An econometric understanding of Fintech and operating performance

Abstract

Purpose This study aims to develop a unique methodology to construct a bank’s financial technology (Fintech) score, which captures the degree of digitalization of a bank’s operations. Using the Fintech score as the proxy, this study investigates the effect of Fintech on the operating performance of the top largest Islamic bank. Design/methodology/approach The methodology used measures the link between the degree of digitization of a bank and its operational performance. This study applies the three-degree polynomial of regression to the largest Islamic bank in which the explanatory variable is the natural logarithm of Fintech score, and the response variable is common operating performance measure. To check the sensitivity of the estimates to the sample size and assumptions’ violation, this study has applied Bootstrapping and Bayesian processes to the three-degree polynomial regressions. Findings The study estimates from 2007 to 2021 show that the relationship between the operating performance of the Islamic banks and the Fintech is nonlinear and strongly significant: operating returns increase with the increasing level of Fintech, whereas the operating returns decrease with the increasing Fintech variance. At an aggregate level, this study attributes a significant rise in internet coverage to the emergence of Fintech in the Middle East region. Originality/value This study constructs an implicit measure of Fintech that measures the adoption of Fintech by the bank and, consequently, offers the technology to their customers for higher use satisfaction. This study finds that Fintech is linked to the operating performance in a nonlinear fashion, in which Fintech and Fintech variance have the opposite effect on operating performance: Fintech increases the operating profitability, whereas Fintech variance decreases the operating profitability of a bank.