This study explores the effect of fintech-driven inclusive finance on the profitability of banks using an unbalanced panel dataset from 660 banks across 40 developing countries between 2011 and 2021. We start with a fixed-effect estimate and subsequently validate our main findings using two-stage least squares (2SLS-IV), two-step system generalized method of moments (GMM), and generalized least squares (GLS) methodologies. Our analysis centers on three key profitability metrics: ROA, ROE, and NIM. Our findings suggest that fintech-backed inclusive finance boosts ROA by 9.10%, ROE by 18.87%, and NIM by 7.98%, highlighting the growing importance of mobile, internet, and agent banking in these nations. We also note that large banks benefit more from inclusive finance than small ones. Additionally, conventional banks see a more marked improvement in profitability than Islamic and savings banks. The relationship between inclusive finance and bank profitability is stronger in countries with higher GDP growth and those actively advancing financial inclusion through fintech, compared to countries with slower GDP growth and less emphasis on financial inclusion. When examining the interaction effects, the COVID-19 pandemic has further emphasized the positive connection between fintech and bank profitability. This suggests that fintech-driven inclusive finance can play a role in enhancing bank profitability, even in challenging times like the COVID-19 period. The transition towards fintech, however, mandates substantial investments, enhanced financial literacy, and heightened customer security, presenting persistent challenges for governments, policymakers, regulators, and financial institutions.

This study examines the impact of fintech-driven financial inclusion on bank risk-taking behavior. We analyze unbalanced panel data from 660 banks across 40 developing countries between 2011 and 2021. Our findings derived from pooled OLS regression suggest that financial inclusion facilitated by fintech significantly reduces various types of bank risks: default risk decreases by 7.85%, leverage risk decreases by 9.23%, and portfolio risk decreases by 7.64%. These reductions are observed in the context of emerging mobile, internet, and agent banking services. The extent of these reductions varies depending on bank type, size, concentration, the institutional quality of the country, and different geographical regions. Our results remain consistent across multiple proxies and robustness tests, including panel-corrected standard errors (PCSE) estimation, two-stage least squares-instrumental variable (2SLS-IV) regression, two-step system generalized method of moments (GMM) estimation, and quantile regression (QR). However, the transformation toward fintech comes with significant challenges, such as large-scale investments, the need for financial literacy, and consumer protection—issues that policymakers, regulators, and financial institutions must address.