Does FinTech Innovation Improve Traditional Banks' Efficiency and Risk Measures? A New Methodology and New Machine-Learning-Based Evidence from Patent Filings

Abstract

We develop a new bank-specific measure of FinTech to test how such innovation impacts traditional
banks’ operational efficiency and risk. Our methodology goes allin machine learning
to measure FinTech innovation within Chinese commercial (traditional) banks. Using
propensity score matching and difference-in-differences, we show that FinTech significantly
improves banks’return on assets, as well as cost and income efficiency. FinTech also ameliorates
banks’ risk measures—including overall risk (Z score), and the capital asset, liquidity,
and nonperforming loan ratios. FinTech has a greater positive impact on efficiency and risk
for banks with greater labor intensity and higher managerial ability.

Keywords: Banks, FinTech, loans, deposits

JEL Classification: G21, G18