Digital financial and banking competition network: Evidence from China

Abstract

The rapid development of digital finance resulted in fierce competition in the banking industry. The study used Bank-corporate credit data to measure interbank competition based on social network model, and we transformed the regional digital finance index into bank-level digital finance index using each bank’s registry and license information. Furthermore, we employed QAP (quadratic assignment procedure) to empirically test the effects of digital finance on the competitive structure among banks. Based on which, we verified its heterogeneity and investigated the mechanisms through which the digital finance affected the banking competition structure. The study finds that, digital finance reshapes the banking competition structure, and intensifies the inter-bank involution while increasing the evolution. The large nation-owned banks have been in central position in the banking network system, with stronger competitiveness and higher strength of digital finance development. For large banks, digital financial development has no significant impact on inter-bank co-opetition and is only more significantly correlated with banking weighted competitive networks. For small and medium-sized banks, digital finance has a significant impact on both co-opetition and competitive pressure. Meanwhile, digital finance also led to the increasing homogeneous competition. In addition, compared with large nation-owned banks, the competitiveness of small and medium-sized joint-equity commercial banks and urban commercial banks are more vulnerable to digital finance and resulting in homogenization problems. Mechanism analysis showed that (1) digital finance promotes the overall competitiveness of the banking industry by improving the inclusiveness of financial services, which expands the service scope (scale effect); (2) digital finance promotes the competition by improving the pricing ability, risk identification ability and finally the capital allocation ability of banks (Pricing effect). The above findings provide new ideas for the governance of banking competition and the realization of a new pattern of economic development.