The role of bank FinTech adoption in the profitability of Indian commercial banks

This study investigates the multidimensional impact of internal Financial Technology (FinTech) adoption on the financial performance of commercial banks in an emerging market context, specifically aiming to examine how institutional characteristics like bank size and ownership structure mediate the financial realization of digital transformation. Utilizing a panel dataset of 29 Indian commercial banks from 2016 to 2024, a novel, multidimensional FinTech development index is constructed via text-mining of bank annual reports, encompassing Information Transfer, Payments and Settlements, and Technical Base. Employing a Fixed Effects model with Driscoll–Kraay standard errors and a dynamic two-step system GMM estimator to address potential endogeneity and reverse causality, the empirical results reveal that internal FinTech adoption exerts a significant, lagged negative impact on overall bank profitability. Heterogeneity analyses demonstrate that this immediate, 1-year lagged profitability shock is heavily concentrated within large banks and private sector institutions, whereas small and state-owned banks experience no statistically significant decline. These findings suggest that the massive, immediate capital expenditures required to remain competitive against agile FinTech entrants create a distinct short-term structural drag on the performance of private institutions. Consequently, bank executives should anticipate a short-term profitability dip, avoiding premature cuts to technological investments, and instead pivot strategic focus toward human capital upskilling. By highlighting the transitional friction institutions face when upgrading digital systems, this research provides critical insights for advancing Sustainable Development Goal 9 regarding resilient infrastructure. Furthermore, policymakers should consider phased regulatory compliance timelines to ease the intense capital transition for commercial banks.