The overwhelming acceptance of fintech by banking industries worldwide has transformed the competitive edge of banks and heightened concern for their stability. Keeping this in view, the study aims to explore the moderating effect of fintech adoption by banks on the relationship between market power and bank stability.
This study utilizes the adjusted Lerner index to assess market power, z-score for capturing stability and a comprehensive fintech adoption index to quantify fintech adoption. Using a dynamic panel regression approach, it investigates how fintech adoption influences the relationship between market power and stability for a sample of 31 Indian commercial banks over the period 2011–2024.
The empirical results reveal a negative association between bank market power and stability, supporting the competition–stability hypothesis. However, fintech adoption moderates this effect, reducing its strength. Additionally, bank-specific factors such as capitalization and profitability enhance stability, whereas operational inefficiency and inflation negatively impact it.
The study suggests that the Reserve Bank of India (RBI) should explore opportunities to consolidate small and mid-sized banks, encourage the entry of new players and stimulate innovation to preserve a balanced distribution of market power. Additionally, it highlights the importance of promoting fintech investment, advising large public sector banks to establish dedicated fintech subsidiaries, while smaller banks can collaborate with fintech firms to access advanced technologies without incurring substantial development expenses.
This study is among the first to examine how fintech adoption moderates the relationship between market power and stability in India's commercial banking sector.
