Analyzing the Banking Sector- Fintech Companies Nexus in Jordan
BASSAM ABU KARAKI1, OMAR Al-KASASBEH2
1Deptartment of Economics,
Al-Hussein Bin Talal University,
JORDAN
2Faculty of Business,
Amman Arab University,
JORDAN
Abstract: - This paper presents an analytical framework that describes the nexus between the banking sector
and financial technology (fintech) companies. It explains existing trends, and by collaborating with banks, the
importance of fintech companies grows daily. It examines the choices that established banks will have to
explore to mitigate the profitability threat. At the onset of the fintech era, many analysts discussed its disruptive
potential for the financial sector. However, we expect more future debates regarding collaboration between
fintech businesses and banks. The other point that is significantly essential to debate about is financial
inclusion. We pick Jordan as a case study since the local fintech sector is expanding, and it acts as a gateway
for the broader MENA region. First and foremost, we attempt to assess the scientific literature that examines
the major components of the fintech sector. The second section of the paper discusses the evolution of the
sector and the critical aspects of the methodology employed, including statistical analyses. Our findings
indicated that it is preferable to rely on qualitative assessment when valuing the relationship between banking
and fintech because statistical analysis might produce inconsistent and incorrect conclusions. In Jordan, we
discovered that both sectors interact with one another. The study offers scientific recommendations for the
banking sector and fintech companies.
Key-Words: - Banking Sector, Central Bank, Fintech Companies, Financial inclusion, Jordan, Spearman.
Received: May 24, 2023. Revised: October 2, 2023. Accepted: November 5, 2023. Available online: December 8, 2023.
1 Introduction
Financial technology (fintech) companies offer
modern technology for application in the financial
sector, which has been an emergent phenomenon
since 2010. fintech encompasses novel ideas
conducive to the offerings and activities of financial
services, providing various solutions by deploying
commensurate technological tools addressed to
business needs, [1], [2], [3]. After the global
financial crisis of 2008, advancements in e-finance
and mobile technologies for financial institutions
arose, driving the development of fintech. As a rule,
venture capital and crowdfunding finance fintech
companies. Some professionals also claim that
fintech start-up companies can increase the
efficiency of the financial system, [4], [5]. There are
two primary causes behind the rise of fintech firms.
First, the global financial crisis of 2008 revealed to
customers the flaws in the old banking system that
precipitated the crisis. Second, the emergence of
new technology makes financial services more
mobile, faster, and less expensive, [6]. Banks’
business strategies and technical infrastructures are
built on this technology to increase efficiency; for
instance, the creation and operation of a physical
branch incur high expenses, including marketing and
manual processes, as well as overhead costs. In
terms of margin and profit, the bank also competes
with other banks. If banks fail to adapt to fintech
they may lose customers, particularly the future
customer group and new generations of digital
natives who are more competent and skilled in using
smart and emerging technologies. Therefore, bank
management must make tangible efforts to preserve
the viability of banks in the fintech era, [7].
Fintech helps banks reach as many customers as
possible to facilitate transactions while promoting
their values and ethics, [8]. The next step is to help
customers use bank applications that customers can
download to conduct online banking transactions in
real-time, especially in downstream fintech
applications such as financing segmentation. This
can enhance the number of online systems utilized
by clients and the market share of banks. The
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DOI: 10.37394/23207.2024.21.25
Bassam Abu Karaki, Omar Al-Kasasbeh
E-ISSN: 2224-2899
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immediate effect is the reduction of costs to
customers and speeding up the service process in the
submission of financing products to banks.
The background of this fintech research is based
on the need to identify solutions to simplify the
process of submitting financing to banks. Modern
fintech services are expected to offer vastly
improved and seamless service by deploying
advanced technologies, improving the service and
product quality (and thus profitability) of banks. The
financing process in many banks is still done
manually, so it takes about 3 to 4 weeks and up to a
longer time, depending on the condition of the
problem from the bank and the prospective
customer. For example, incomplete documentation
from customers can incur costly delays, or the bank
official who decides on financing may not be
available promptly. Although there are also banks
that have implemented the system, it has not been
comprehensive and has not been generalized as a
whole. Fintech is an issue of great importance not
only internationally but also in Jordan, where efforts
are being made to ensure the effective development
of innovative fintech. As fintech begins to play a
significant role in our everyday lives and economies,
it is crucial to research this sector to comprehend the
relationships between various sectors, particularly
the financial sector.
This article focuses on Jordan since there are
several viewpoints that the fintech sector in this
nation has the potential to become a fintech hub for
the MENA region, and the financial services sector
is a key aspect of the national economy, which is
heavily knowledge and service-based, in contrast to
most MENA states. The Central Bank and financial
sector regulators provide substantial assistance in
advancing financial innovations in Jordan. The
Ministry of Finance is also highly active in
contributing to the growth of the fintech sector.
Jordan’s government is also very supportive of
fintech’s expansion, whose growth has been
prioritized as one of the main national development
goals. Fintech businesses with rapid growth and
expansion have begun to boost competition in the
banking sector. The media has portrayed fintech as
revolutionary and disruptive, with digital weaponry
that revolutionizes traditional financial institutions
and eliminates obstacles, [9]. Each financial
institution must develop possibilities to use and
invest in fintech to remain competitive with fintech
firms, which have already had a substantial influence
on the financial sector. Jordan was ranked sixth
among Arab countries in the number of fintech
companies active in its jurisdiction in 2020, as
shown in Figure 1.
Fig. 1: Proportion of fintech companies in Arab
countries, 2020
Several initiatives have recently been undertaken
to help Jordan’s booming start-up and fintech
communities. For example, the Innovation Startups
and Small and Medium Enterprises Fund (ISSF) was
established in 2017 with a budget of USD 98 million
to expand and develop the entrepreneurial ecosystem
through programs and training provided by its
partners. The Central Bank of Jordan and Jordan
Loan Guarantee Organization own ISSF, a private
joint stock business.
Numerous economists have questioned whether
fintech would assist start-up firms and challenger
banks that “push” traditional banks out of the
financial sector, supporting a healthy competitive
process that promotes efficiency in a market with
entry barriers, or whether it will instead generate
chaos and financial instability: “fintech is
developing rapidly, but the impact of the banking
sector on it is still unclear, and it is suspected that it
could pose a threat to financial institutions”, [10]. As
a result, economists and scientists are striving to
discover if fintech firms may operate in tandem with
traditional banks and collaboration with them, or
whether banks can still negatively influence fintech
companies and reduce their performance. Since
fintech is a comparatively recent issue in the
financial world, very limited research has been
conducted on it.
The effect of the banking sector on fintech firms
in Jordan has not before been explored, hence the
novelty of this article is highly pertinent. In addition,
we focus on how banks can influence the elaboration
of fintech institutions. The drive of the study is to
determine whether there is a relationship between
performance indicators of the country’s banking
sector and the growth of fintech companies and
whether banks collaborate with fintech firms. In this
study, we want to examine several facets to observe
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how Jordan's FinTech companies and the banking
sector interact. The object of this research is the
FinTech firms and banking sector. To accomplish
the goal of this study, regression, and correlation
analysis were applied to investigate the nexus
between the banking sector and financial technology
companies in Jordan.
2 Literature Review
2.1 Previous Studies
The development of information technology is
regarded as a significant component in the transition
from traditional to digital platforms for service
delivery. Many organizations can now reach their
customers regardless of time or distance constraints.
Financial institutions are heavily impacted by this
growth of technological advancement and have
invested heavily in new financial technologies, [11].
Financial technologies encompass the delivery of
financial services via electronic platforms, such as
card banking, online banking, and mobile banking,
as well as other digital media-based services, [12].
Traditional brick-and-mortar financial services have
increasingly switched to mainly electronic service
provision, and we are currently in an era of cloud
banking and the increasing use of digital currencies,
[13].
It is considered that electronic-based platforms
make financial services more accessible to bank
consumers and aid in giving faster services to
bankers when compared to traditional banking
services, [14]. Many scholars believe that providing
quick and accessible services will improve bankers’
operating efficiency, service quality, and
profitability, [15]. Aside from the benefits to bankers
and banked communities, it is widely acknowledged
that employing fintech also improves the financial
inclusion of hitherto underserved populations, such
as unbanked rural populations, [16].
The study, [17], gathered information from the
major banks in the UK, Germany, France, and
Canada, and discovered that banks increasingly
engage with fintech, and they emphasized that “now
there are several banking solutions developed by
fintech businesses. However, the adoption of
financial technologies by customers has not been as
straightforward as many bankers anticipated. A lack
of prerequisite infrastructure (e.g., required
coverage, speed, and accessibility of Internet
connectivity) is a commonly reported obstacle facing
fintech (and e-commerce generally) in many
developing nations, [18]. Nevertheless, some
developing countries have been early adopters of
fintech, and have achieved demonstrable benefits,
notably China. The study, [19], investigated credit
risk concerns in regard to fintech in China’s banking
sector and concluded that fintech banks considerably
decreased credit risk compared to other types of
banks. The study, [20], researched Chinese banks
and found that the emergence of internet-only banks
affected the efficiency of traditional banks.
The study, [21], investigated how fintech might
enhance small and medium-sized firms' financial
inclusion. In addition to focusing on blockchain
technologies, the cited authors also addressed data
technology, cloud computing technologies, and
artificial intelligence technology. The study, [8],
examined the impact of financial inclusion on the
growth of businesses. The most important metric of
financial inclusion was credit access. The principal
findings led to the conclusion that manufacturing
business owners and banks should intensify their
limit of the distribution of credit access and financial
inclusion efforts to the optimal level.
However, the obstacles to adopting such
electronic finance technology are not restricted to
service provider-side issues such as banking services
per se and physical accessibility; rather, they also
involve and are affected by the target consumer’s
preferences and decisions, which are based on their
attitudes and purposes of the potential utilization of
the technologies in question, [22]. Related to
consumer preferences, diverse research on fintech
companies emphasizes financial inclusion as a
crucial aspect of financial innovations. The study,
[23], analyzed customer willingness to utilize fintech
services based on their advantages and risks and
discovered that perceived benefits had a greater
effect on customer choices than perceived hazards.
The study, [24], investigated the factors that affect
bank customers’ adoption of Islamic fintech services
using polling of a convenience sample. They found
that acceptance of Islamic fintech services is driven
by perceived usefulness, ease of use, and customer
innovativeness.
The study, [25], developed an incorporated
financial big data and asset allocation optimization
model and fintech into a real-world bank application.
The study and implementation process demonstrated
that financial big data and fintech may be easily
coupled to enhance financial services and provide
better outcomes. Financial inclusion issues through
fintech innovations were investigated by, [26], [27].
Numerous studies investigated risks and fintech-
related issues, reporting substantial contact between
fintech businesses and the banking sector, [28], [29],
[30], [31], [32], [33]. In light of the preceding, it is
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essential to determine if the fintech sector has a
substantial impact on the financial sector.
2.2 Hypotheses
H01: There is no relationship between the banking
sector and fintech companies in Jordan.
H02: FinTech companies negatively affected bank
return on equity (ROE) in Jordan.
H03: FinTech companies negatively affected bank
return on assets (ROA) in Jordan.
H04: FinTech companies negatively affected bank
Net Income (PRO) in Jordan.
H05: FinTech companies negatively affected the
bank efficiency ratio (EFE) in Jordan.
3 Methodology
To achieve the main objective of this study which is
to investigate whether There is a relationship
between the banking sector and fintech companies in
Jordan, the most common technique used by
academics is the correlation-regression analysis
which is one of the best models for interpreting this
effect and most used in previous studies, [34], [35],
[36]. If this relationship is found a further regression
will made to determine this effect on banks'
performance by using multidimensional linear
regression analysis.
3.1 Model and Data
To examine the influence of various changes on the
banking sector, researchers frequently employ
correlation, [36], [37], [38], [39], [40], and
regression analysis, [41]. In addition, correlation
regression analysis is the technique most commonly
employed by academics for studying the influence of
fintech on banks, [34], [35]. Using correlation and
multidimensional linear regression analysis, the
influence of the fintech sector on the banking sector
in Jordan was evaluated to achieve the aim of this
article.
If this relationship is found a further regression
will made to determine this effect on banks'
performance by using multidimensional linear
regression analysis.
Using the annual reports released by the Central
Bank, annual statistics on the Jordanian banking
sector were selected for the study. The dependent
variable was the number of fintech companies, and
the explanatory variables were the return on equity
(ROE), return on assets (ROA), profit (PRO), and
efficiency ratio (EFE); these were chosen for the
correlation-regression investigation.
4 Results and Discussion
Descriptive statistics for the variables are presented
in Table 1. Included statistics such as mean, standard
deviation (SD), 25th and 75th percentiles as well as
skewness and kurtosis. Table 1 describes our dataset
is provided. To get insight into the data, specific
basic statistics are provided. This data includes
summaries for the full sample as well as breakdowns
by bank at the 25% and 75% levels. We took data
from 20 different banks and found the following
about their overall performance: the average PRO is
4.86%, while the ROE is 0.7%. Likewise, ROA is at
7.27%. In addition, the value of EFE exceeds
10.40%. As anticipated, these performance figures
are greater in the 75th percentile compared to the
25th percentile (among the factors under control).
Table 1. Descriptive statistics
Mean
SD
25%
75%
Kurtosis
fintech
6.672
9.850
1.000
9.000
5.791
PRO
4.863
3.108
3.501
6.114
12.324
ROE
0.736
4.238
0.454
1.769
40.003
ROA
7.267
15.718
2.695
12.617
18.270
EFE
10.397
2.292
8.951
11.113
6.123
A multiple regression analysis was conducted to
determine the association between the number of
fintech firms in Jordan and the country’s banking
sector. The relationships between the dependent
variable number of fintech firms (fintech) and the
explanatory variables (PRO, ROE, ROA, and EFE)
were studied. We first performed Spearman’s rank
correlation due to the shortness of the time series.
Table 2 demonstrates that the correlation between
variables is typically rather strong, with the strongest
association being the strong positive correlation
between the numbers of fintech businesses and the
banking sector ROA. The impact of the banking
sector on FinTech enterprises has garnered
significant attention from scholars and entrepreneurs
in recent years. Scholars from several nations are
engaged in study endeavors aimed at discerning the
prospective trajectories of these two analogous
service providers. According to a study conducted
by, [42], the influence of the FinTech sector on the
banking sector in Indonesia was examined. The
findings of the study suggest that FinTech has a
detrimental effect on banking operations and may
potentially diminish the prominence of traditional
banks in the future. However, it is not our intention
to support such conclusions in the context of Jordan,
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as our observations have revealed a contrasting
scenario within a limited timeframe.
Table 2. Correlation matrix
Fintech
PRO
ROE
EFE
ROA
Fintech
1.0000
0.7972
-0.8186
0.2428
0.9014
PRO
0.7972
1.0000
-0.7957
0.4221
0.8002
ROE
-0.8186
-0.7957
1.0000
-0.3571
-0.8732
EFE
0.2428
0.4221
-0.3571
1.0000
0.9242
ROA
0.9014
0.8002
-0.8732
0.9242
1.0000
Initially, Spearman's rank correlation was
employed due to the short time series. Table 3 shows
the Spearman’s rank correlation p-value for the four
explanatory variables.
Table 3. Spearman’s rank correlation p-value for
exploratory variables
p-value
PRO
ROE
EFE
ROA
Fintech
0.0480
0.0357
0.7413
0.0142
For each variable, we examined the following
hypothesis: The H0-correlation coefficient is equal
to zero. According to the test findings, H0 is only
rejected at a significance level of α = 0.05 when EFE
is present; in all other circumstances, H0 is
supported. At this point in our investigation, we
obtained multiple linear regression.
Regression models were constructed for each
variable, as shown in Table 4. Given the importance
of the ratios, it is essential to focus on the indicators
that define the parameters of the regression model.
Table 4. Regression analysis results
Variable
Coefficients
Standard
Error
Durbin-
Waston
coefficient
p-
value
Intercept
8.080
6.916
4.209
0.049
PRO
2.869
6.802
2. 507
0.036
ROE
5.832
3.795
2.624
0.141
EFE
-0.728
1.601
2.157
0.256
ROA
2.814
0.702
2.441
0.
042
From Formula (1) we can see that variable EFE
had an adverse influence on the expansion of the
FinTech sector. According to the Durbin-Watson
test, there is no major autocorrelation issue, using
the results of correlation and regression analysis.
D(fintech) = 8.080 + 2.869*PRO + 5.832*ROE -
0.728*EFE + 2.814*ROA (1)
Based on the regression analysis, it can be
inferred that the profitability of banks has a positive
impact on FinTech companies. Specifically, the
profitability of the banking sector appears to attract a
greater number of FinTech companies to enter the
financial sector and offer services akin to those
provided by traditional banks.
For future study, we would like to dig further to
determine the extent to which regulatory institutions
influence fintech development. We would propose
repeating this study with a bigger sample of
observations after some time to obtain more reliable
regression analysis findings.
5 Findings
Reviewing the scientific literature illustrated that
there is no consensus on how fintech impacts the
profitability of the banking sector. On the one hand,
fintech may have a negative impact on the
profitability of banks due to easier adaptability to
new technology and the development of new
operating models in the financial sector. Other
studies, however, imply that fintech does not have a
substantial influence on the profitability of the
banking sector, since banks can adapt to new
technology due to the very evident prospects for
opportunities between the two industries. Fintech
may serve as an accelerator for the financial sector,
enhancing not only the quality of all financial
services but also financial inclusion and customer
satisfaction among those who use such services.
Fintech’s greatest benefit is financial inclusion,
which is linked to economic growth. Consequently,
fintech facilitates the maximization of welfare.
According to numerous authors, fintech companies
have maintained stronger positions in negotiations
with banks, and everything indicates that banks will
not be able to maintain their market positions in
competition with fintech companies because they
will be incapable of providing services as efficiently
as fintech companies do. After analyzing the
instance of Jordan, it can be concluded that fintech
firms encourage the banking sector to become more
efficient.
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6 Recommendation and Further
Study
Furthermore, financial service providers must cater
to the needs of the current and future generations of
customers, who require quality and speed. Thus, to
survive in the market, all financial market
intermediaries must not compete with one another
but instead strive for the maximum level of client
satisfaction with their services.
Lastly, a quantitative examination of the
influence of fintech on the Jordanian banking sector
revealed that fintech businesses in Jordan do not
pose a serious competitive threat, as there is no
negative relationship. Every innovation introduces
new risks to the financial system, thus it would be
beneficial for future study not just to examine
longer-run horizons, but also to assess all potential
dangers that may occur in the context of the fintech
sector’s exponential increase.
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.25
Bassam Abu Karaki, Omar Al-Kasasbeh
E-ISSN: 2224-2899
286
Volume 21, 2024
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.25
Bassam Abu Karaki, Omar Al-Kasasbeh
E-ISSN: 2224-2899
287
Volume 21, 2024