FinTech and Bank Intermediation – Evidence From the Deposit Market in China

This study investigates whether and how FinTech influences intermediation and stability of banks with a focus on the competition between FinTech companies and banks in the deposit market. Using proprietary data from a leading Chinese FinTech company, we study a money market fund with deposit-like features, available through a widely-adopted payment platform in China. With a Bartik-style instrumental variable approach, we exploit cross-sectional variation in banks’ exposure to FinTech and document several novel findings: (i) In the short run, FinTech competition induces negative deposit demand shocks and crowds out bank deposits. In response, banks more exposed to Fintech competition do not cut their lending, but reduce liquid assets and financial investments and issue more bonds, (ii) After the removal of the deposit rate ceiling in 2015, more exposed banks experience higher deposit and loan growth (i.e., expand bank intermediation) because they are more likely to offer innovative deposit products and raise deposit interest rates higher in the long term, (iii) The positive effects of FinTech on bank intermediation are stronger during monetary tightening, (iv) There is no evidence that FinTech competition stimulates banks to take more risks and switch to less stable wholesale fundings, mitigating the financial stability concerns