Fintech proves critical for risk reduction in non-state banks

The results indicate that higher fintech development is linked to lower credit risk. According to the findings, fintech adoption reduces the non-performing loan ratio by an average of 0.9 percentage points across the banks studied. This is a significant shift in credit quality, especially against the backdrop of a decade marked by slowing growth, tighter regulations and shifting consumption patterns.

Commercial banks are seeing clear benefits from financial technology (fintech) adoption as new research reveals that digital tools are becoming a key force in lowering credit risk and strengthening long-term financial stability. The findings suggest that technology is changing the basic structure of credit risk governance in the Chinese banking sector by improving cost efficiency, asset management and overall resilience.

The research, titled “Fintech Adoption and Credit Risk Mitigation: Evidence from Chinese Commercial Banks” and published in Sustainability, examines a decade of data from 135 Chinese commercial banks between 2013 and 2023. 

A decade of rising fintech adoption

The study points out the growing uncertainty in global financial markets and the renewed demand for stronger credit risk management. The authors explain that past financial crises and recent shocks have shown how quickly credit risk can spread across banking systems. In this context, the surge in digital finance is not simply a trend but a response to rising operational challenges.

Chinese banks have adopted fintech at a rapid pace, covering risk assessment, payment services, digital infrastructure, customer management and automated operations. To capture these changes, the authors created a new fintech index that measures the depth of digital development across banks. Instead of relying on survey data or broad indicators, they used the content of banks’ annual reports to calculate the scale of fintech investment, services and strategic direction. This index captures the real level of technological change taking place inside the institutions.

The study uses this index to assess the relationship between fintech development and credit risk. Risk is measured through banks’ non-performing loan ratios, which reflect the share of loans that borrowers fail to repay.

Strong evidence that fintech reduces credit risk

The results indicate that higher fintech development is linked to lower credit risk. According to the findings, fintech adoption reduces the non-performing loan ratio by an average of 0.9 percentage points across the banks studied. This is a significant shift in credit quality, especially against the backdrop of a decade marked by slowing growth, tighter regulations and shifting consumption patterns.

The authors also found that the impact of fintech is not uniform across all banks. The reduction in credit risk is more pronounced among non-state-owned banks. These institutions often face tougher competition, smaller customer pools and limited resources. Fintech gives them new tools to screen borrowers, track risk and manage operations. This helps them reduce default risks more effectively than before.

On the other hand, state-owned banks appear to see a smaller benefit because they already have strong internal systems, established risk controls and larger capital buffers. For them, fintech acts more as an improvement tool rather than a transformational one.

Technology improves both cost efficiency and asset efficiency

The authors focus on two major channels: cost efficiency and asset efficiency. Cost efficiency improves because digital systems automate routine tasks. Processes that once required manual work, such as document review or credit approval, can now be completed in real time. Automation cuts labor costs, reduces processing time and improves the consistency of risk evaluation. Banks can reallocate resources to more strategic tasks or maintain services at a lower cost.

Asset efficiency improves because fintech tools enhance the way banks allocate and manage their assets. With better data and forecasting tools, banks can match funds more closely to demand. Digital systems improve liquidity management, reduce idle balances and help banks prepare for stress scenarios. Improved asset turnover directly strengthens resilience, allowing banks to absorb shocks with fewer losses.

The study finds that these two efficiency gains act as important mediators. In other words, fintech does not reduce credit risk on its own but does so through improved financial sustainability. Better efficiency leads to better risk outcomes.

Real-time monitoring improves early warning

Fintech adoption also improves early detection of potential risk events. Digital tools allow banks to monitor borrower behavior in real time. Patterns such as unusual spending, unexpected transfers or signs of fraud can be detected more quickly. Automated alerts allow banks to take action before risks escalate.

The study explains that traditional lending relies heavily on documents, collateral and limited financial statements. These sources are often incomplete or outdated. Fintech tools incorporate new forms of data, including transaction history, behavior signals and business activity patterns. This reduces information gaps and supports a more complete view of borrower quality.

Risk reduction is stronger in less developed regions

The study shows that the positive effect of fintech is stronger in regions where the service sector is less developed. These areas tend to have weaker information infrastructure, limited access to financial services and more traditional lending models.

In these environments, fintech offers substantial improvements because even small advances in data collection or risk assessment can deliver strong gains. By contrast, in regions where the service industry is already mature and data infrastructure is richer, the marginal improvement from fintech adoption is smaller.

This finding carries major implications for policymakers, as it suggests that fintech can help reduce regional financial inequality by offering more effective risk tools in lagging areas.

Green development creates stronger risk controls

The authors also introduce a unique external factor: regional green development. They use the level of environmental progress and carbon intensity reductions as a measure of broader sustainability.

The results show that fintech’s ability to reduce credit risk is significantly stronger in regions with higher levels of green development. Regions with stronger environmental rules, better disclosure requirements and more mature green finance systems create better data environments for risk management. Borrowers in these regions tend to provide better environmental and compliance information, which makes risk evaluation more reliable.

This suggests a strong link between fintech effectiveness and environmental progress. The study argues that green development plays an important moderating role in shaping how well banks can leverage digital tools. The combination of fintech and green finance enhances risk governance more than either factor alone.

Banks in emerging markets stand to gain the most

The study places its findings in a global context. It notes that in advanced economies, financial infrastructure is already mature, and the basic tools for risk management are widely available. In these settings, fintech may improve efficiency but is less likely to drive dramatic changes.

In emerging markets, the effect is different. Fintech adoption often fills gaps in financial access, builds new digital ecosystems and supports borrowers that were previously hard to evaluate. China’s experience shows that with proper regulation and policy guidance, fintech can deliver stronger risk reduction and support long-term economic resilience.

Policy recommendations for a changing financial landscape

The authors outline several policy directions based on their findings. They recommend that banks align fintech adoption with sustainability goals, including green lending and ESG-related risk assessment. They urge regulators to design policies that encourage the use of environmental information in credit evaluations. They also suggest that small and medium-sized banks receive targeted support, including access to regulatory sandboxes, to help them adopt intelligent risk tools.

They also call for stronger global governance of fintech. While technology reduces credit risk, it also introduces new vulnerabilities, including algorithmic bias, data security risks and cyber threats. Regulators should focus on transparency, stronger data protection and real-time monitoring to ensure safe digital transformation.