DO FINANCIAL INNOVATIONS MATTER? EXPLORING STRATEGY-PERFORMANCE LINKAGES IN INDONESIAN BANKING UNDER COMPETITIVE PRESSURE

The aim of this research is to examine the mediating role of financial innovation and the moderating role of market competitiveness in the relationship between business strategy and firm performance after the Indonesian Financial Services Authority (OJK) introduced regulations on digital banking services, and to further analyze the impact of the COVID-19 pandemic. The paper consists of 294 observations of banking firms for the period 2018-2023. The results were examined through Hayes' PROCESS Macro Model 15. These findings relate to Resource-Based View (RBV) and Industrial Organization (IO) theories. Across the timeline, major regulatory changes, financial technology development, and customer preferences occurred for banks. The effectiveness of strategy implementation is one major determinant contributing to the variation in firm performance. Banks are therefore recommended to align their business strategies with the level of market competitiveness to enhance performance. This study has several limitations: (1) there are data gaps, especially in the NSFR ratio, which was imputed by KNN; (2) there is scant empirical literature that substantiates hypotheses 7a and 7b; and (3) there are limitations in time and resources for manual data collection of financial innovation data. However, the research was conducted, and the results were positive. The novelty of this study lies in the development of a more holistic moderated-mediation research model using Hayes' PROCESS Macro. Another novelty is the attempt to reconstruct the measurement of business strategy variables to complement existing models.