FinTech development and financial system stability in South Africa

We examine the impact of FinTech formations on the default risk of incumbent financial institutions in South Africa and find that the growth of FinTech firms reduces the bankruptcy risk, credit risk, and stock return volatility of banks and other financial institutions. Further analysis shows that the risk reduction impact of FinTech development is more pronounced for smaller banks compared to their larger counterparts. Overall, our results are consistent with the notion that FinTech formations generally enhance the efficiency of risk management and reduce the default risk of incumbent financial institutions. However, the relationship is nonlinear, suggesting that initial collaboration, which reduces default risk, could turn into increased competition as more FinTech firms enter the market. From a policy standpoint, efforts to promote more collaboration should be encouraged, but regulators must be cautious of potential systemic risk.