How does FinTech development impact technological progress? A theoretical framework and empirical evidence

Abstract Purpose The critical role of finance in technological progress is well established, yet the theoretical explanation of how FinTech development—as a new part of the financial industry—affects technological progress remains underdeveloped. This research aims to bridge this gap by developing a novel theoretical framework that explains the impact of FinTech firms’ development, particularly their interactions with traditional financial intermediaries, on technological progress. Design/methodology/approach We develop an endogenous growth model in which technological progress is endogenous and the financial sector is subdivided into FinTech firms and traditional financial intermediaries. The model has two novel features: (i) an extended physical capital accumulation equation that captures the differential saving-to-investment conversion efficiencies of both financial subsectors and (ii) an interaction framework adapted from Krugman (J Pol Econ 87:253-266,1979. https://doi.org/10.1086/260755 ) and Grossman and Helpman (Econ J 101:1214–1229, 1991. https://doi.org/10.2307/2234437 ) to model the dynamic interplay between two financial subsectors. In this framework, we derive three empirically testable propositions. We then use data from China to examine the propositions via panel data models, mediating and moderating effect models, and differential GMMs. Findings (i) FinTech firms can promote the development of traditional financial intermediaries, thereby indirectly fostering technological progress; however, (ii) the efficiency gap between the two financial subsectors acts as a drag on technological progress. The greater the efficiency gap is, the wider the negative effect; thus, the synergetic interaction between two financial subsectors is beneficial to technological progress. (iii) FinTech firms can stimulate technological progress through human capital and physical capital accumulation. Practical implications Policymakers should take a positive and inclusive attitude toward FinTech firms and facilitate cooperation between FinTechs and traditional financial intermediaries. Regulatory authorities should implement measures to facilitate knowledge transfer and accelerate the adoption of FinTech innovations by traditional financial intermediaries. This includes creating platforms for technology sharing and providing incentives for modernization efforts. Moreover, it is important to encourage traditional banks to develop specialized financial products for tech enterprises. Originality/value This paper offers new insights into the role of FinTechs in technological progress. First, it extends the existing theoretical literature on the finance‒technological progress nexus by incorporating FinTech as a distinct financial sector and analyzing its interactions with traditional financial intermediaries. Second, the findings provide robust theoretical grounding for existing empirical studies examining the impact of FinTech on firm-level technological progress.