legally operating mobile payment services. In terms of bank FinTech, mobile banking became a popular FinTech product at this stage. Mobile banking was a new type of banking service channel that served as an extension of online banking. Mobile banking utilizes the ability of mobile internet tech- nology to be available anytime and anywhere, which provides a more convenient and competitive service method for the banking industry. Taking the China Merchants Bank as an example, the total number of mobile banking customers in 2013 reached 12.434 million, and the accumulated mobile payment transactions reached 69.961 million, with a transaction amount of 12.719 billion yuan. 4 In this stage, the user and transaction volume of mobile banking developed rapidly. 2.2.3. Third stage: emerging technologies and finance (after 2015) The third stage is the combination of finance and emerging technologies, such as artificial intelligence technology, blockchain technology, cloud computing technology, and big data technology. At this stage, by employing emerging technologies, the financial industry not only innovated traditional business models but also changed information collection, risk management, pricing strategy, and so on. These emerging technologies have not only greatly improved the efficiency of traditional finance but also helped tradi- tional financial institutions better optimize their business models. In this stage, Bank FinTech focused mainly on the application of artificial intelligence technology, blockchain technology, cloud computing technology, and big data technology in commercial banks. For instance, more than 100 commercial banks have optimized their business strategies and improved their efficiency through cloud computing technology through cooperation with the Alibaba Cloud. 5 In addition, the ICBC proposed a new development strategy named E-ICBC 2.0 based on big data technology and internet technology in 2015. With the help of artificial intelligence technology, the CCB began to promote the application of robo-advisers in 2016. The BOC and Tencent Technology Corporation established a FinTech joint laboratory based on artificial intelligence tech- nology, blockchain technology, and big data technology in 2017 to promote its FinTech development. These FinTech applications have effectively helped these commercial banks improve their operational efficiency and risk management. 2.3. Regulations of FinTech With the development of FinTech, Chinese government departments issued several FinTech laws and regulations. For example, the State Council of China has promulgated a series of policies about specific technologies to guide and regulate the development of FinTech since 2015. In January 2015, the “Opinions of the State Council on Promoting the Innovative Development of Cloud Computing and Cultivating New Formats of the Information Industry” stated that cloud computing is a new
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