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Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-ups

Author

Listed:
  • Doina Caragea

    (Kansas State University)

  • Theodor Cojoianu

    (University of Edinburgh Business School)

  • Mihai Dobri

    (Kansas State University)

  • Andreas Hoepner

    (University College Dublin)

  • Oana Peia

    (University College Dublin)

  • Davide Romelli

    (Trinity College Dublin)

Abstract

This paper provides new evidence on the effects of entry on incumbents’ incentives to innovate by examining the rise of FinTech innovations over the period 2000-2016. We employ machine learning algorithms to classify a large sample of patent applications into five types of FinTech innovations. We then show that greater competition from innovators outside the financial sector increases the probability that incumbent financial firms will innovate. Our identification strategy exploits the variation over time in the share of FinTech patent applications by non-financial start-ups relative to incumbent financial firms, as a proxy for competitive pressures from outside the financial industry. We also find that this increased competition results in a higher number of FinTech patent applications by financial incumbents relative to non-financial ones, especially when the FinTech innovations are more important, as proxied by the number of their future patent citations.

Suggested Citation

  • Doina Caragea & Theodor Cojoianu & Mihai Dobri & Andreas Hoepner & Oana Peia & Davide Romelli, 2024. "Competition and Innovation in the Financial Sector: Evidence from the Rise of FinTech Start-ups," Journal of Financial Services Research, Springer;Western Finance Association, vol. 65(1), pages 103-140, February.
    • Handle: RePEc:kap:jfsres:v:65:y:2024:i:1:d:10.1007_s10693-023-00413-7
    DOI: 10.1007/s10693-023-00413-7
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    More about this item

    Keywords

    FinTech; Patents; Machine learning; Financial incumbents; Innovation;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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