Fintech and financial system stability in South Africa

In this paper we examine the relationship between fintech formations and the default risk and performance of incumbent financial institutions in South Africa. We find that the development of fintech startups is associated with lower bankruptcy risk, credit risk and stock return volatility among banks and other financial institutions. Fintech startup formations are also associated with improvement in incumbent institutions’ performance. Further analysis shows that the risk reduction effect of fintech development is more pronounced for smaller banks. Overall, our results are consistent with the assertion that fintech formations generally improve risk management efficiency and reduce incumbent financial institutions’ default risk. However, the relationship is nonlinear, suggesting that the initial collaboration, which reduces default risk, can turn into increased competition as more fintech startups enter the market. From a policy standpoint, efforts to promote more collaboration should be encouraged, but regulators need to be cautious of potential systemic risk.