Banking competition in Indonesia: does Fintech lending matters?

Purpose This paper aims to examine how the rise of financial technology (Fintech) lending affects bank competition. Moreover, this study also identifies the structure of Indonesian commercial banking sector and the different behaviour of competition among bank groups (based on their size, type and ownership) and the joint impact of COVID-19 due to the rise of Fintech lending. Design/methodology/approach Using an unbalanced panel data set of 118 commercial banks in Indonesia over the period 2018–2022, both static panel and 2SLS/IV data analysis were used and found that random effect model is the best model. Findings The results show that the Indonesian commercial banking sector can be considered as monopolistic competition. Moreover, using the Lerner index reveals that the entry of the Fintech lenders increases bank competition. Furthermore, there were different responses to the impact of Fintech lending on bank competition among state-owned banks, private banks, regional development banks and foreign banks. Greater efficiency and stability lead to greater market power. In the meantime, higher level of asset growth, capitalisation and cost-to-income ratio increase the competition. Lastly, higher bank credit growth and lower inflation boost overall bank competitiveness. Practical implications This study highlights some policy recommendations for commercial banks to be aware of the coming of Fintech lenders because they have started to increase the market competition. The government should create a more collaborative ecosystem between banks and Fintech lending to anticipate unhealthy competition. Originality/value This study will contribute to the literature by expanding the determinants of bank competition by considering the rise of Fintech lending in the market.