FinTech innovation, stability and efficiency: Evidence from Malaysian bank industry

Abstract The rapid development of digital finance is reshaping the business model of the traditional bank industry and bringing challenges to it as well. Based on an unbalanced panel of data constructed by 36 banks in Malaysia from 2006 to 2020, this study examines the impact of financial technology on banks' stability and efficiency. We find that, compared with Islamic banks, FinTech innovation significantly improves the stability of commercial banks. Additionally, it improves the entire sample banks' efficiency calculated by the data envelopment analysis‐Malmquist method, which can capture the efficiency changes from a dynamic perspective. These baseline results are affirmed by the generalized method of moment approach to mitigate potential endogeneity issues. Furthermore, the impacts of FinTech innovation on banks are heterogeneous. The high‐profit banks enjoy the benefits of improving their stability level from FinTech development. However, for the small‐sized and low‐profit banks, FinTech innovation contributes more to improving their efficiency. Our analysis provides empirical evidence for Malaysia and similar developing countries that are receptive to FinTech development but have relatively less advanced technology infrastructure. It can also shed light on the FinTech investment decisions of bank management.