Research On The Impact Of Fintech On The Profit And Risk Of Retail Business Of Chinese Commercial Banks

In recent years,financial technology(“Fintech”)sees surge in China together with deepened integration of financial services with ever-evolving information technologies.While bringing along more choices and efficiency in financial services,Fintech tightens up competition in the financial market,which reflecting significantly on the operations of commercial banks.At the same time,China's economic growth is transforming from investment and export driven to consumption driven.The consumption ability and willingness of residents are profoundly adjusted,and the retail business of commercial banks will be transformed accordingly.The retail business has the characteristics of large number of customers and small single sum of money,which is highly consistent with the comparative advantage of Fintech.Therefore,in the future,the transformation of retail business of commercial banks and the development of Fintech will be highly integrated.However,how will Fintech affect the retail business of commercial banks? What is the impact of Fintech on retail business? The existing literature does not answer these questions.In order to make up for the existing research gaps,this paper examines the influence of Fintech over the retail business in commercial banks in China.By adopting a combination of theoretical,empirical,and case study analysis,this paper studies such influence from two perspectives of profitability and risk exposure,as they are also two vital pillars for commercial banks' operating.In the theoretical analysis,this paper cites relevant theories and analyzes the effecting mechanism on the profitability and risk exposure of commercial banks.In terms of empirical analysis,this paper models a Fintech index by applying text mining and factor analysis on basis of Baidu search index and Baidu media index,and explores to which extent Fintech may affect the profitability and risk exposure of commercial banks by applying differential generalized moment estimation based on panel data of listed banks in China from 2011-2018.Furthermore,this paper studies the case of China Construction Bank,trying to explore how much its profitability and risk exposure vary due to Fintech.Hence this paper come to the conclusions as follows:First,Fintech plays an important role in the retail business operation of commercial banks in China,a mix of positive and negative effects with negatives dominating in the early stage,positives overtaking and recouping negatives in the later stage and eventually positive effects outweighing negative ones.Fintech affects the retail business of commercial banks in three dimensions,including technology,industry and integration,by four approaches that is called promotion,competition,demonstration and relating effect.Positive effects are found with promotion in the technology dimension,competition in the industry dimension,and demonstration and relating under the integration dimension.Second,Fintech functions both positively and negatively in terms of the profitability of the retail business of commercial banks.It works with negative effects initially,which is overtook and recouped by positive effects later.With its positive effects outweighing negative ones eventually,Fintech shapes a “U” in affecting the profitability of the retail business of commercial banks.When competition intensifies arising out of the Fintech enterprises joining the financial retail service market in the early stage,competition begins to weaken the profitability in retail business of commercial banks.In process of time,on the one hand,commercial banks deepen their application of Fintech technologies,which reduces transaction costs,promotes customer experience and betters the profitability of commercial banks,so called the promotion effect;on the other hand,commercial banks learn from the interplay with Fintech enterprises,start to profit from the advanced technologies and business model and establish a mutually beneficial and win-win cooperation model,which enhances the profitability of commercial banks through demonstration effect and relating effect.In the later stage,commercial banks find their profitability rebound gradually as enhancement to the profitability later has made up for the negative effect in the early stage.Third,in terms of the risk exposure of the retail business of commercial banks,Fintech functions both positively and negatively with negatives initially,which is overtook and recouped by positives.With positives outweighing negatives eventually,Fintech shapes an “inverted-U” in affecting the risk exposure of the retail business of commercial banks.When competition intensifies and risk exposure tends to expand arising out of the Fintech enterprises joining the financial retail service market in the early stage,competition effect begins to weaken the profitability in retail business of commercial banks and up the risk exposure of commercial banks.In process of time,on the one hand,commercial banks deepen their application of Fintech technologies,which reduces transaction costs,promotes customer experience,improves risk management and betters the profitability of commercial banks;on the other hand,commercial banks learn from the interplay with Fintech enterprises,start to profit from the advanced technologies and business model,control possibility of risk dissemination,facilitate improvements in profitability and operating efficiency as well as risk control capability,so a mix of promotion,demonstration and relating effect will help to mitigate the risk exposure of commercial banks.Such drops in risk exposure in the later stage will make up for the negative effect in the early stage and help to lower the risk exposure of the retail business of commercial banks gradually.Fourth,Fintech affects the retail business operation of commercial banks in such a heterogeneous way that the influence may vary depending on different types of banks.Large state-owned commercial banks may respond relative slowly and ungainly to the weight of Fintech as they feature deficient property rights,complex organization and internal hierarchy,long commission-agent chain,and relatively inflexible institutional mechanism;mid-and small-sized commercial banks may respond more sensitively and flexibly in face of Fintech as they feature clear property rights,relatively simple hierarchy,short commission-agent chain,and flexible institutional mechanism.Fifth,the case study of China Construction Bank(“CCB”)in this paper also shows that its retail business was hindered due to the presence of Fintech enterprises in the early stage,leading to a decline in profitability and an increase in risk exposure.Challenged by these difficulties,China Construction Bank set up active strategies and took measures to continue cooperation with Fintech companies together with a wide range of application and innovation in Fintech technologies,for the purpose of improving operating efficiency,enhancing control on risk dissemination,and improving risk management.As a result of all the measures,CCB saw an increase in profitability and a decline in risk exposure,both of which compensated for the negative results it suffered in the previous stage and led to a gradual recovery in profitability and drops in risk exposure.Findings of this paper sort out the mechanism how Fintech affects the retail business of commercial banks,make itself a new part of studies on Fintech and its impact on the operation of commercial banks,and may serve as a key indicator for commercial banks.It is important for commercial banks to underline the Fintech strategy as the core strategy of retail business,strengthen Fintech application and innovation proactively,expand the breadth and depth of cooperation with Fintech companies,and empower business progresses by applying Fintech technologies.