The Effect of FinTech on the Financial Institution in Six ASEAN Countries

Low, Chia Sean (2019) The Effect of FinTech on the Financial Institution in Six ASEAN Countries. Masters thesis, Tunku Abdul Rahman University College.

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Abstract

Technology innovation has evolved in the financial industry since the first bank existed in the 14th century. It is not new to the banking institutions to constantly adapt to the technological advancement in the fast-growing globalization market in the world. The new trend arises when the hype over FinTech emergence with the notion of “Disruptive innovation” armed with “digital weapons” that could possibly “tear down” the stiff barriers of traditional financial institutions to the extent to replace at large. With so much attention shift towards the “digital weapons” in FinTech start-ups after the Global Financial Crisis (GFC) 2008, many believe that the traditional financial institutions should be reformed and replaced by the customer-centric and simpler financial products and services rendered by FinTech start-ups due to the mistrust of the failures in GFC 2008. However, though the beliefs echoed worldwide, their potential effect on the traditional banks are far from clarity. The tension then arises among the regulators and the traditional financial institutions to seek financial recovery and financial stability whilst the people seek financial freedom, financial inclusion and most importantly, financial transparency. The regulations governing on the emerging FinTech start-ups have been on-going debates for many countries especially in the emerging markets where some of these markets are not so affected by the traumatic GFC 2008 which results in geographical heterogeneity variance in effect of responding to the FinTech growth. The questions of at what level should the governing factors be conducive for the FinTech start-ups to grow in the meantime maintaining important roles of traditional banks to product the consumers. As such, this study intends to examine the complementarity of FinTech start-ups to the traditional financial institutions by investigating the effect of FinTech growth on the 70 existing banks in six ASEAN countries namely Indonesia, Malaysia, Philippine, Singapore, Thailand ,and Vietnam from the year 2012 to the year 2018. Specifically, this study proxies the dollar-funding volume, number of deals, and number of FinTech companies created as the supply drivers to the FinTech growth whereas internet banking, alternative financial service provider, and unbanked population as the demand drivers to the FinTech growth in six ASEAN countries. The data collected is then regressed using panel data analysis with the model adapted from the latest asset pricing model that is Fama and French five-factor model. The findings indicate that there is a significant complementarity relationship between FinTech growth and incumbent banks’ stock return in Singapore and Philippine. Indonesia and Vietnam are found to have contradicting results. The insignificant substitution effect of FinTech growth in Indonesia and the incumbent banks’ stock return whereas the insignificant complementary effect of FinTech growth in Vietnam with the incumbent banks’ stock return. On the other end, FinTech growth in Malaysia and Thailand are found to have no effect on the incumbent banks’ stock return. This paper proposes to address the FinTech ecosystem portrayed in the six ASEAN countries differ due to the geographical heterogeneity in the technology innovation cycle which means that the magnitude of financial innovation and digital disruption underway on to the traditional financial industry are varied across these six ASEAN countries. Aside from that, the scale of growth opportunities in the FinTech industry which are both exhilarating and horrifying to the notion of the traditional financial industry that is too big to fail are being examined once again in this paper. Most importantly, this paper endeavours to highlight the future financial industry to the securities analysts, practitioners as well as the global investors of inevitable challenges and the opportunities from the emergence of FinTech start-ups into these six ASEAN countries.