Responsible Banking Under Twin Transition: FinTech M&As, ESG Strategy, and Bank Performance

ABSTRACT This paper investigates how banking innovation strategies, namely FinTech M&As and ESG practices, affect bank performance under rising competitive pressures and regulatory complexity. Using a unique dataset of 543 listed banks across 49 countries from 2000 to 2023, we analyse whether these strategic investments enhance banks' profitability, efficiency and risk profiles. The empirical strategy combines bilateral fixed effects and 2SLS‐IV estimations to address endogeneity concerns. We complement the analysis with a cluster‐based classification of banks' business models to assess heterogeneity in strategic responses. Our findings suggest that FinTech‐related M&As primarily improve banks' market‐based risk measures over time, while ESG adoption enhances balance sheet stability and profitability, though efficiency effects remain mixed. Crucially, we show that the performance impact of these levers is moderated by institutional and structural factors. We identify when banks benefit more from specialised strategies (FinTech or ESG) and when a combined approach is more effective. The paper contributes to M&A and banking performance literatures by uncovering the trade‐offs inherent in innovation‐driven transformations, and it offers actionable implications for managers and regulators seeking to align FinTech adoption and sustainability with long‐term value creation. The primary implication is that banks should not treat FinTech acquisitions and ESG adoption as universal performance‐enhancing strategies, but should align them with their business model, institutional environment, and strategic objectives to balance profitability, efficiency and risk.