3. Theoretical Analysis and Research Hypothesis
3.1. Theoretical Analysis
Over the past two decades, big techs like FANNG (Facebook, Apple, Microsoft, Google,
Alphabet and Amazon) and BATX (Baidu, Albaba, Tencent, and Millet) have grown tremen-
dously. Their success depends on the direct interaction between a large number of users,
which in turn generates massive amounts of user behavior data, such as social networks
generating massive users and real-time complete log data about user behavior. Through new
technical means (such as distributed machine learning), these big data are deeply mined
and analyzed to achieve customer expansion, risk evaluation and credit decision-making.
Based on the dual advantages of less supervision and technology, some large technol-
ogy companies are involved in financial services, including third-party payments, online
loans, and intelligent investment advisor. The entry of technology giants has brought rapid
changes and profound impacts to the traditional financial system (
Xie and Zou 2012
). On
the one hand, technology companies have rapidly scaled up by reducing information and
transaction costs and developing low-cost businesses, providing basic financial services
to low-income groups and small and medium enterprises (SMEs), alleviating credit ra-
tioning and promoting financial inclusion (
Philippon 2019
). On the other hand, technology
companies enter the financial field, triggering the competitive integration of Fintech and
traditional finance, bringing new factors of risk-benefit balance (
BIS 2019
). According to the
‘Franchise Value Theory’ proposed by
Marcus
(
1984
), competition in the deposit market
weakens the ‘Franchise value’ of banks, and enhances banks’ incentives for excessive risks
and risk-taking behavior.
In fact, technology companies are both banks’ partner and competitor. For instance,
Bank of China has strategic cooperation with Tencent, Agricultural Bank of China has
strategic cooperation with Baidu, Industrial and Commercial bank of China has strategic
cooperation with JingDong, China Construction Bank has strategic cooperation with Al-
ibaba. Many small and medium-sized banks have various cooperation with technology
companies. Tech giants do well in technology, financial institutions do well in finance.
At the same time, banks are paying more and more attention to independent research
and development of financial technology, instead of relying solely on the technology of
external technology companies. Independent research and development has high input
costs, long development cycles, and slow application of scenarios. Thus, two different in-
dependent research and development (R&D) models of Fintech have been formed. That is,
large banks are more inclined to build their own teams and conduct independent research
and development, while small and medium banks often cannot afford huge research and
development costs and have difficulties in independent innovation. Even if they cooperate
with technology enterprises, small and medium-sized banks are often in a weak position
and the technical cooperation is difficult. Finally, digital innovation may lead to the phe-
nomenon of ‘winner-take-all’ (
Schumpeter 1912
), which leads to further concentration of
bank market structure, more unstable operation of small and medium-sized banks and
greater competitive risks.
Based on the above theory, because large technology companies have technical and
regulatory advantages, they are the main leaders in the development of Fintech. Moreover,
big technology companies are impacting the traditional financial market with banks as
the main body from the asset side and risk control side. However, most of their income
comes from expenses paid by the household. Therefore, the model in this article aims to
Risks
2021
,
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, 99
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analyze the impact of Fintech on bank risks by discussing the family’s investment choices
(independent investment, traditional investment advisors or Robo-Advisors).
3.2. The Model
Drawing on Philippon’s research (
Philippon 2019
), we consider that there is a contin-
uum of mass 1 of households whose wealth
w
is distributed according to the (cumulative)
distribution
G
(
w
). Households are risk neutral (or, equivalently, returns are risk adjusted)
and have access to an investment technology with gross return
r
. The reservation utility
(the return of the household) of a household is thus
rw
. Households also have the option to
hire an asset manager in order to earn higher returns.
Here, we discuss assets manager in different financial intermediaries.
i
represents
the type of financial intermediaries. There are two types of financial intermediaries, one
is the large intermediary (b) and the other is the small intermediary(s). We found that
intermediaries of different sizes have different returns and costs, we assume that
M
asset
managers in the large intermediary have access to an investment technology with return
R
b
and ones in a middle or small intermediary have access to an investment technology with
return
R
s
(
R
b
>
R
s
>
r
). They in big and middle or small intermediaries need to respectively
pay the fixed cost
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