The effect of financial technology development on commercial banks’ profitability experimental evidence in vietnamese commercial banks from 2008 to 2022

BANKING ACADEMY BANKING FACULTY GRADUATION THESIS THE EFFECT OF FINANCIAL TECHNOLOGY DEVELOPMENT ON COMMERCIAL BANKS’ PROFITABILITY: EXPERIMENTAL EVIDENCE IN VIETNAMESE COMMERCIAL BAN

BANKING ACADEMY BANKING FACULTY

GRADUATION THESIS

THE EFFECT OF FINANCIAL TECHNOLOGY DEVELOPMENT

ON COMMERCIAL BANKS’ PROFITABILITY: EXPERIMENTAL

EVIDENCE IN VIETNAMESE COMMERCIAL BANKS

FROM 2008 TO 2022

Student name: Le Quynh Khanh

Academic year: 2019 – 2023

Hanoi, 2023

BANKING ACADEMY BANKING FACULTY

GRADUATION THESIS

THE EFFECT OF FINANCIAL TECHNOLOGY DEVELOPMENT

ON COMMERCIAL BANKS’ PROFITABILITY: EXPERIMENTAL

EVIDENCE IN VIETNAMESE COMMERCIAL BANKS

FROM 2008 TO 2022

Student name: Le Quynh Khanh

Academic year: 2019 – 2023

Hanoi, 2023

DECLARATION

I declare that the graduation thesis entitled: "The effect of financial technology development on commercial banks’ profitability: Experimental evidence in Vietnamese commercial banks from 2008 to 2022” was carried out by

myself and submitted to the Banking Faculty of Banking Academy of Vietnam In which, all the content and results in the study are precise, trustful, and never been published before The theoretical framework in the research is cited and referenced formally, meanwhile the data used is presented honestly I further ensure that I have not copied any other authors’ work or used any material from other sources without acknowledgement

ACKNOWLEDGEMENT

The thesis was carried out by the knowledge I applied during 4 years studying

at the Advanced Program of Banking Academy I would not have been able to complete this thesis without the support and encouragement of my teachers, family, and friends

First of all, I would like to express my deep gratitude to all the teachers at Banking Academy for their enthusiasm and dedication during my university time Their precious lessons and knowledge are the values that I would keep along with even until my post-graduate

I also really appreciate my instructor – MsC Dao My Hang She is the most supportive person while I finish my thesis Her dedicated comments and encouragement have hugely contributed to this study as well

I further want to thank my family and friends, who have always been with me through my difficult times and gave me motivation to believe in myself, confident with my decisions

LIST OF ABBREVIATIONS

ASEAN Association of Southeast Asian Nations

ICT Information & Communications Technologies

NASDAQ National Association of Securities Dealers

Automated Quotations System

P2P Peer to peer

LIST OF TABLES

Table 1: Research related to Fintech review 5

Table 2.1: Expectation in affecting direction 36

Table 3.2: Correlation matrix among variables 61Table 3.3: Results of testing appropriate models 62Table 3.4: Regression results of REM models 63

Table 3.7: Testing endogenous phenomena in Model 1 69Table 3.8: Testing endogenous phenomena in Model 2 69Table 3.9: Testing endogenous phenomena in Model 3 70

LIST OF FIGURES

Figure 2.2: Interest in keywords about Market-supporting

services on Google Trends

41

Figure 3.1: Number of Fintech company in Vietnam 46Figure 3.2: Domain of Fintech companies 2022 47Figure 3.3: Top countries with the largest number of

TABLE OF CONTENTS

DECLARATION i

ACKNOWLEDGEMENT ii

LIST OF ABBREVIATIONS iii

LIST OF TABLES v

LIST OF FIGURES vi

PART 1: INTRODUCTION 1

1 Rationale 1

2 Literature review 2

2.1 Literature review 2

2.2 Contribution of the topic 10

3 Aim of the study 11

3.1 Study objectives 11

3.2 Study questionnaire 11

4 Object and range of study 11

4.1 Object of study 11

4.2 Range of study 11

5 Research methodology 11

5.1 Data collection method 11

5.2 Quantitative research methods 12

6 Study structure 12

PART 2: RESEARCH CONTENTS 13

Chapter 1: Theoretical framework for the effect of financial technology development on bank profitability 13

1 Financial technology development 13

1.1 Definition of financial technology 13

1.2 Development of Fintech 14

1.3 Classification 17

1.4 Fintech development measurement 22

2 Profitability of commercial banks 24

2.1 Profitability of commercial banks 24

2.2 Measurement indicators 24

2.3 Factors affecting the bank profitability 26

3 The effect of financial technology development on bank profitability 29

3.1 Positive impact 29

3.2 Fintech competes with commercial banks 31

Chapter 2: Assessing models 33

1 Research Process 33

2 Research methodology 33

2.1 Research methodology 33

2.2 Research hypotheses and models 34

2.3 Data collection methods 38

Chapter 3: Research and evaluation results 43

1 Descriptive statistics 43

2 Assess the current situation 46

2.1 Overview of Fintech development in Vietnam market 46

2.2 Banking and Fintech 53

2.3 Summary 60

3 Regression results 60

3.1 Correlation coefficient 60

3.2 Regression model 62

3.3 Defects of regression model testing 67

3.4 Correcting model 71

Chapter 4: Recommendations 74

1 Conclusion 74

2 Recommendation 75

2.1 For the Government 75

2.2 For the SBV 76

2.3 For the Vietnamese commercial banks 78

REFERENCES 80

Foreign documents 80

Domestic documents 81

PART 1: INTRODUCTION

1 Rationale

The Industry Revolution 4.0 was firstly originated in 2011, from a high-tech project under the German government to promote the computerization of production

(K Factory EU) The basic concept of "Industry 4.0" embedded systems and smart

manufacturing facilities to create digital convergence between industry, business,

functions, and internal processes In 2016, Klaus Schwab (Executive Chairman of the World Economic Forum) introduced a simpler concept of Industry 4.0 as follows: " The Fourth Industrial Revolution creates a world in which virtual and physical systems of manufacturing cooperate with each other in a flexible way at the global level" It can be understood that Industry 4.0 is a digital revolution, applying advanced

technology techniques to serve and optimize processes and production and business methods of humanity

In terms of the technology trend that Industry 4.0 brings, the concept of Financial Technology (Fintech) was born with the idea of combining finance and technology to create new products and services in the field of finance – banking Taking advantage of the utilities that technology brings along with financial services, the emergence of financial technology has contributed to enhancing customer experience and bringing innovations and creativity that change the face of the traditional banking and financial system when switching to digital banking technology It can be said that financial technology has gradually appeared in products and services provided by banks such as: payment, P2P Lending, crowdfunding, wealth management, insurance technology (insurtech), regulatory and supervision technology (Regtech or Suptech) in the financial sector, cryptocurrency, Blockchain technology

At present, Fintech in Vietnam is growing at an exponential rate and is considered as a potential industry with a significantly increasing number of

businesses (Bryan Carrol, 2022) In 2018, there were 144 fintech companies Under

the impact of COVID-19 pandemic, this number increased dramatically during

2019-2021 By the end of 2022, it is estimated that there were more than 260 companies

participating in the fintech sector in Vietnam (according to Nextrans' Vietnam Startup

Report 2022) Recognizing the perspective of the Vietnam fintech sector, since 2008,

the SBV has licensed the establishment of the first Fintech companies The development of Fintech has brought many positive changes to the Vietnamese banking system, strongly affecting the development strategy and business methods of traditional financial service providers Since the emergence of Fintech, the digitization process in banking activities has become an inevitable trend, especially during the COVID-19 epidemic More and more banks are cooperating with domestic and foreign Fintech partners to improve services, followed by the cooperation between VietinBank and Opportunity Network (UK), VPBank and BE Group (Sweden), OCB and RippleNet (US) or TPBank and Backbase (Netherlands) In fact, how does the application of financial technology affect the profitability of commercial banks in Vietnam in the context of inevitable digital transformation from Industry 4.0?

2 Literature review

2.1 Literature review

Banking always plays an important role in a national economy The stability

as well as profitability of the banks are closely related to the national economic situation Therefore, bank performance is a topic that obtains concentration from many economists and researchers There have been numbers of papers worldwide on factors affecting bank profitability In general, some factors that were popularly used can be mentioned are external factors (from the macroeconomy) and internal factors (from the banks themselves) Besides, in the context of the industrial revolution 4.0 taking place strongly and creating a trend of digital transformation in the banking system, Fintech-related indicators are also chosen by many researchers around the world when analyzing bank profitability

2.1.1 Foreign research

Dinh Phan et al (2018) conducted a study to examine whether the development

of Fintech companies affects the performance of banks The authors have studied the Indonesian market, where the strong growth of Fintech has been recorded Using a model of 41 banks and data on Fintech companies, the study shows that the macro

funding cost (FC) have a positive impact on profitability of Indonesian commercial banks The remaining explanatory variables (GDP, LLP, CTI, DG) and the main explanatory variable, Fintech (the growth of Fintech companies) have a negative effect on bank performance

Chi-Chuan Lee et al (2021) conducted a study to examine whether the

development of the financial technology industry (fintech) affected the performance

of China's banking sector in 2003–2017 The fintech development indicators are built using fintech enterprise-level data Through the SMETA method, the study found that the application of fintech helped banks to improve cost efficiency, thereby increasing profitability while improving banks' access to technology In terms of other explanatory variables, only the equity to asset ratio had a positive impact on bank profitability, other indicators showed negative results

Also in 2021, Ahlem Chhaidar et al (2021) studied the relationship between

fintech investments and financial performance to consider whether bank size could affect performance in the context of digital transformation The authors used the FMOLS model with an observational sample of 23 European banks between 2010 and 2019 Econometric results show that Fintech and bank size had a positive and significant impact on bank profitability, where the greater the level of digital interaction of banks, the higher the profitability In contrast, LIQ CAR NPL and the INF all experienced negative positive to the dependent variable - ROA

business activities; use of automatic payment technology by phone and computer; technological innovation Besides, among the explanatory variables with statistical significance, only inflation positively affects ROA of banks CIR and ETA both negatively affect the bank profitability

Choosing a newer timeline - from 2011 to 2019, Nguyen Duc Trung et al (2022) conducted an experimental investigation on the impact of technology

spending on banks’ efficiency and stability based on the data set of 12 Vietnamese commercial banks The results show that technology investment positively and significantly affects the bank's net interest income (NIM) ratio However, there was

no evidence of a relationship between spending on technology budgets and banking stability The authors believe that the study is useful for both regulators and regulators

in the governance and administration of banks as well as development policy orientation

Dinh Thi Thu Hong et al (2021) studied the influence of Fintech companies

on the performance of commercial banks in Vietnam The study uses an observational sample including 31 Vietnamese joint-stock commercial banks and data on the establishment of Fintech companies in the period 2006 - 2018 The analysis is based

on an important theoretical framework and models’ multivariable linearity to provide reliable evidence The research results found that the increase in Fintech companies has a negative impact on the performance indicators of banks including ROA, ROE and NIM with the magnitude of the correlation coefficient being 0, respectively 0046; 0.04 and 0.009 The authors also find statistical evidence on the impact of bank characteristics and macro variables on the performance of Vietnamese commercial banks

Obviously, there was a relationship between financial technology and bank profitability However, with the differences in the method measuring Fintech index, these papers showed the contrast effect direction on bank profitability Therefore, paying attention to this topic would guide related parties to develop appropriate policies in order to maximize the efficiency brought by technology, meanwhile preventing potential risks to banking business For the overview, the author has

Table 1: Research related to Fintech review

POSITIVE EFFECT ON DEPENDENT VARIABLE

+ NPL: non-performing loans ratio of commercial banks + LABOR: the number of employees at the bank

+ W1: Personnel expenses to total assets net of fixed assets + W2: Other operating expenses to fixed assets

+ W3: Total interest expenses to deposits and borrowed money + CR4: the four-bank concentration ratio

Fintech applications helped banks improve cost efficiency, thereby increasing profitability while improving banks' access to technology in China in the period 2003–

(2021)

+ DIG: banks’ interaction with technology index (measured by the frequency of occurrence of digitized vocabulary in banks’

annual report) + SIZE: The logarithm of the commercial bank's total annual assets

Fintech had a positive and significant impact on the profitability of European banks between 2010 and

2019, where the greater the

+ INF: Annual inflation rate + GDP: Annual GDP growth

level of digital interaction

of banks, the higher the profitability

+ CIR: The ratio of operating expenses to total income of commercial banks

+ NPL/TL: Ratio of bad loans to total outstanding loans of commercial banks

+ SIZE: The logarithm of the commercial bank's total annual assets

+ COST: Total interest expense of commercial banks + GDP: Growth of Vietnam's annual GDP

+ INF: Vietnam's annual inflation rate

The profitability of Vietnamese commercial banks in the period 2008 –

2017 was positively influenced by the following factors: use of technology

in business activities; use of automatic payment technology via phone and computer; technological innovation

(2022)

+ TECHINVEST: Logarithm the total annual expenditure of commercial banks on expenses related to software and technology

+ SIZE: The logarithm of the commercial bank's total annual assets

+ CAPITAL: The ratio between equity and total assets

+ LLR: Ratio of risk provision and total outstanding loan

+ EXPENSE: The ratio of operating expenses to total operating income before provisions

+ STATE: equal to 1 for state-owned commercial banks, and zero for the other

+ GRGDP: Growth of Vietnam's annual GDP

+ IFLR: Vietnam's annual inflation rate + GRSERVICE: Growth in annual net service fee collection by commercial banks

Technology investment positively and significantly affected the NIM ratio of 12 commercial banks in Vietnam between 2011 and

2019 However, there was

no evidence of a relationship between spending on technology budgets and consumer stability

NEGATIVE EFFECT ON DEPENDENT VARIABLE

+ LLP: Loan loss provisions equals loan loss provisions over total loans

+ DG: Annual growth of deposits + IIS: Interest income share equals total interest income over total income

+ FC: Funding cost equals interest expenses over average total deposits

+ GDP: Indonesia annual GDP growth rate + INF: Indonesia annual inflation rate

variables: NIM, ROA, ROE, YEA, the authors have shown that the number of FinTech companies has a negative and significant impact on all four models In which, there was a model that showed compared with small-sized and privately owned banks, state-owned banks are less negatively affected by Fintech companies

commercial

banks

+ EQUITY: Equity/Total asset + COST: Operating expenses/ Equity + DEPOSIT: Deposits and issuance of valuable papers/Total asset

+ INCDIV: Total non-interest income/Total asset + HHI: Herfindahl - Hirschman index The index is from 0 to 1, the closer the index is to a less competitive market

+ GGDP: GDP growth rate at constant prices + SFML: Ratio of short-term capital for medium and long-term loans

the parameters of this relationship are all statistically significant This shows that commercial banks in Vietnam are being competed by Fintech companies and in performance indicators, the increase of Fintech companies has a strong impact on ROE

Source: Author collecting

2.2 Contribution of the topic

There have been a large number of studies worldwide that follow the topic of Fintech affecting profitability of commercial banks With the main explanatory variable, those studies have taken diverse approaches: total annual technology-related

costs of banks (Nguyen Duc Trung et al.), the bank's technology interaction index (Ahlem Chhaidar et al.) or dummy variables of related to technology applications applied in banking (research by Chi-Chuan Lee et al., Phan Thi Hang Nga et al.)

Although having different approaching methods, all technological variables share the same impact on bank profitability

In this study, besides the familiar independent variables used in previous papers, the author also mentioned the development of financial technology through three indicators: (i) Number of Vietnamese Fintech company, (ii) Total funding value

in Vietnam Fintech industry, and (iii) Level of Public-interest in financial technology The author will measure the index related to Fintech variables based on data collected corresponding to three suggesting models, which has not existed in any Vietnamese research Through regression methods, the study would clarify the effect of financial technology development on banks profitability and then analyze the reaction of banks' profitability to changes in Fintech statements

In addition, to ameliorate the research by updating data as well as market

coverage, the author selected an observational sample of 27 commercial banks listed

on the stock market in the period from 2008-2022 This is the period that contains

the impact of the COVID-19 epidemic, which has significantly evolved in the popularity of financial technology Thereby, the research would highlight the role of technology in the bank's performance compared to the previous papers as this period has rarely been mentioned in papers that related to the effect of fintech on bank profitability

Therefore, the author decided to choose the topic: "The effect of financial technology development on commercial banks’ profitability: Experimental evidence in Vietnamese commercial banks from 2008 to 2022.”

3 Aim of the study

3.1 Study objectives

The author sets out the following research tasks:

+ Firstly, summarize the theoretical framework of factors affecting Vietnamese commercial banks’ profitability

+ Second, study the practical impact of financial technology development on the profitability of Vietnamese commercial banks

+ Third, propose conclusions and practical recommendations to related parties

5.1 Data collection method

The research paper uses indicators related to the financial position of 27 commercial banks listed on the Vietnamese stock exchange, in particular:

Table 2: Variables summarize

DEPENDENT VARIABLE

MAIN EXPLANATORY VARIABLES

FC Number of fintech companies in Vietnam Statista

FV The value of total funding in Vietnamese

ETA Total equity to total asset Financial report

CASA Current account savings account Financial report

5.2 Quantitative research methods

The study applies regression models: Pooled OLS, REM, and FEM with secondary data to analyze the effect of financial technology development on banks profitability, which is measured by ROA indicators

6 Study structure

Chapter 1: Theoretical framework

Chapter 2: Assessing model

Chapter 3: Research and evaluation results

Chapter 4: Recommendations

PART 2: RESEARCH CONTENTS

Chapter 1: Theoretical framework for the effect of financial technology development on bank profitability

1 Financial technology development

1.1 Definition of financial technology

New technologies of the industrial revolution (Industry 4.0) such as IoT - internet of things, Big data, Artificial Intelligence (AI), Cloud Computing, Blockchain, Biometric - Geometric has been creating significant turning points in

history by affecting most socio-economic activities in all countries around the world (Phan Thi Hoang Yen et al, 2022) It was these technology products that have been

thoroughly applied to financial activities to achieve value in both products and operating processes Until then, the word "Fintech" was born

Initially, the word was only used to describe the data processing and storage systems (back-ends) that establish consumer networks of commercial financial

institutions (Nguyen Hung, 2021) By the first decade of the 21st century, “Fintech”

had expanded to refer to any technological innovation in the financial sector, including innovations in finance and education, retail banking, investment, and even the cryptocurrency sector

After the global recession in 2008, the convenience and speed brought by Fintech has provided a breakthrough customer experience, offering products that are affordable, easy to use and fully interactive by digital technology Today, Fintech is breathing new life into the banking value chain as they partner with traditional banks

or new banks (Neo Banks) to fill the gap in products and services and expand choices

for customers (MBBank, 2021)

In a study by the Financial Stability Board (FSB, 2017) which discussed about

the important policies for financial stability goals from Fintech, Fintech is defined

as innovation in financial services with the help and support of technology, leading

to business models, new applications, processes, or products that have an essential impact on the delivery of financial services This definition is also used by the

International Monetary Fund (IMF, 2018) in the panorama study when analyzing the

development of Fintech in the Central Asia - North Africa - Afghanistan - Caucasus regions, the Middle East and Pakistan

Although there are various ways to describe the word "Fintech", the considerations above all confirmed the presence of technology in financial activities with the purpose of optimizing the quality of products and services in financial institutions Fintech has become an inevitable trend that changes the management and business concept of banks and financial institutions

Hence, the author briefly understands "Fintech” as a combination of two concepts "finance" (finance) and "technology" (technology) And as the name suggests, “Fintech” is used to describe the application of modern technology into financial institutions' activities

1.2 Development of Fintech

Figure 1.1: A brief story of Fintech

Source: " Fintech and Digital Banks" Report, MBBank (2021) Research of Doulas D.A Janos N.B and Ross P.B (2016) divided the

development process of Fintech into 3 main stages, which are closely linked to the industrial revolutions that have occurred in history

FinTech 1.0 (1866-1967): During this period, the development of

technologies such as the telegraph, railway systems, and steam engines allowed international transactions and payments to be made quickly and conveniently between countries However, the arrival of credit cards for the first time in the US in

1950 and the deployment of Barlays' first ATM in the UK in 1967 marked a new transformation of financial technology, marking the stage of Fintech 1.0 – the process

of moving from financial services based on Analog Technology to Digital Technology

Fintech 2.0 (1967-2008): The characteristic of this period was the flourishing

development of IT, which has pushed financial automation to a higher level

Four years after the first ATM was introduced, in the United States, automated stock trading was established with the introduction of the NASDAQ trading system

in 1971 This has ended the era of fixed stock trading at each exchange, which has been maintained since the 1600s Instead, there has been the electronic securities trading activity that has prolonged until present In the banking industry, the first online banking was established in the US in 1980 and in the UK in 1983 It wasn't

until 1995 that the emergence of the Internet created a breakthrough development of Fintech when Wells Fargo used the World Wide Web to provide online checking services By 2005, the first online banks without tangible branches appeared However, this period also saw an increase in complexities, limitations and risks in computerized risk management systems such as the "Black Monday" event in the US stock market in 1987 or the Asian financial crisis of 1997-1998

Fintech 3.0 (2008-present): In the 3.0 phase, Fintech stands out with the use

of Blockchain technology without using the Web like previous 1.0 or 2.0 versions, the Blockchain system helps to carry out global value exchange transactions based

on the Internet

There are two main events that became catalysts for the development of the Fintech 3.0 era during this period The first was the Global Financial Crisis (2008), which changed the public's perception of the importance of technology companies With banks struggling and expectations for their stability shaken, the level of public trust in the handling of financial services has gradually increased Especially in many developing countries such as China, A growing number of non-listed companies have processed money and provided financial services to millions of customers thanks to its convenience and cheaper costs Thus, the reputation factor is no longer important

in choosing to provide financial services for consumers in the new era

The development of Fintech in this period also coincided with the time of Industry 4.0 Since 2010, Industry 4.0 has rekindled with the combination of 3 fields

of physical, digital, and biological technologies These fields had been expected to create unprecedented modern technological breakthroughs in history In the banking and finance industry, the management model will be completed thanks to the strong development of AI while Industry 4.0 will completely change the distribution channels and traditional banking services

At present, the number of Fintech companies has been growing strongly globally with a huge revenue scale By the end of 2021, according to a Deloitte report, the Fintech market reached a total value of more than $150,000 billion and is expected

to reach $188,000 billion by 2024 This is considered a great opportunity for banks

because if they take advantage of the modernity of financial technology, this will be

a premise to help banks optimize their operations

Figure 1.2: Fintech industry size Figure 1.3: Fintech dominants in 2022

Source: Findexable (2022)

1.3 Classification

Figure 1.4: Fintech classification

Source: FSI Insights on policy implementation No 23 (2020)

According to the FSB Financial Stability Board classification, Fintech activities are divided into 5 types of financial services, including:

(1) Payment and clearing payment

Technological innovations in payment services include services and applications related to domestic and international payment transactions on network platforms and mobile devices International payment platforms such as Alipay, Android Pay, PayPal, Samsung Pay allowing users to pay for goods and services online or bank transfers using handheld devices such as tablets and smartphones with

lower transaction costs than traditional payment methods (FSB, 2017) In addition,

recently, the term "e-wallet" has also been popularized quite widely A digital wallet

is a place that stores currency (which can include digital currency) and payment information for various payment systems, the payment information can then be used

during the payment process without re-entering (Dorfleitner et al., 2017) With the

storage function, e-wallets are often integrated into users' online payment accounts to support transactions to be made faster and more convenient

The main benefits of e-wallets are the convenience of Internet shopping and the low cost of transactions because the execution of invoices and orders is automatically settled With e-wallets, customers do not have to fill in online orders like other payment methods Instead, customers just need to click on their e-wallet icon on the screen and the software will automatically fill in the information related

to ordering and shipping This not only speeds up the order processing process, but also reduces the risks of information theft or fraud that credit card payments are common E-wallets not only benefit buyers but also sellers Using e-wallets will help sellers lower transaction costs, create opportunities for marketing, advertising, customer retention activities as well as reduce fraud cases faster and more convenient

Next, blockchain technology and digital currency are technological innovations aimed at providing virtual currencies as alternatives to conventional money as well as legal means of payment that can store, use, and exchange

cryptocurrencies (Bafin, 2016) One of the cryptocurrencies known for its largest

market capitalization is Bitcoin Based on Blockchain technology, virtual currency transactions are almost absolute security but still ensure openness and transparency

(Bohme et al 2015) However, the legality of cryptocurrencies remains a

controversial issue worldwide

(2) Receiving deposits, loans and raising funding

First, community lending refers to online technology platforms that make it possible for individuals and small and medium-sized businesses to lend or receive loans directly from each other, while ensuring the safety of these loans Individuals and businesses participating in these platforms are either investors of idle money, or borrowers and there is no entity acting as an intermediary in this credit relationship, hence the common name of peer-to-peer lending Borrowers can pay lower interest rates than some other credits, while lenders can achieve higher rates of return than

investing in corporate bonds, bank deposits or certificates of deposit (Emekter et al., 2014) On the positive side, this improvement can meet the credit needs of those who

have not yet met the loan standards of traditional financial institutions As a result, small businesses that do not have access to bank loans can still raise capital for development investment, working capital financing or addressing unexpected

financial needs (Segal, 2015) However, the credit risks arising with this form of

lending are a matter of concern Since 2005, there have been many active community lending platforms, mainly in the UK and US such as Prosper, Zopa, Lending Club, Funding Circle, Upstart,

Next, crowdfunding is an activity in which users can raise capital from various

individuals through social media, lending money or buying shares of companies (Conard, 2012) In addition, it is an open form of fundraising, mainly via the Internet,

to mobilize financial resources in the form of donations in return by products or some form of reimbursement (monetary or non-monetary) in the future to support

initiatives for a particular project (Belleflamme, 2014) In general, this is a form of

capital raising with the idea of leveraging the development of information technology

to crowdfund A useful tool for startups that want to raise capital in the early stages

(N Scholz, 2015) Some famous capital raising platforms in the world can be

mentioned as Kickstarter, IndieGoGo, GoFundMe, CircleUp

(3) Insurance

Technological innovations in the insurance sector are often referred to as

"InsurTech." One of the typical InsurTech initiatives is Internet-connected wearables (Wearables IoT), such as a smartwatch used to track and analyze customers' health information, thereby helping insurers make personalized value propositions By tracking and monitoring key health indicators, these devices can send that information

to an insurer, who can then provide better and more tailored services (Nicoletti, 2017)

In addition, insurance companies have leveraged the development of digital technology to reach out to potential customers on online portals and social networks through mobile devices with the goal of increasing proactive customer engagement

and increasing operational efficiency (Nicoletti, 2017) Moreover, Insurtech also

helps to improve the speed of responding to claims and resolving insurance benefits, such as Manulife Insurance's EasyClaims portal, Generali's GenClaims portal,

(4) Wealth Management

Fintech in investment management includes innovations aimed at providing advisory services, portfolio selection and management, and meta-analytical indicators of personal finance A revolutionary innovation to investing in the financial markets in the last few years is the social trading platform It is a form of investing in which followers can observe, discuss, and copy investment strategies or portfolios of

experienced investors in the same social network (Liu et al., 2014) Every investor

benefits from the collective wisdom of a large number of investors participating in the network Depending on the business model of the social trading platform, users may be charged spreads, bid fees, or a percentage of the investment amount

(Dorfleitner et al., 2017) Currently, social trading is widely used in the field of forex

investment with famous international platforms such as Zulutrade, eToro, OctaFX, InstaForex, FBS; in which, eToro has an investor consulting and support partner in Vietnam Investing.vn

Next, Robo-advice technology is a breakthrough innovation involving a portfolio management system that provides investment advice based on automated

algorithms and sometimes assists users in making investment decisions (ESA, 2015)

Investors need to declare their risk tolerance, preferred investment term as well as

2015) Robo-advice platform providers are typically funded by investors through two

fees: one is an initial fee corresponding to the total investment amount, the other is a

fee based on investment performance (Dorfleitner et al., 2017) According to

statistics from German research firm Statista, investment platforms with Robo-advice manage more than 980 billion US dollars in assets worldwide and are expected to increase in value by about 27% through 2023

Finally, personal finance management (PFM) technology refers to software applications that assist in building personal financial plans PFM allows customers to keep track of assets they have deposited with different financial institutions as well

as loans from different lenders in one interface These apps typically require users to

pay a one-time fee or annually (Dorfleitner et al., 2017) At the same time, these

applications also support the ability to analyze the financial ability of the user's budget and give useful advice with specific goals

Other new products that have been developed in the field of investment fund management include ETFs (Exchange TraFunds Guide, 2019) In the Vietnamese market, Fintech creates new investment services and products with diverse and suitable options for investors This factor helps to expand the base of investors and further strengthen confidence in the market

(5) Market support services

Market support services such as cloud computing technology, big data, digital identity verification, regtech are technology solutions that help network platforms, applications and software operate safely, stably, and efficiently, contributing to strengthening market infrastructure Cloud computing is a new computing solution that allows the use of an online network (called a "cloud") with storage processors

for increased scale and flexibility in computing power (FSB, 2017) This technology

not only frees companies from fixed data centers but also allows the analysis of very large data sets (Big Data) and the development of many other Fintech applications Big data is an umbrella term describing a huge amount of data generated by the increasing use of digital tools and information systems

Another solution is digital identity verification, which consists of a range of technologies used to confirm the identity of actors in major transactions or other

applications, thus helping to prevent fraud and ensure user security (FSB, 2017)

Finally, Regtech technology includes solutions to ensure financial institutions comply with regulatory and regulatory reporting requirements These solutions can be provided by independent companies with close links with supervisory authorities, or

as application improvements by supervisory authorities themselves (FSB, 2017)

1.4 Fintech development measurement

“Development” refers to the process of growing or changing and becoming more advanced of an object (Cambridge dictionary) Therefore, the development of financial technology can be comprehended as the progressive of Fintech day by day There are no fixed criteria for investigating “fintech development”, many researchers found different methods to measure it

1.4.1 The number of Fintech companies

Researches using the number of Fintech companies as a variable were mainly based on the consumer theory (Aaker and Keller, 1990) and disruptive innovation theory (Christensen, 1997) Consumer theory suggests that new services (such as those provided by FinTech firms) by meeting the same consumer demand can replace the old services (such as those provided by traditional banks) Based on disruptive innovation theory, new entrants who apply innovative technology to provide more accessible and cost-effective goods and services can create competition in the market

These theories are relevant to today's background, where new entrants are FinTech firms and established incumbents are traditional banks With the increasing number of Fintech companies over the world, new services provided by Fintech companies are capable of competing and replacing services conducted by traditional banking In other words, Fintech companies are growing and becoming more advanced to compete with the banks Hence, this indicator can be considered to measure Fintech development In terms of the effect of FinTech firms on bank profitability, Dinh Phan et al (2019) and Dinh Thi Thu Hong et al (2021) also used this index to represent the Fintech development variable

1.4.2 Total Funding in the Fintech industry

Another indicator that can measure the development of Fintech is the total

it is focused on investment and makes a profit from that investment process As the value of investment in the financial technology industry increases, it means that they have an abundant input source to develop and expand new projects, enhancing the profit Consequently, this would contribute to attracting more investors as they all realize the potential growth of Fintech

George Doran (1981) implies the measurements should first circumscribe what practicable parameters will “define” it with SMART (Specific, Measurable, Attainable, Realistic, and Timebound) indicators Although this criteria was not built

to measure the development of Fintech particularly, it can be applied to investigate any phenomenon due to its high applicability Therefore, if based on SMART criteria

to consider the indicators to measure Fintech development, the total funding in the Fintech industry responds to it

1.4.3 Public-interest in financial technology information

The orientation "Customer is the focus" is always the main motto of

commercial banks Because, customer satisfaction will help the bank strengthen its position and credibility, and at the same time have a basis to improve the quality of products and services Only when a bank meets the needs of customers in financial products can it create opportunities to engage with customers for a long time and build a competitive advantage with other competitors in the market One of the criteria to determine the needs of customers with a product is through the level of customer interest, the behavior of seeking information of customers to that product

Information-seeking behavior is the set of active actions of an individual or group involved in the process of identifying and evaluating information sources; developing information search strategies; evaluating and selecting information to

satisfy identified information needs (Bui Ha Phuong, 2019) In the inevitable trend

of digital transformation in many countries around the world, including Vietnam, information about financial technology is increasingly appearing on the mass media Thereby, the public can easily access this information to get a more objective view of financial technology products, realize the utility that financial technology brings; at the same time, the risks of these modern products are also taken into consideration

2 Profitability of commercial banks

2.1 Profitability of commercial banks

For commercial banks, maximizing profits is always a top priority Hence, there has been a number of research when selecting subjects as banks have paid attention to the indicator "Profitability" as a basis evaluation

A number of foreign studies have highlighted the importance of bank

profitability According to Bobáková (2003), bank profitability is not only a result of

its business but also a necessary factor for its success during the fiercely competitive period of the credit market

According to Nguyen Thi Thu Hien (2017), this financial indicator is one of

the most important when evaluating financial results of commercial banks, considered based on combining business results and available resources Profitability

is an important foundation to help banks innovate and diversify products, thereby

operating effectively Sharing the same view, Nguyen Thanh Phuong et al (2022) also

stated: "The profitability of commercial banks is one of the important indicators of measuring financial results of banks Profitability is a necessary condition to maintain the existence and development of commercial banks"

Because a bank's profitability is a set of indicators measured by specific formulas, there is no standard verbal concept However, despite differing interpretations of views related to "bank profitability", the judgments are consistent

on the following points: (i) The profitability of the bank is an important measurement indicator in evaluating the performance of the bank; (ii) It is the fundamental criterion offer banks appropriate orientations to optimize their business activities Consequently, banks would improve the quality of products and services and increase their competitiveness in the market

2.2 Measurement indicators

Almajali et al (2012) argued that there were different measures of financial

activity Because, to evaluate the performance of the bank's business performance, it

is necessary to consider a full range of aspects, not just fixed in a specific indicator

In particular, the characteristic indicators to measure profitability are widely applied

in studies including return on average total assets (ROA), return on average equity (ROE), marginal net interest income (NIM)

First of all is the indicator of return on total assets (ROA)

ROA is a financial metric used to measure the relationship between a bank’s net profit and total average assets over a given period ROA indicates how much after-tax profit each unit of assets used in business operations will generate This indicator assesses efficiency in revenue and cost management and reflects the bank's ability to

convert assets into net profit (Halil Emre, 2012)

ROA = (Net Profit/ Total Assets) × 100%

It is also widely used by market analysts as a key measure of performance, as

it measures the effectiveness of assets in generating income ROA is the primary ratio for evaluating a bank's profitability because ROA is not distorted by a high equity ratio whereas return on equity (ROE) downplays leverage risks, in other words, ROE

does not refer to liabilities (Tadesse Wubie Abatel and Enyew Alemaw Mesfin, 2019) This financial index was also selected as a dependent variable in the study by Ahlem Chhaidar et al (2021)

Next, the return on average equity (ROE)

ROE is a financial metric used to measure the relationship between a bank's net profit and average equity over a certain period of time ROE indicates how much after-tax profit is generated for each average unit of equity spent in operations This indicator demonstrates the profitability and efficiency of using a bank's capital to make a profit

ROE = (Net Profit / Total Average Equity) × 100%

K Bojāre (2017) and Phan Thi Hang Nga et al (2019) chose to use the

dependent variable ROE, because it represents the profitability of the bank in terms

of invested capital, so this index will be suitable for the bank's shareholders In addition, based on the formula, ROE is assessed to vary by a greater amplitude than

ROA and is therefore more sensitive to changes in explanatory variables (K Bojāre 2017)

In addition, NIM - net interest income margin is an indicator that also demonstrates the profitability of the bank

Marginal net interest income is a measure of profit for banks and financial institutions It is calculated based on the difference between the interest receipts and

the interest payable by the bank Nguyen Duc Trung et al (2021) also selected the net

interest income (NIM) ratio to represent the efficiency and stability of the bank NIM identifies a bank's ability to manage interest rate risk in affecting its profitability

(Chaudron, 2018) The bank's NIM is calculated by the formula:

In addition to being used as a dependent variable to assess the profitability of banks, this indicator is also used as an explanatory variable to complement factors

affecting ROA variables as in James Gatauwa's research (2020)

2.3 Factors affecting the bank profitability

2.3.1 Annual GDP growth rate (GDP)

When GDP increases, the economy will be assessed as a growth economy, people will tend to either increase the demand for loans to spend or increase the tendency to deposit money in banks This will enable the bank to generate more

profits and improve the quality of bank assets (Anbar and Alper, 2012) Therefore,

the relationship between GDP and profitability of banks is said to be positive and is

shown in the research of Phan Thi Hang Nga et al (2019), Ahlem Chhaidar et al (2021), Chi-Chuan Lee et al (2021) as well as the research of Nguyen Duc Trung et

al (2022) In a few other studies, however, changes in GDP did not have a significant

impact on bank profits This mainly comes from the stability of the SBV's monetary

policy, thereby limiting bank borrowing (Athanasoglou et al., 2006) In general, the

relationship between GDP and bank profitability can vary depending on different market conditions

2.3.2 Inflation rate (INF)

Inflation is one of the factors affecting bank profitability because normally, the inflation rate is expected to be the basis for the bank to adjust interest rates However, the results of this factor's relationship to bank profits have been inconsistent

research of Nguyen Duc Trung et al (2022), the inflation rate is directly proportional

to the bank's operating efficiency This is explained that during the study period, the inflation rate in Vietnam was controlled at a stable level and no negative impacts

occurred, resulting in reduced people's credit needs Meanwhile, a study by Ahlem Chhaidar et al (2021) on factors affecting the profitability of banks in Europe –

where inflation rates fluctuate – had a negative impact on bank performance As inflation rates rise, so do interest rates for banks in Europe However, because inflation rises more than bank revenues, the relationship is reversed

was found in the study by Nesrine and Younes (2012) on the determinants of bank

profitability in Tunisia, which showed that variables in market capitalization, credit risk and the ratio of bank concentration have a positive relationship to profitability

2.3.4 Total assets (SIZE)

Bank size is one of the most mentioned factors in bank profitability studies However, the relationship between bank size and bank profitability has produced

different results in studies Research by Ahlem Chhaidar et al (2021) demonstrated

that bank size results are directly proportional to bank profitability because scale banks are less exposed to risk in accessing and managing target markets As a result, the cost of capital of these banks decreased significantly, leading to higher

large-profits However, this relationship is not shown in the study of Phan Thi Hang Nga

et al (2019) and the study of Nguyen Duc Trung et al (2022) In most of the study

periods, the size of the bank had almost no effect on bank profitability

2.3.5 Ratio of capital to total assets (ETA)

Many researchers argue that the ratio of bank capital is an important factor determining the profitability of banks In fact, when the ratio of capital to total assets increases, it means that the bank's leverage is low because the cost of borrowing capital is not too expensive From there, banks can increase profitability thanks to the

large difference in deposit and lending rates This result is shown in research by Chuan Lee et al (2021), Nguyen Duc Trung et al (2022) showing that the ratio of

Chi-capital to total assets of banks has the same impact on profitability However, in an

earlier study in 2019 by Phan Thi Hang Nga and colleagues, this effect was the

opposite effect The explanation for the opposite effect is that the growth rate of profits has not kept pace with the growth of equity So, although the equity ratio has increased, the return on equity has not improved

2.3.6 Non-performing loans (NPL)

In Vietnam, according to the SBV's regulations, bad debts are defined as debts classified into substandard debts, doubtful debts, and debts capable of losing capital The bad debt ratio shows how many loans out of total outstanding loans are bad debts,

so this is a basic indicator of the bank's credit quality Most of the studies that choose this explanatory variable have the same result that the NPL ratio has a negative impact

on the profitability of banks, including research by Phan Thi Hang Nga et al (2019), Chi-Chuan Lee et al (2021), Ahlem Chhaidar et al (2021) and research by Nguyen Duc Trung et al (2022) The results also showed that credit risks measured by bad

loans negatively affected the bank's performance This result is explained by the negative impact of customer defaults on the balance sheet and income statement, which causes the profitability of the bank to decrease due to increased credit risk

2.3.7 Demand Deposit (CASA)

CASA - Current account saving account is one of the important criteria that commercial banks are interested in Because this is an inexpensive source of mobilized capital, on the contrary, it helps banks reduce input capital costs, thereby increasing profitability thanks to the difference between lending and deposit interest rates Therefore, this demand deposit independence variable will have a similar

impact on the profitability of the bank and is reflected in the research results of B

2.3.8 Cost-to-income ratio (CIR)

The CIR is often used to assess a bank's ability to manage expenses The smaller the ratio, the better because then the cost of generating income will be less,

in other words, the bank will make more profit, which means the bank's rate of return

will be higher Research by Athanasoglou (2008) also highlights the important role

of cost management capabilities in bank profitability According to the results of

Phan Thi Hang Nga et al (2019), with a significance of 1%, cost management

capacity has an adverse impact on ROE This showed that if commercial banks have good cost management, they will limit costs, contributing to increasing profitability

3 The effect of financial technology development on bank profitability

Economies in general and the financial services sector in particular are heavily affected by the "4.0 technology revolution" that has erupted in recent decades Therefore, developing technology products is essential for the financial services sector and banking is undoubtedly driving change by implementing IT-based solutions In the era of rapid technological development with that huge amount of data and information, the relationship between Fintech and the banking and finance industry is a relationship that has an impact on each other, whether positive or challenging

3.1 Positive impact

As a "new member" entering the financial market, Fintech companies promote the provision of services that traditional commercial banks have ineffectively

implemented or ignored (Do Thi Bich Hong, 2022) The effectiveness of Fintech in

banking and finance activities is shown through the following 5 positive effects:

Firstly, Fintech companies are the driving force for commercial banks to implement digital transformation faster Fintech companies are currently entering

the market with huge advantages in terms of high-tech applications This forces commercial banks to actively transform digitally to meet the increasingly diverse needs of customers, thereby attracting new customers and creating competitive

advantages for commercial banks compared to Fintech companies (Do Thi Bich Hong, 2022) Once commercial banks grasp the advantages in the digital