Fintech innovations and banking sector dynamics: evidence from South Africa.

Abstract

The South African banking sector, vital to the country’s socio-economic stability, is undergoing rapid transformation due to innovations in financial technology (Fintech). Regulated by the South African Reserve Bank (SARB), banks are essential for economic growth through capital provision, risk management, and transaction facilitation. Recent Fintech advancements offer more efficient, personalised, and cost-effective solutions, challenging traditional banking models. Against this background, this thesis aims to explore the impact of Fintech innovations on banking sector dynamics, focusing on African Bank, FirstRand, Standard Bank, Capitec Bank, Investec Bank Limited, Absa Group, Nedbank Group, and Finbond Group, which are publicly traded banks on the Johannesburg Stock Exchange (JSE) from 2000 to 2023. The study tests the hypothesis that Fintech innovations influence competition, performance, efficiency, and stability within the banking system using the appropriate panel regression model determined. The findings reveal that Fintech enhances competition, reflected by an increase in market power, particularly through mobile transactions that raise the banking sector's competition. While Fintech has not significantly improved bank performance indicators, it positively impacts operational efficiency, particularly through mobile transactions, suggesting a shift toward digital solutions. Stability results show no effects of Fintech on banking sector stability, with traditional capital structures remaining more influential than Fintech innovations. These findings stress the dual nature of Fintech's impact: while fostering competition and efficiency improvements in South African banking, it also introduces new risks in disrupting traditional banking services through more convenient and cost-effective alternatives that make banks compete more aggressively. As this landscape evolves, adaptive regulatory frameworks are being called for to balance technological advances with the need for stability within the banking sector.