Digital transformation and risk dynamics: The inverted U-shaped impact of FinTech on Iranian banks’ risk-taking behavior

• This study aims to investigate the impact of FinTech innovations on the risk-taking behavior of Iranian banks. • We use panel data of 18 Iranian banks from 2008 to 2022. Random effects and generalized method of moments have been applied to robust the findings. • It confirms the inverted U-shaped relation between FinTech and risk-taking behavior. • A rise in risk-taking in the early stages of FinTech development followed by the subsequent decline. • The findings of this paper contribute to the literature on the effect of FinTech adoption on the dynamics of risk in the Iranian banking sector. The rapid expansion of financial technology (FinTech), driven by digitalization, smartphone adoption, internet penetration, big data analytics, blockchain, and artificial intelligence, has transformed banking systems worldwide. While international studies provide evidence on FinTech’s effects on bank risk-taking and efficiency, findings are mixed and relatively limited for emerging economies. This paper investigates the impact of FinTech innovations on the risk-taking behavior of Iranian banks using a panel dataset of 18 banks from 2008 to 2022. Employing random-effects and generalized method of moments (GMM) estimations to ensure robustness, we find an inverted U-shaped relationship: risk-taking initially increases during the early stages of FinTech adoption but declines as digital integration matures. These results provide new micro-level evidence from an emerging market and offer insights for policymakers and banking leaders navigating the evolving FinTech landscape, highlighting how technology adoption shapes banking risk profiles in Iran.