The impact of internet finance on the profitability of commercial banks in China

Abstract

Several studies analyzed the impact of internet finance on the profitability of Chinese commercial banks. This paper adds to the literature by focusing on two types of internet finance, internal internet finance (online banking) and external internet finance (third-party-payment (TPP) and peer-to-peer lending (P2P) platforms), and their relationship with bank performance. Two datasets that cover the years 2011 to 2018 are used for the regression analyses, a balanced panel dataset of 10 banks to analyze the impact of internal and external internet finance on bank performance and an unbalanced panel dataset of a larger sample of 43 banks to further explore the impact of external internet finance on commercial bank performance. The regression results suggest that online banking reduced the profitability of banks, which might be explained by increased cost in terms of operation, marketing and maintenance as well as upgrading of infrastructure. TPP growth also negatively affected bank profitability, which might indicate that TPP increases competition. The rapid growth of P2P, on the other hand, had a positive effect on bank performance, probably because of technology spillover effects from internet companies. To increase profitability, besides controlling cost, commercial banks should improve online channels and win-win cooperate with EIF enterprises to take advantage of technology spillover effect.