Effect of Fintech Integration on Financial Performance of Commercial Banks in Kenya

Abstract

The rapid evolution of financial technology has profoundly transformed the banking industry, particularly in emerging markets such as Kenya. As banks increasingly adopt fintech solutions to enhance their service delivery and operational efficiency, understanding the impact of these technologies on financial performance becomes crucial. This study was motivated by the need to assess how fintech integration influences the profitability of commercial banks in Kenya, a country recognized for its pioneering role in mobile banking and other fintech innovations. The study aimed to determine the effect of fintech integration—measured through the volume of mobile banking, internet banking, and ATM transactions—on the financial performance of commercial banks, specifically focusing on ROA. The research was anchored on the diffusion of technology theory, which explains how new technologies are adopted and spread across industries. This was supported by financial inclusion theory, which highlights the role of fintech in expanding access to financial services, and the digital divide theory, which addresses the disparities in access to digital technologies. A descriptive research design was employed, utilizing secondary data from the annual financial reports of 39 commercial banks in Kenya over the period from 2019 to 2023. The data was analyzed using STATA version 18, and the analysis included descriptive statistics, correlation analysis, and panel regression to test the relationship between the variables. The findings revealed that fintech integration significantly impacts the financial performance of commercial banks in Kenya. Specifically, mobile banking (Coef. = 0.044, p = 0.008) and ATM transactions (Coef. = 0.114, p = 0.001) were found to have a positive and statistically significant effect on ROA, indicating that increased adoption of these fintech channels enhances profitability. Internet banking, while positively correlated with ROA, did not show a statistically significant effect in the regression analysis (Coef. = 0.006, p = 0.232). Among the control variables, asset quality had a significant negative impact on ROA (Coef. = -0.165, p = 0.008), highlighting the importance of managing non-performing loans to sustain profitability. Firm size also showed a positive and significant effect on ROA (Coef. = 0.093, p = 0.001), suggesting that larger banks are better positioned to leverage fintech for financial gains. The model had an R-squared value of 0.4217, indicating that approximately 42.17% of the variability in financial performance was explained by the independent variables. In conclusion, the study underscores the critical role of fintech integration, particularly through mobile banking and ATM services, in enhancing the financial performance of commercial banks in Kenya. The findings suggest that banks should continue to invest in these technologies to maintain competitive advantage and profitability. Policymakers are encouraged to create a supportive regulatory environment that fosters fintech innovation while ensuring consumer protection. Future research should consider expanding the geographical scope to include comparative studies across different regions and incorporating qualitative data to explore the broader implications of fintech integration.