Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-Ups
39 Pages Posted: 30 Jan 2022 Last revised: 26 Jul 2022
Date Written: July 2022
Abstract
We provide new evidence on the effects of competition on incumbents’ innovative behavior by examining the rise of FinTech start-ups over the period 2000-2016. We employ machine learning techniques to classify a large global sample of patent applications into five FinTech categories. We exploit the variation in the share of FinTech patent applications by non-financial startups to incumbent financial firms to measure competitive pressures from outside the financial industry. We show that higher competitive pressures from nonfinancial start-ups increases the probability that financial incumbents innovate. Moreover, competition from start-ups results in a higher number of FinTech patent applications by financial incumbents as compared to non-financial firms, especially when the innovations of FinTech start-ups are more important, as proxied by future patent citations count.
Keywords: FinTech, patents, machine learning, financial incumbents, innovation
JEL Classification: G20, G21, O31
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