Traditional finance, digital finance, and financial efficiency: An empirical analysis based on 19 urban agglomerations in China

With the emergence of the digital economy era, enhancing financial efficiency through the complementary effect of digital and traditional finance has increasingly become a focal point in the financial industry. This paper focuses on 19 urban agglomerations in China to investigate whether digital finance and traditional finance have complementary effect on improving financial efficiency. It explores the mechanisms behind this complementary effect, examines whether financial efficiency can continue to improve once digital finance reaches a critical scale, and investigates whether economic development moderates the impact of digital finance on financial efficiency. The findings reveal that digital finance contributes positively to enhancing financial efficiency, and that there exists a complementary effect between digital finance and traditional finance in this regard. These conclusions remain robust even after conducting various stability tests and addressing endogeneity issues. Mechanism testing demonstrated that this complementary effect arises from improvements of transactional efficiency and marketization level. Further analysis reveals that, while digital finance significantly enhances financial efficiency up to a critical scale, this effect diminishes beyond that threshold. Moreover, in areas with high-level financial development, economic development has a positive moderating effect on the impact of digital finance on financial efficiency, whereas in areas with low-level financial development, such a moderating effect is not robust.