The future of finance how fintech impacts bank performance (evidence on vietnam)

The major findings of this study indicate the impact of FinTech on bank performance in Vietnam.. Bank performance in Vietnam: The banking sector is the most important component of the Vi

BỘ GIÁO DỤC VÀ ĐÀO TẠO

ĐẠI HỌC KINH TÉ THÀNH PHỐ HÒ CHÍ MINH

BẢO CẢO TỎNG KẼT

ĐÈ TÀI NGHIÊN cứu KHOA HỌC THAM GIA XÉT GIẢI THƯỞNG

‘’ NHÀ NGHIÊN CỨU TRẺ UEH” NĂM 2024

THE FUTURE OF FINANCE: HOW FINTECH

IMPACTS BANK PERFORMANCE

(EVIDENCE ON VIETNAM)

Thuộc nhóm chuyên ngành: Kinh tê

TP Hồ Chí Minh, tháng 2/2024

During the past ten years, the fast growth of financial technology, or FinTech, and theperformance discourse has been a concern in the banking sectors These are the difficulties that raise the question of whether FinTech disrupts or even helps the bankingsystem The study focuses on understanding FinTech and its use in the Vietnamese banking sector For this quantitative research approach, a survey was conducted tocollect data using convenience sampling techniques The major findings of this study indicate the impact of FinTech on bank performance in Vietnam Furthermore, partnering to improve banking performance This study contribution may be useful forpractitioners and scholars interested in learning about FinTech collaboration in the performance of banking in Vietnam

2.1.2 FinTech development and regulatory background: 13

2.2 Hypothesis development and ConceptualFramework: 15

4.4 The interaction of number of FinTech firms and Trade Freedom 25

LIST OF TABLES

Table 1 Variables Definitions

Table 2 Descriptive statistics of variable

Table 3 Correlation Coefficient Matrix

Table 4 Heteroskedasticity test

Table 5 Regression model

Table 6 Interaction term

LIST OF FIGURES

Figure 1 Growth in FinTech firms by country, 2018-YTD 2022Figure 2 Conceptual Framework

ATM Automated teller machine

FinTcch Finance Technology

FTPS Finance Technology products

GDP Gross Domestic Product

OLS Ordinary Least Squares

ROA Return on total assets

ROE Return on common equity

VTM Virtual teller machine

1 INTRODUCTION:

1.1 FinTech in Vietnam:

The fourth industrial revolution is reaffirming the power of technology in all aspects ofsocial life, including the critical role of core technologies in the banking sector's future.The banking industry is currently undergoing the most fundamental transformation in its history, with pressure to innovate in order to sustain and grow its customer base inthe contemporary period Thal pressure is developing as a result of digitalization whenstartups or companies provide financial technology goods - FinTech

FinTech, as the term implies, is the confluence of finance and technology Of course,technology has always had an impact on the financial business, with advances affecting the way the economy operates In the article on the evolution of FinTech (Amer et al.,2015), the evolution of FinTech is an ongoing process "during which finance and technology have evolved together" and has resulted in numerous incremental and disruptive innovations such as Internet banking, mobile payments, crowdfunding, peer-to-peer lending, Robo-Advisory, online identification, risk management, networking(Song & Appiah-Otoo, 2022) channel and so on Whereas banks have lately acquiredFinTech firms, most FinTech startups are independent of banks and available toinvestment interests Because many banks, beyond the well-known big banks, continue

to provide outdated, expensive, and time-consuming financial services (Brandl &Hornuf, 2020), FinTech companies have the potential to take over various essentialfunctions of traditional banks

In recent years, Asia has emerged as one of

the main FinTech markets, with the greatest

FinTech revenue globally, and Vietnam is

one of the region's developing FinTech

markets (Nguyen, 2022) In Vietnam,

FinTech has received much attention from

policy makers, researchers, and especially

regulators in the banking industry Despite

the impact of the COVID-19 epidemic,

FinTech companies with their own

capabilities are still thriving at the moment

Now firms 586

Totol number

of iinTeth firms operating

and even the result demand for contactless financial transactions has offered prospects for this sector (Safiullah & Paramati, 2022) to flourish more swiftly with the number ofFinTechs in Vietnam has doubled between 2018 and 2021 (Trần, 2021) Based on the research of Tùng (2019), approximately 72% of FinTech companies collaborate withbanks to do business and provide services; this cooperation will serve as a foundationfor helping to improve the quality of financial and banking services in Vietnam.

1.2 Bank performance in Vietnam:

The banking sector is the most important component of the Vietnamese financial system

- which is regarded as the economy's lifeline and it represents between 16% and 18% ofthe GDP annually () Its activities cover a wide range of socioeconomic operations andare highly involved in intermediary operations linked with economic movement.Though this banking business does not immediately generate material wealth in the economy, it is critical to fostering long-term economic development The globalizationtrend has compelled Vietnamese banks to adopt international best practices andeventually become more effective financial mediators Vietnam is one of the world's most successful emerging markets, with economic growth averaging 6.4% per year over the last two decades, and the value of the banking system's total assets is almost two times that of the GDP (Trieu & D'Hulster, 2019) The banking system, in particular, is critical to the Vietnamese financial system

Competition in the economy, particularly in the banking industry, is severe Banks will use all available resources to gain market share and keep consumers, which is becomingincreasingly challenging in the digital era Consumers are transitioning from traditional

to digital channels, and the omnichannel concept is becoming popular in the banking business Many banks now rely on digital banking services to meet the demands of the country's connected clients Due to limits on numerous offline retail activities, the use

of cashless payments, which was already beginning to form in Vietnam prior to the COVID-19 outbreak, has increased Furthermore, the massive increase in both the value and number of internet transactions over the previous few years demonstrates the expansion of online banking usage Together with the burgeoning Vietnamese finlechsector, digital banking is anticipated to evolve and become the future of the Vietnamese banking industry (Nguyen, 2022)

1.3 Problem statements/Motivation :

This topic is relevant and warrants empirical investigation because the FinTech market

is quickly expanding and the banking industry is under market pressure to include advanced financial technologies into its service offerings and transactions This issuehas gained a lot of attention in the banking sectors, and as a result, banks are prioritizing FinTech-based financial services However, adopting these new banking services just tocompete with new entrants at the expense of financial stability may threaten the entire banking system (Safiullah & Paramati, 2022) FinTech advancement also undermines traditional banking system deposit growth and liquidity, affecting enterprises, individuals, and industry growth (Chen et al., 2019) Recognizing this is pivota because policymakers, especially in developing nations such as Vietnam, China, Indonesia, and Nigeria (Investopedia, 2022), are focused on generating high and sustainable economicgrowth

Besides, the development of FinTech firms had a negative impact on bank performance Despite the advent of digital innovation and its apparent effect on the banking field, the impact of digital advancements and FinTech growth on the financial sector is less wellcomprehended The market share of banks tends to decrease due to the share of marketshare with FinTech companies Because of the rapid advancement of technology, a hugenumber of bank personnel who work directly at traditional counters can be replaced;artificial intelligence and robots will become more popular, thus bank branches and transaction offices are diminishing in both size and quantity Also, the growth of onlinelending has a direct impact on banks' lending activities, which means that traditionalbanks often are unable to meet the demand for loans (Boot et al., 2021), in large part because of the stringent regulation they are subject to

1.4 Linkage between Fintech and bank performance:

The extremely high use of smartphones, as well as technological advancements, have spurred the rise of the digital payments industry Fintech enables users to obtainfinancial services more efficiently and quickly than traditional businesses, particularlyduring the COVID-19 pandemic caused by health restrictions, including restrictions on physical interaction It is obvious in how people with no prior knowledge in digitalbanking are instructed in technology in a relatively short period of time to manage theirdigital accounts Due to mobility constraints during the COVID-19 outbreak, many

people are beginning to gain access to financial activities using their mobile phones,including receiving government cash payments via their mobile devices.

From the supply side, FinTech, defined as a combination of financial services and technological advancement, contributes to the financial system by offering a plethora ofnew financial services to the market, resulting in the competitive and complementary role of FinTech firms with traditional intermediaries FinTech, in particular, has been viewed as a disruptive innovation, posing a challenge from new entrants and providing

an alternative to existing financial intermediaries (Kohardinata et al , 2020) From the viewpoint of regulators, while FinTech has the potential to greatly improve national financial inclusion policies by providing new services to disadvantaged sectors, its rapidgrowth has raised concerns about financial stability and cyber threats Market policymakers have paid close attention to these potential risks, which demand carefuloversight and legislative solutions As a result of FinTech's growth, regulatory challenges, as well as client privacy and data security, may represent a risk to overall financial stability (Allen el al, 2021)

1.5 Research questions/Objectives:

Based on the present context, this study is conducted to achieve the following goals:First and foremost, applying the existing literature and knowledge to analyze the real- world issue (FinTech and bank performance) in order to know how it operates, and whether bank characteristics, such as market value (MV) and firm age (FA) influencethe way FinTech influences bank performance Secondly, the research aim to measure the impact of FinTech on Vietnamese's bank performance and also build a basic model

to identify the aspects of FinTech that influence bank performance in Vietnam.Furthermore, in examining the effects of FinTech, the study employ a diverse set ofcontrol factors consistent with the literature on banking performance determinants

Hence, the following questions have been devised to aid in the direction of this investigation The three questions are as follow:

(1) What aspects of FinTech contribute to the bank performance?

(2) Does FinTech only create a prosperous bank performance or are there negativeimpacts on this industry?

To address these questions, this study will use annual data from Vietnamese commercial banks to experimentally investigate the integration and causal relationship between bank

profits and FinTech development level using Ordinary Least Squares regression (OLS)

In addition, this study will undertake an empirical study using annual data from Vietnamese commercial banks to investigate the influence of FinTech on theirprofitability What is more, it is critical to clarify the impact of FinTechs on bankprofitability in order to encourage banks to initiate business transformations and strategic adjustments in order to promote the continuous and stable operation of banks,prevent financial risks, and maintain the financial system's stability

1.6 Research scope:

FinTech is one of the fastest growing business sectors globally, with Vietnam at the forefront of its growth FinTech targets a diverse customer base, from individuals, toenterprises, banks, non-government organizations (NGO), public authorities, and soforth FinTech has become an integral part of financial activities for individuals and companies in Vietnam, starling with traditional activities usually undertaken by banks such as payments, lending, wealth management, and Point-Of-Sale (POS), andcontinuing with new business models developed through introduction of newtechnologies such as blockchain, insurtech and digital banking

Vietnam FinTech is growing steadily as the businesses and people are more preferring the digitized manner of choosing the financial product for their investment evaluationand payments A complete background analysis of the Vietnam FinTech Markel, which includes an assessment of the economy, market overview, market size estimation for key segments, emerging trends, market dynamics, and key banks’ profiles are covered

in the report

1.7 Research contributions:

Investigating the impact of fintech on Vietnamese bank performance offers valuable research contributions across several dimensions Firstly, it contributes to the growingbody of knowledge on the global fintech revolution, specifically within the context of

an emerging economy like Vietnam This allows for cross-country comparisons andpinpoints unique challenges and opportunities Vietnamese banks face during this technological shift Secondly, it addresses the scarcity of empirical research on this specific topic Studies like "Impact of Fintech's Development on Bank Performance: AnEmpirical Study from Vietnam" (Pham, 2022) and "Fintech and Banking: Evidence from Vietnam" (Nguyen et al, 2020) provide valuable data and insights, filling the gap

in understanding the local dynamics Thirdly, the research can inform policymakers and bank executives in Vietnam By analyzing the positive and negative impacts of fintech

on performance, as seen in The effect of bank fintech on bank efficiency: an empiricalstudy from Vietnam (Pham et al, 2023), it can guide strategies for sustainable growthand adaptation to the changing financial landscape Finally, the Vietnamese case study can offer valuable generalizable insights for other developing economies grappling withsimilar challenges and opportunities presented by fintech By understanding the uniqueexperiences of Vietnam, other nations can learn valuable lessons and tailor their ownapproaches to harnessing the power of fintech for a more inclusive and efficient financialsystem

2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT:

2.1 Literature review:

2.1.1 FinTech:

The last decade has seen a significant increase in digital innovations, particularly inFinTech start-up formations and market volume FinTech is a portmanteau for “financial technology.” According to a Subanidja study, FinTech is the application of information technology in finance and startups, services, technology, companies, digitalisation, industry, new generation, possibilities, goods, or risks (Subanidja et al., 2020) In addition, the FinTech mechanism describes a way for developing, altering, or upgrading

a business model (Legowo et al., 2020) Many additional points of view contend that FinTech provides a mechanism for disruption orcollaboration (Dermine, 2017; Oshodin

et al., 2017; Prawirasasra, 2018)

2.1.2 FinTech development and regulatory background:

Today, FinTech is widely used in many nations, particularly in countries with strongeconomic and information technology backgrounds, such as China, Korea, India, and the United Kingdom (Kim et al., 2016) However, FinTech is still relatively new indeveloping nations like Vietnam It is expected to have revolutionary breakthroughs inthe future In a few years, FinTech in Vietnam has drawn a lot of interest fromresearchers, policymakers, and particularly banking industry authorities In forums and conferences, FinTech is also a hot topic of conversation However, very little empiricalstudy has been done to understand FinTech and its uses in the Vietnamese banking industry (Lien et al., 2020)

Traditional banks and the FinTech sector have gradually moved from being competitors

to working together more Early FinTech development saw the emergence of mobilepayments and online financial services because technology and platform businesses were engaged in the payment business under a lax regulatory environment (Zhao et al., 2022) When e-payments were introduced in Vietnam in 2008, the initial model was ane-wallet (Tran & Nguyền, 2021) This marked a significant turning point in the development of the financial industry, which was led by technology firms and adopted

by conventional financial institutions Numerous non-FinTech companies also utilized their advantages to directly offer cutting-edge financial products and services to businesses and consumers, which caused the bank payment settlement business todrastically decline

2.1.3 FinTech Products and bank performance:

In this day and age, the huge potential of at least three emerging FinTech Products (FTPs) trends is currently being gradually explored in Vietnam These include mobilebanking, VTMs (Virtual teller machines), and ATMs (Automated teller machines) In response, banks should move swiftly and decisively, bolstering skills and capacities toseize opportunities and adjust to the new market realities

The banking industry now has fresh motivation to boost its performance in a number ofways thanks to digital innovation and FTPS that support accessible financial services.For instance, to enhance employee productivity, sendee quality, and profitability whilealso enhancing customer happiness and expectation Performance is crucial to all businesses, and there are two ways to gauge organizational performance: financially and non-financially (Chen et al., 2021) Studies have discovered the effects of FTPs use on banks' profitability using a variety of financial factors that are frequently taken intoaccount in banking literature such as ROE, ROA, leverage, etc (Ky et al., 2019).Otherwise, non-financial performance is linked to business social responsibility, customer satisfaction and expectations, service quality, and workplace efficiency(Richard et al., 2009)

Although there is considerable risk associated with financial innovation, both theoreticaland empirical research demonstrates its usefulness In other words, if the FinTech solutions are practical and simple to use, users should be happy During COVID-19, a

successful FinTech deployment at a bank should ease employees’ customer service tasksand maintain the services even when they work remotely.

2.2 Hypothesis development and Conceptual Framework:

Second, banks behave differently depending on their ownership structure (Lee el al., 2021) Large banks, which have more experience transacting loans than small banks,can use FinTech innovation to improve lending technology, simplify information transfer, and reduce costs, allowing for continuous improvement in bank performance, whereas smaller banks have been slower to embrace and adopt FinTech innovation (Sheng, 2021) As a result of differences in the characteristics of various banks in the development of FinTech innovation, heterogeneity in the performance of banks withdifferent asset sizes, bank types, and competitiveness can emerge (Li et al., 2022)

Hypothesis 2: The impact of FinTech on bank performance is positive.

According to the article “The Impact of FinTech on The Financial and Banking'’ We find a strong positive and significant relationship between technology and finance in

terms of bank profitability, efficiency, and stability in "Sustainable Performance: Disruption or Collaboration" The research results are based on the use of explanatory variables, controlling for bank and macro-micro level confounding factors, bank fixed effects, and taking alternative measures of bank performance and mobile moneyadoption into account (Subanidja et al., 2021).

According to the National Statistics Office of Vietnam, approximately 70% of the population has access to online social networks Therefore, the majority of customers can conduct transactions or stock trading with advanced generations of portable smartphones at their disposal, making FinTech more popular with investors (Nguyen &Ryu, 2022) Moreover, customers have more choice to complete their transactionquickly and efficiently The greater variety of payment instruments then promotes banking innovations (Tran, 2021) FinTech companies may have phenomenal innovations with streamlined banking technology to a broader base of customers and investors via mobile-oriented applications; they can better meet market needs in areaswhere financial services are lacking (Nguyen & Ryu, 2022)

Overall, these studies highlight the advantages of collaboration between banks and mobile network operators in the provision of mobile money Furthermore, FinTech is expected to be able to sustainably improve its performance in the financial and banking sectors, thereby assisting banks in improving their financial performance

2.2.2 Conceptual Framework:

Figure 2 Conceptual Framework