Fintech revolution in banking: A double-edged sword?

We develop a novel bank-level index of fintech integration by mitigating media bias in index construction. We then explore its relationship with bank stability across 56 economies from 2010 to 2022. We uncover a U-shaped relationship between this index and bank stability. Initially, fintech increases bank fragility, but as integration deepens, it ultimately enhances stability. Interestingly, this pattern is influenced by both bank-level and industry-level factors. Strong, foreign-owned banks experience a milder initial decline in stability, reflecting their ability to navigate the fintech landscape effectively. Furthermore, banks operating in developed, competitive markets show a flatter relationship, emphasizing the importance of a supportive ecosystem. The role of regulatory sandboxes varies depending on factors such as bank competition, economic growth, regulatory strength, financial development, and access to credit information. We further validate our findings using an instrumental variables approach and an alternative index of fintech integration, reinforcing the robustness of the identified U-shaped relationship between fintech and bank stability. • The study explores the complex relationship between fintech integration and bank stability in 56 emerging economies. • We uncover a U-shaped relationship in which initial fintech integration increases bank fragility, but deeper integration ultimately enhances bank stability. • Several bank-level and industry-level factors play a crucial role in the fintech-stability dynamics. • Regulatory sandboxes vary with bank competition, economic conditions, regulatory strength, financial development, and credit data access. • The findings are reinforced using instrumental variables and an alternative fintech index, confirming the robustness of the U-shaped relationship.