The effect of fintech companies on business performance of banking sector in vietnam

Therefore, the examination on the relationship between the fintech industry and banking system can give more information on how fintech companies can impact the banking operation, especi

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE AND INVESTMENT

DISSERTATION ON THE EFFECT OF FINTECH COMPANIES ON BUSINESS PERFORMANCE OF BANKING

SECTOR IN VIETNAM

NGUYEN HOANG LONG

ID No: 23081342 Intake 07

Supervisor: Dr Tran Ngoc Mai

September, 2024

DISSERTATION CONFIRMATION PAGE

Student’s name: Nguyen Hoang Long

Student number: 23081342

Supervisor’s name: Dr Tran Ngoc Mai

I, Supervisor’s name: Dr Tran Ngoc Mai, hereby confirm that I have supervised the research

and preparation of the student’s dissertation I have reviewed the content, structure, and methodology used in the Dissertation and found it to be of satisfactory quality

I am confident that the Dissertation meets the requirements set forth by the University of the West of England and is ready for examination

Signature of Student and date Signature of Supervisor and date

Date: 9th September, 2024 Date: 9

th September, 2024

ACKNOWLEDGEMENT

First and foremost, I would like to express my deepest gratitude to my advisor, Dr Tran Ngoc Mai, at the Banking Academy of Vietnam, for her exceptional guidance, unwavering support, and valuable insights throughout the course of my research Her expertise and encouragement were indispensable in helping me navigate the complexities of this study, and her dedication has profoundly inspired me

I would also like to extend my heartfelt thanks to the faculty and staff at the Banking Academy

of Vietnam and University of West England for their knowledge and support during my time

of study Their constructive feedback and academic guidance have played a significant role in shaping this thesis

Last but not least, I am sincerely grateful to my family and colleague for their constant encouragement, understanding, and patience, which have been a source of motivation throughout this journey

TABLE OF CONTENTS

ACKNOWLEDGEMENT 3

LIST OF ABBREVIATIONS 5

LIST OF TABLES 6

LIST OF FIGURES 7

INTRODUCTION 1

1 The necessity of the research 1

2 Literature Review and Hypothesis Development 2

3 Research gap 4

4 Research questions 4

5 Scope and access 4

6 Research method 5

7 Research structure 5

CHAPTER I: PRACTICAL ISSUES ON VIETNAMESE FINTECH INDUSTRY AND BANKING SECTOR 6

1.1 Overview of previous studies and Hypothesis development 6

1.3 Overview of Vietnam banking industry 8

1.3 Overview of the relationship between Fintech and Banks 9

CHAPTER II: RESEARCH METHODOLOGY AND FINDINGS 10

2.1 Research methodology 10

2.1.1 Research Model 10

2.1.2 Data Collection 10

2.2 Data Analysis: 11

2.2.1 Descriptive Analysis 11

2.2.2 ROAA: 12

2.2.3 ROAE: 15

2.3 Discussion and Findings 18

2.3.1 The development of Vietnam fintech industry 18

2.3.2 The better performance of fintech companies leads to the better business performance of Vietnamese banks 19

CHAPTER III: RECOMMENDATION 21

CONCLUSION 23

REFERENCES 24

APPENDIX 30

LIST OF ABBREVIATIONS

Fintech Financial Technology

GDP Gross Domestic Product

GSO General Statistics Office

JSCB Joint Stock Commercial Bank

MIC Ministry of Information and Communication

MOF Ministry of Finance

MS Market Size (Total Transaction Value on the market)

R&D Research and Development

ROAA Return on Average Assets

ROAE Return on Average Equity

SBV State Bank of Vietnam

SOCB State - owned Commercial Bank

LIST OF TABLES

Table 1:Descriptive Analysis of the variables 11

Table 2: The Collinearity Check for the model 12

Table 3: Summary of econometric results of the ROAA model 13

Table 4: Summary of econometric results of the ROAE model 16

LIST OF FIGURES

Figure 1: Top 5 Fintech Companies by Social Media Popularity 1 Figure 2: The number of Fintech companies in Vietnam in the period of 10 years (2014-2023) 7 Figure 3: Number of Vietnamese banks by categories 8

INTRODUCTION

In this digital development era nowadays, it cannot be denied that the role of technology is important in many aspects Technology appears mostly everywhere, mostly in every field, and people are willing to utilize the modern technique into working activities which can bring better quality and productivity This also happens in the banking sector, since the trend of using digital banking is growing rapidly in recent years, especially during and after the Covid-19 period The lockdown period is seen as one of the best reasons to promote the development of digitalization

in the Vietnamese banking industry, since at that moment, the demand of people for online shopping and online payment was getting higher

Along with the digitalization in banks, the fintech industry has also been benefited from this social distancing, or can be seen as a “golden chance” for fintech to have a huge growth step Fintech - stands for Financial Technology - is the way using technology in solving financial issues (Arner et al., 2017) This term has appeared in Vietnam for more than 10 years; however,

it has been well-known in the market for recent years thanks to the 4.0 technology era Some big fintech companies that are common to customers can be named as VNPAY, MoMo, Timo, Finhay, …

Figure 1: Top 5 Fintech Companies by Social Media Popularity

(Source: Reputa, 2023)

176.36 35.33

23.91 9.77 8.7

159.3 46.9

24.4 11.8 9.8

Due to the rapid and unexpected growth, along with the trend of digital transformation in the global, many researches have been done in order to examine the impact of the fintech industry

on the financial system In the context of the Vietnam market, fintech has developed rapidly especially during and after the pandemic, since the demand of digital payment has grown In fact, fintech industry in Vietnam is expected to have many potentials for future growing, especially when looking at some achievements and development of Vietnamese fintech companies, for example, MoMo as Vietnamese representative in Top 10 Global Platform 2023

by TABInsight under The Asian Banker (Dat, 2023)

The growth of the Fintech industry, therefore, has benefited positively to the banks’ performances since fintech can contribute to the promotion of digital transformation in the banking system, in order to serve the digital trend in the world nowadays In fact, this relationship can be a mutual positive collaboration, since both banks and fintech companies can gain benefit from others For banks, they need the technology invention of fintech companies

in the digitization process, they need the application of technology from fintech companies to develop their digital banking system in order to serve their existing customers, especially since the demand of online payment has increased remarkably after the pandemic On the other hand, with fintech firms, the resources from banks can help them keep growing and developing further The resources from banks can be counted as financial resources which can serve their R&D activities, or the data on existing customers for marketing activities, Especially since the fintech industry has still appeared in recent years, it probably meets the problems of competition with banks Then, instead of becoming a rival, cooperating with banks would be a better idea

Therefore, the examination on the relationship between the fintech industry and banking system can give more information on how fintech companies can impact the banking operation, especially the performance of Vietnamese banks, and also some remaining issues of this relationship in the Vietnam market in order to give the best solutions for those problems

Fintech has appeared in Vietnam since the year of 2015, but it just witnessed a steady growth

in recent years, especially during the pandemic with 56% of fintech users in 2021 (SBV, 2021)

As can be seen that, although fintech was still a new term in Vietnam’s finance sector, it was predicted to have a quick growth, since the number of fintech startup companies has grown from 40 to more than 150, which means, over 4 times growth just in the period of 4 years (2016-2019) (Nguyen et al., 2020) Specifically, it has been pointed out that most of those fintech companies in Vietnam preferred developing online payment tools and have linked with the

banking system to spread their network to customers Otherwise, Nguyen et al (2022) has indicated the reason why fintech has many potential growths in the Vietnam market, based on the statistics related to Vietnam’s population In detail, 69% of Vietnamese people had savings accounts, 45% had their own smartphones and 57% used the Internet on their phones, and these numbers were expected to increase rapidly in recent years, which can be a good background for the growth of the fintech industry in Vietnam (Nguyen et al., 2022) Although fintech has grown strongly during the pandemic, it still has some challenges To specify, the fast growth of fintech made the recent legal system hardly caught up with, and it led to the gap in legal and legislations for fintech which created chances for online scams related to fintech (Le, 2018) Otherwise, the fintech industry may face difficulties in risk management, especially in securing information and data (Pham, 2023)

Besides, the banking sector, although had to face many challenges, especially in the period of Covid-19, this industry was still seen as an important field of Vietnam and witnessed a recovery and development in 2023, after the pandemic passed (Hieu, 2024) The profit after tax of Vietnamese commercial banks in recent years were recorded as going up, and it reflected that despite some difficulties, Vietnamese banks still had good business performances and received many expectations from finance experts (Hieu, 2024) In some cases, although the Covid-19 has damaged and negatively affected the economy, some identified that it was also a good chance for the banking industry in promoting digitalization, along with the support of Fourth Technology Revolution (Ngoc, 2021) Also, as SBV (2021), after 35 years of development, the banking industry in Vietnam has witnessed many successes in different fields, such as completing foreign exchange management policies, significant steps in the legal framework on supervision and supervisory apparatus, developing in payments infrastructure and banking technology, These all were good signals for the growth of the banking sector in the future, and the Government also gave many expectations to this industry when banking had an important role in stabilizing the economy (MOF, 2024)

In the context of the Fourth Technology Revolution (4.0 Revolution), the role of fintech, or online transaction has become clearer and more important, especially during the Covid-19 period (Ngoc, 2021) This statement was confirmed by Nguyen Toan Thang - General Secretary

of Vietnam Banks Association, and he also stated that the appearance of fintech companies in the Vietnam market has enhanced the digital banking race between Vietnamese banks (MOF, 2024) This showed that the fintech industry, with its existence combined with some external factors, has pushed more pressure on the banking sector in developing their technology for digital banking In fact, promoting investment for digitization was seen as one of the best

opportunities for banks’ growth, which received 100% belief from Vietnamese banks (Vietnam Report, 2024) That information, in summary, has reflected that Vietnamese banks have also paid attention to the development of digital technology in the finance field, and they also invested in R&D activities for this development Otherwise, banks also choose to cooperate with fintech companies, especially in the digital payment field, which may create a chance for together growth Specifically, 72% of fintech companies in the market have cooperated with Vietnamese banks, 14% of companies developed new services and only 14% of companies chose to compete with banks (SBV, 2022) This showed that most companies on the fintech market were aware of their lack of experience to fight against existing banks, therefore, decided

on cooperating rather than competing This would benefit both, since banks can benefit from the technology of fintech companies since fintech can spread their brand to customers through the collaboration with banks Therefore, this cooperation was seen as a good relationship for both banking and fintech industry, furthermore, for the general economic situation in the digitalization era (SBV, 2022)

In the context of the global, fintech has been a common topic for researcher due to its rapid development in this digital transformation era, especially how the fintech can be applied and how it can affect to the financial structure and banking operation As in Vietnam, after the pandemic passed, the trend of digital payment keeps growing and the Government also pays attention on the cashless payment and the development of fintech industry Therefore, there has been some studies working on exploring the efficiency and potential growth of fintech in Vietnam, however, there still some gaps in investigating the relationship between fintech and Vietnamese banks As a result, this research will be conducted in order to find out how fintech can impact the profitability of banks in the context of Vietnam market

This research aims at examining the relationship between fintech companies and business performance of the banking sector, in detail, investigating whether the growth of the fintech industry can have any effect on the performance of Vietnamese banks Therefore, the research questions will be defined as:

● Whether the growth of fintech users can benefit banks' performance?

● Whether the development in business performance of the fintech industry may have a positive effect on banks performance?

This research will focus on the relationship between Vietnamese fintech companies and Vietnam banking sector by choosing 10 listed banks including both SOCB and JSCB type In addition, there will be some subsamples and macroeconomic factor during the model estimation process

The research will gather related statistical dataset on given variables in order to make

statisical analysis and evaluation for the given regression model

In addition to the introduction, conclusion, reference list and appendix, the topic “The effect of

Fintech companies on business performance of Banking sector in Vietnam” is structured in 3

chapters as follow:

Chapter I: Practical issues on Vietnamese fintech industry and banking sector

Chapter II: Research methodology and findings

Chapter III: Recommendations

CHAPTER I: PRACTICAL ISSUES ON VIETNAMESE FINTECH INDUSTRY AND

BANKING SECTOR

1.1.Overview of previous studies and Hypothesis development

Theoretically, there was some previous research that investigated the effect of Fintech companies on the banking system in some countries, however, there has been an argument on this relationship between fintech firms and banks For instance, Phan et al (2019) has examined the affection of fintech firms on Indonesia banks performance and has stated the negative relationship, since Naser et al (2024) has proved the positive relationship between fintech and banks performances in the context of Bahrain Therefore, since the fintech industry has received many expectations for potential growth, this research is conducted to prove the positive cooperation of fintech firms and banks’ performances, to give evidence for promoting this collaboration In addition, Bashayreh and Wadi (2021) have also examined the effect of fintech

on banks’ performance in the context of Jordan, and the result has shown that there was a positive relationship between the growth of fintech and banking sector in order to prove that fintech industry has brought positive effect on Jordan banks Otherwise, Siek and Sutanto (2019) have investigated on the payment and peer-to-per aspects and the received results have stated that Indonesian customers tended to have awareness and satisfied with fintech services rather than banks, therefore, the customer satisfaction rate of fintech has witnessed higher than banking services in the context of Indonesia In China, Chen (2020) has an analysis to understand how the profitability of traditional banks changed across period of time since the existence of Internet-only banks, and the results although has proved that Chinese Internet-only banks met problems in profitability, but the author also stated that this type of banking system has more potential for future development and profitability Also, in the context of China, Lee

et al (2021) has also pointed out the question whether the fintech innovation can improve the efficiency of Chinese banks, and the results have stated that there was a positive signal between fintech innovation and banks efficiency, in detail, fintech innovation can help improving cost efficiency and promoting technology implementation in Chinese banking system

Based on the given information on previous researches on the relationship between fintech and banking sector, it can be seen that mostly fintech industry was seen as having positive effect on the operation of banking system Therefore, in order to investigate the effect of fintech on banks’ performance in the context of Vietnam, the research will state the hypothesis as follows:

H1: The development of Fintech companies affects positively to the profitability of Vietnamese banks

The profitability in this research, also as other former studies, will be chosen as ROAA and ROAE ratio of banks in the context of Vietnam market

1.2.Overview of Vietnam fintech industry

Figure 2: The number of Fintech companies in Vietnam in the period of 10 years (2014-2023)

(Source: State Bank of Vietnam, 2024)

As can be seen, in the period of 10 years (2014-2023), the number of fintech companies in Vietnam witnessed a fast growth, from 49 companies in 2014 to 187 companies in 2023, reaching more than 281% growth rate (SBV, 2024) In detail, fintech has appeared in Vietnam for a long time before, but it has been focused since the year of 2018, with 125 fintech companies in the market and it also received about 31.7 billion USD in the first half of this period of year (Nghiem, 2019) Realizing the potential growth of fintech, The State Bank of Vietnam has formed “Fintech Steering Committee” in 2017 in order to work deeper on this field, with the aim of completing the fintech ecosystem, legal system and supporting fintech companies in Vietnam (Nghiem, 2019) In addition, Vietnam has also been believed by many experts in the world, as one of the highest potential markets in South-East Asia in 2021, with third ranking on fintech funding in the region (Trang, 2018), reached 388 million USD of investment for 15 deals - account for 10% of the total closed deals for South-East Asia (Pham, 2023) Those figures have proved that the fintech industry, in recent years, has become more common in Vietnam and fintech, nowadays, has been familiar to Vietnamese users Moreover,

it can be seen that this industry grew faster in the 3 years of pandemic (2020-2022), with about

141 new entries in this period, and it kept growing and reaching 187 companies in the recovery period (2023) This can be understood that the lockdown period has made fintech applications become more necessary and important to Vietnam’s finance group of industries, and also served the demand of customers in online shopping and payment (SBV, 2024)

1.3.Overview of Vietnam banking industry

Figure 3: Number of Vietnamese banks by categories

(Source: Ngo, 2024)

Vietnam banking industry has been seen as a highly competitive market, when there are 49 banks existing in the market, in detail, 4 100% State-owned Banks; 31 Joint Stock Commercial Banks; 9 100% Foreign-owned Banks; 2 Policy Banks; 1 Cooperative Bank and 2 Joint Venture Banks (Ngo, 2024) This industry is also known as one of the most essential industries that can have many effects on Vietnam’s economic situation, since banks take responsibility in managing cash resources and providing funds for enterprises, in other words, banks act as a role

of balancing and reserving cash for the country Therefore, banks are mostly seen as a sustainable market, in fact, this industry still has some opportunities for developing, especially based on the policies on cash payment the Government and State Bank of Vietnam has provided In detail, the State Bank of Vietnam has given out statements to Vietnamese banks

on promoting cashless payment, requiring banks to enhance promotion programs in order to encourage customers using digital payment methods rather than traditional cash payment (Government News, 2023) This led to the increase in bank account users of Vietnamese adults,

8%

63%

19%

specifically, about 75% of Vietnamese adults owned bank accounts (Government News, 2023), and this can be a chance for banks to widen their customers’ data, to attract more customers in using services and increase their business performance Besides, as other industries, the banking sector also has its own market share, and some leading institutions in the market, for instances,

“Big 4 Banks” in Vietnam - namely Vietcombank (VCB), BIDV (BID), Agribank, Vietinbank (CTG), and some other joint stock banks as Techcombank (TCB), VPBank (VPB), …

However, after the year of 2018, since the explosion of fintech, banks have faced the threats of being affected by fintech companies, in detail, related to market share and business performance Along with the trend of digital development in the finance field, Vietnamese banks also had to adapt with these changes, by improving technology level to provide quality service to the customers Some banks, in this context, focused and invested on R&D to innovate their own system, others chose to cooperate with existing fintech companies for joint growth, and this relationship also received the support from State Bank of Vietnam (Phuong, 2018)

1.3 Overview of the relationship between Fintech and Banks

The relationship between fintech industry and banking sector has existed in recent years, especially became popular in the technology era and especially during the Covid-19 social distancing In detail, during that time, the demand for shopping online has grown which led to the growth in digital payment (SBV, 2023); therefore, it was an unexpected opportunity for fintech and banks in digital channel due to the customer behavior in the world, and even since the vaccine appeared as the difficult time passed, this digital transformation trend kept continuing (Carbo-Valverde et al 2021) However, due to the unexpected rapid growth, the adoption of fintech may contain some risks that can harm the operational performance of banks, one of those was cyber risk (Al-Shari and Lokhande, 2023) Therefore, promoting action for this relationship, even though it can be beneficial, still requires time for restructuring the financial system and regulation In Vietnam, the SBV and Government are also concerned about the growth in the relationship between fintech and banks, since Vietnam is enhancing the digital transformation in the banking sector, reducing the use of cash payment in the society and put attention on completing legislation for fintech industry (SBV, 2024) Then, it can be said that the Vietnamese Government is also putting many efforts and expectations on the sustainable growth of the fintech industry and believing in the positive relationship between fintech and banks

CHAPTER II: RESEARCH METHODOLOGY AND FINDINGS

2.1 Research methodology

2.1.1 Research Model

𝑩𝑷𝒊,𝒕= 𝑭𝑰𝑵𝑻𝑬𝑪𝑯𝒊,𝒕+ 𝑿𝒊,𝒕+ 𝑮𝑫𝑷𝒕+ 𝑪

Specifically, 𝑩𝑷𝒊,𝒕 can be understood as banks profitability, which is estimated through ROAA

and ROAE coefficient of 10 selected banks (both for SOCB and JSCB) which have been listed

in Top 10 Prestigious Banks in Vietnam in 2023 by Vietnam Report including Vietcombank (VCB), BIDV (BID), Vietinbank (CTG), Agribank (AGRIBANK), Techcombank (TCB), VPBank (VPB), MBBank (MBB), TPBank (TPB), Asia Commercial Bank (ACB), Vietnam International Bank (VIB) in the period of 10 years Meanwhile, 𝑭𝑰𝑵𝑻𝑬𝑪𝑯𝒊,𝒕 represents for 2 aspects of fintech industry will be carried out for measuring as fintech users and fintech total transaction value (take the logarithm of value), when 𝑿𝒊,𝒕 represents the subsamples, or the

control variables in this model as bank size (logarithm of total asset) and bank age (since the establishment till the given years in the period) Finally, 𝑮𝑫𝑷𝒕 is the GDP growth rate during

the given period, and is carried out as an important macroeconomic factor for this measurement

In order to explore the results for the analysis, the model will be approached through the Ordinary Least Squares (OLS) method with the support of the EView application

2.1.2 Data Collection

The research will gather the data on the number of users and the total transaction value of the fintech industry, along with the profitability ratios including Return on Asset Average (ROAA) and Return on Average Equity (ROAE) of the banking industry, and also the GDP growth rate

of Vietnam in the period of 10 years (2014-2023) and bank size to find the relationship between the development of fintech industry and the business performance of banking sector This aims

at proving that the growth of fintech companies; by increasing the number of users and the total transaction value can have a positive impact on the banks’ profitability, which will reflect that

it affects the business performance of Vietnamese banks The profitability ratios of the banking sector will be taken from the summary report from Vietstock Finance, and also information on bank size and bank age, since the data on the number of fintech users and total transaction value will be gathered from the summary of SBV and GSO, since the data on GDP growth rate can also be gathered from GSO Besides, the banks’ profitability ratios - ROAA and ROAE will be set as dependent variables, since other aspects related to fintech's performance namely number

of users and transaction value, and GDP growth rate will be set as independent variables in the model Otherwise, bank size and bank age will be set as control variables in order to support and strengthen the estimation

10 years, and it proved that Vietnam has a moderate growth rate as developing countries, and also proved the stable macroeconomic situation for future growth Besides, the skewness coefficients of ROAA, fintech users and fintech market size are recorded positive values, or

right-skewed, since others ware negative or left-skewed, while all the kurtosis values are lower than 3, or reflected the platykurtic distribution in the regression In the case of the Jarque-Bera Test, it can be seen that the ROAE, BANK_SIZE and FINTECH_MS witness a higher than 0.05 in P-value (0.134, 0.163 and 0.7041 respectively), which means, there is a normal distribution for the data of ROAE, BANK_SIZE and FINTECH_MS