Fintech May Lower Bank Risk Across Borders

Fintech (financial technology) companies are often seen as more modern and more innovative alternatives to traditional banks, insurance companies, and other financial institutions.

But by creating new financial infrastructures, they also impact the overall structure of financial markets and banking activities. So they can either reduce or increase local and systemic risks, and it is not always clear what the final effect is.

A new study by researchers at the University of Greenwich (UK) and the National Bank (NBHC ) of Slovakia investigated this very question.

They found that fintech development reduces bank credit risk both domestically and internationally. But it also appeared that such a credit risk-mitigating effect of fintech is concentrated in bank-based financial systems, whereas it is absent in market-based structures.

They published their results in Research in International Business and Finance¹, under the title “FinTech development and bank credit risk: Spatial spillovers and the role of financial system structures”

Fintechs’ Effect On Risks

Fintech can have multiple impacts on risks for banks and the financial system at large.

On one hand, competitive pressure from fintech firms may incentivise banks to assume greater risk in order to preserve market share and profitability.

On the other hand, the bottom-fishing strategy of many fintech firms may attract relatively riskier customers away from banks.

Meanwhile, internal development and adoption of fintech by banks can enable them to benefit from improved screening technologies, enhanced operational efficiency, and better risk management.

So the aggregate effect can be complex, and until this study, there was little data about how the overall risk of a country’s banking sector is affected by fintechs.

So to answer this question, the researchers analyzed three main questions:

• Is fintech development positively or negatively related to credit risk of the banking industry in its entirety?
• Do cross-border spillovers across banking sectors affect the relationship between fintech development and bank credit risk?
• Does the relationship between fintech development and bank credit risk vary between bank-based (Germany, Japan) and market-based (the United States, the United Kingdom) financial systems?

The classification of a country as bank-based or “market-based” is based on a given country’s banking sector size, measured as the deposit money banks’ assets-to-GDP ratio.

For the capital market, size, activities, and efficiencies are measured as the stock market capitalisation-to-GDP ratio, the total value traded-to-GDP ratio, and the stock market turnover ratio

“In a bank-based financial system, banks play a leading role in mobilising savings, allocating capital, overseeing corporate investment decisions, and providing risk management tools. In contrast, market-based financial systems see other players, such as the securities markets, sharing prominence with banks in channelling savings, exerting corporate control, and facilitating risk management”

They also analyzed the distribution of the non-performing loan (NPL) ratio, which can differ greatly by country and region.

Source: Research in International Business and Finance

To answer these questions, they analyzed a global coverage encompassing 63 economies worldwide, accounting for 92.5% of the world GDP and 95% of global bank assets, from 2013 to 2021, with data sources from the World Bank.

Fintech development was assessed with data on fintech investment activities from PitchBook to capture the actual volume of investment flowing into the fintech industry.

Fintech & Risk

Moving Risk Away From Banks

The first discovery is that the credit risk of the banking sector is spatially correlated across jurisdictions, meaning that neighboring countries tend to share risk and contagion during crises.

Regarding the effects of fintech, fintech investment activities in a country not only reduce bank credit risk levels locally but also in neighboring countries.  This could indicate that under competitive pressure from fintech firms, banks may also be motivated to focus more on institutional and wealthy clients in pursuit of stronger performance.

It is also likely that such technologies can help minimize human error, enhance data processing and screening, and improve the efficiency of banks’ risk management practices.

However, the researchers found that fintech’s risk-reducing effect was concentrated in bank-based economies. In market-based economies, the direct, cross-border, and total effects were not statistically significant.

The researchers’ interpretation is that when credit activity is distributed across banks, securities markets, and non-bank lenders, it dilutes fintech’s effect on bank balance sheets. A key factor is that market-based economies already offer a wide range of alternative channels for raising capital for high-risk borrowers, so these borrowers are already unlikely to use banks in these countries.

In addition, market-based countries tend to have less concentrated and less regulated banking sectors. Market-based systems are also characterized by greater public information disclosure.

“The regulatory requirements imposed on banks, which are far stricter than those applied to FinTech firms, create significant regulatory arbitrage, allowing FinTech operations in bank-based systems to function with greater flexibility, compared to their counterparts in market-based systems”

Development Levels Matter

Within countries adopting bank-based financial systems, fintech’s risk-mitigating impact is stronger in financially underdeveloped markets.

This is likely because financially underdeveloped countries, compared to developed nations, face factors such as limited regulatory capacity, lower adherence to international standards, and weaker institutional frameworks.

“Less stringent financial regulation reduces compliance burdens on FinTech firms, facilitating their expansion and strengthening their ability to attract riskier customers away from the banking sector. ”

The spatial spillover in bank credit risk among countries with a bank-based financial system is constant, regardless of whether they are financially underdeveloped or developed.

Investors Takeaways

For investors, it is very interesting data to learn that bank risk declines with fintech adoption. But they also need to pay attention to the fact that this phenomenon is not actually happening at a significant scale in market-based economies like the UK and the USA, but only in bank-based economies.

Another interesting finding is that fintech development in one country was associated with lower bank credit risk in neighboring countries. This suggests that financial technology and its effect on systemic banking risk can spread through shared infrastructure, competitive imitation, multinational institutions, and regional lending networks.

These results should, however, not be overinterpreted: lower bank risk does not necessarily mean lower system-wide risk.

Fintech lenders may simply absorb borrowers that banks reject, moving credit risk outside the regulated banking perimeter. As the absorption of the riskier lender is considered by the study an important factor in why bank-based economies see such a strong reduction in bank risks, this is a likely interpretation.

This means that lower bank credit risk should not automatically be interpreted as lower system-wide risk. Some risk may instead migrate to fintech platforms and other non-bank lenders, where regulatory oversight and loss-absorbing capacity can differ substantially from those of traditional banks.

Investing In Risk Prediction

Fair Isaac Corporation

Figuring out the actual risk of default on a loan, of a stock crashing, or an economy slowing down are some of the most important calculations in the financial system.

Fair Isaac Corporation (FICO )  produces the FICO score, a three-digit number ranging from 300 to 850 that lenders use to evaluate creditworthiness. It has been the US industry standard measure of consumer credit risk for over 35 years.

Source: FICO

This makes the company an essential component of the financial system for credit scoring, lending decisions, predictive analytics, and risk management. It makes the infrastructure underlying technology-assisted credit decisions, but is not a direct beneficiary of every increase in fintech funding.

The company is also integrating AI in its decision-making, with more than 137 patents in AI, and a rich dataset unique in the industry for its length and depth.

“At FICO, AI is already driving meaningful results today, while creating significant opportunities that we are well positioned to capture ”

Investors should, however, be aware that the company’s dominant position in its market is under pressure. The company stock crashed by up to 29% in late syyskuu 2026, or its worst single-day drop since 1989.

The trigger for the crash was when the Federal Housing Finance Agency (FHFA) announced that government-sponsored enterprise giants Fannie Mae and Freddie Mac will merge their mortgage pricing matrices into a single, unified pricing grid. This new structure places FICO’s chief competitor, VantageScore 4.0, on exactly equal footing with FICO Classic for conforming mortgages, disrupting a 30-year-old monopoly.

This could be an overreaction, as the secondary mortgage-backed securities (MBS) market still heavily favors FICO scores for asset securitization.

Still, the change in regulatory landscape could pressure FICO’s margins, so investors will want to properly assess their own risks when considering putting money in the company’s stock.

Latest Fair Isaac Corporation (FICO) Stock News and Developments

Study Referenced

^{1. Kefei You, Barbara Koranteng, and Ján Klacso. FinTech development and bank credit risk: Spatial spillovers and the role of financial system structures. Research in International Business and Finance. marraskuu 2026. Article: 103626. Volume 91. 10.1016/j.ribaf.2026.103626}