Cutting Operational Costs by Integrating Fintech into Traditional Banking Firms

Fintech firms mobilize information technology to provide intermediation services using a broker methodology, whereas dealer banks intermediate using leveraged balance sheets. The integration of Fintech into banking may reduce the unit cost of intermediation by shifting the production function from dealer to broker. Identifying commonalities in the financial structures of Fintech-adopting banks, we develop the "Fintech score." Analysis of on-balance sheet lending, securitization, brokered deposits and non-interest income demonstrates that more broker-like (dealer-like) banks have high (low) Fintech scores. Using Data Envelopment and Stochastic Cost Frontier Analyses, banks with higher Fintech scores are more operationally efficient and resilient in crises.