Finclusion: The nexus of Fintech and financial inclusion against banks’ market power

Abstract

The banking literature does not provide consensus over the impact of Fintech on banks. On the one hand, Fintech advancements are poised to enhance the accessibility of financial services; on the other, it can lead to alterations in market structure. Thus, it is important to ascertain the impact of Fintech entry from both perspectives. We examine the impact of Fintech entry on financial inclusion (FI) and banking competition by introducing conditionalities and non-linearity to uncover the potential transmission channels for Fintech to affect inclusion and market structure. Findings suggest episodes of low and medium inclusion from 2005 till 2018. However, post 2018, there has been a significant increase in FI. Similarly, persistent monopolistic tendencies were observed with most banks enjoying higher Lerner margins. The extent of Fintech reveals highly sluggish growth over 2005 to 2015. However, post 2016, drastic increase is observed commensurate with the central bank's regulatory push. Further, Fintech is inversely related to banks' market power indicating a diminishing effect. We propose three transmission mechanisms for Fintech effects: the inclusion channel, the growth channel, and the regulatory environment. In addition, we find a significant and positive impact of Fintech on FI however, the relationship is essentially non-linear.