Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-Ups

Forthcoming, Journal of Financial Services Research

39 Pages Posted: 30 Jan 2022 Last revised: 30 Sep 2023

See all articles by Doina Caragea

Doina Caragea

Kansas State University - Department of Computer Science

Theodor Cojoianu

Edinburgh Business School - The University of Edinburgh

Mihai Dobri

Kansas State University

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; European Commission - DG FISMA

Oana Peia

University College Dublin (UCD)

Davide Romelli

Trinity College (Dublin) - Department of Economics; Trinity College (Dublin)

Date Written: July 1, 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

Suggested Citation

Caragea, Doina and Cojoianu, Theodor and Dobri, Mihai and Hoepner, Andreas G. F. and Peia, Oana and Romelli, Davide, Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-Ups (July 1, 2022). Forthcoming, Journal of Financial Services Research, Available at SSRN: https://ssrn.com/abstract=4021161 or http://dx.doi.org/10.2139/ssrn.4021161

Doina Caragea

Kansas State University - Department of Computer Science

Manhattan, KS 66506-4001
United States

Theodor Cojoianu

Edinburgh Business School - The University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Mihai Dobri

Kansas State University

Manhattan, KS 66506-4001
United States

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

European Commission - DG FISMA ( email )

2 Rue de Spa
Brussels, 1000
Belgium

Oana Peia (Contact Author)

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

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