Can Digitizing Services Through Utilizing Fintech Improve Competitiveness and Performance of The Banking Sector? Empirical Evidence from Palestine.

Abstract

This study aims to investigate the effect of digitization of bank services on competitiveness and bank profitability. As the Palestinian banking sector operates within the region's unique socio-economic and geopolitical context, banks stand at the crossroads between traditional banking and technological innovation. Evidence suggests that FinTech has already exerted a financial influence on the performance of conventional banks. This research investigates whether digitizing banks' products and services improves banks' competitiveness and performance through sufficient empirical data to support these propositions, aiming to encourage bank managers to make more significant efforts toward applying new technologies and financial innovation. This study investigates the effect of digitization of products and services on competitiveness using panel data over twelve years (2011–2022), implementing the Herfindahl index (HHI) to measure competitiveness. Overall, the results indicate and answer the research question: can digitization of banks' products and services improve competition? The results of the study conclude that the competition-profitability and digitization-profitability relations are not significant yet positive in the Palestinian banks; however, bank size has a significant positive effect on profitability, and digitization has a significant positive impact on banks' competitiveness. The study suggests that bank managers should be encouraged to adopt financial innovation to achieve more competitiveness and efficiency, and regulators should encourage healthy competition among banks to mitigate competition's negative impact on banks' financial performance. In addition, regulators should motivate small banks to merge and benefit from economies of scale for higher profitability.