Does Financial Innovation Drive Firm Value? The Mediating Role of Financial Performance in Indonesian Banking

INKUBIS: Jurnal Ekonomi dan Bisnis Volume 8, Issue 1, 278-296 e_ISSN: 2775-3913 https://inkubis.polteksci.ac.id/index.php/ink/index DOI: doi.org/10.59261/inkubis.v8i1.160 Does Financial Innovation Drive Firm Value? The Mediating Role of Financial Performance in Indonesian Banking Mursidah Nurfadillah1* Fenty Fauziah2 Universitas Muhammadiyah Kalimantan Timur, Indonesia Universitas Muhammadiyah Kalimantan Timur, Indonesia Nidya Rudiani3 Nur Hanisfatin Rushami Zien4 Universitas Muhammadiyah Kalimantan Timur, Indonesia Universiti Utara Malaysia, Malaysia *Corresponding author: Mursidah Nurfadillah, Universitas Muhammadiyah Kalimantan Timur, Indonesia. 🖂 Article Info: Article history: Received: March 03, 2026 Revised: March 18, 2026 Accepted: March 20, 2026 Abstract Background: Financial innovation in Indonesian banking has evolved alongside changes in the banking system. While the adoption of Internet Banking (IB) services has been fast, bank value indicators, like Price-toBook Value (PBV), have shown significant fluctuations, raising questions about whether financial innovation truly adds value. Objective: This study examines the impact of financial innovation on firm value and financial performance in Indonesian banks, and whether financial performance mediates this relationship. It views financial Keywords: innovation not only through its financial outcomes but also as part of the banking; financial innovation; firm broader technology-driven digital transformation in banking towards value; financial performance; PLSsustainability and resilience. SEM Methods: The research was conducted by analyzing Secondary data from 13 banks listed on the Indonesia Stock Exchange (BEI) annual financial report data with the period of 2019–2024 which were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) technique. Results: Financial innovation directly affects firm value, but does not directly affect financial performance that can be used to significantly mediate the relationship between financial innovation and firm value. What this means is that, rather than an immediate profitability boost, the additional value to the firm from financial innovation is likely due to a long-term perspective of growth potential and viability. Conclusion: Market participants value innovation not just for short-term financial gains, but for its role in building resilience and long-term business models. While some innovations may offer short-term benefits, they remain a key strategy for enhancing firm value and building trust in the market over time. To cite this article: Mursidah, N., Fauziah, F., Rudiani, N., & Zien, N. H. R. (2026). Does Financial Innovation Drive Firm Value? The Mediating Role of Financial Performance in Indonesian Banking. INKUBIS: Jurnal Ekonomi dan Bisnis, 8(1), 278–296 https://doi.org/10.59261/inkubis.v8i1.160 INTRODUCTION The digital economy, especially financial transactions, continues to grow rapidly as digital transformation driving national integration grows ever faster. As information, the volume of digital banking transactions in Q2/2024 recorded a growth of 32.03% (yoy) to 5.26 billion from 3.98 billion, the transaction value increasing by 33.26% (yoy) to IDR 10.872 trillion. Electronic money transactions are still a growing segment with a transaction value of IDR 232 trillion with a volume of 3.87 billion transactions, or a 36.22% (yoy) increase compared to the previous quarter. QRIS transactions also recorded a high growth of 226.54% (yoy), supported by 50.5 million users INKUBIS: Jurnal Ekonomi dan Bisnis | 278 Mursidah Nurfadillah, Fenty Fauziah, Nidya Rudiani, Nur Hanisfatin Rushami Zien Does Financial Innovation... and 32.71 million merchants (Bank Indonesia 2024). Such rapid adoption signals how critical financial innovation has become to competitive, operational, and future growth resilience in the banking sector. With investors paying more attention to whether banks can adapt to digital disruption, identifying the determinants of firm value (FVI) has never been more important. Though knowing this rise is a sign of growing readiness for digital, it begs the question, do these innovations actually create firm value, or do they only influence market expectations of future value? More broadly, this dynamic environment presents a fundamental question in corporate finance: Does the quantifiable growth of digital financial services really correlates to higher firm value as well as higher financial performance among Indonesia bank, and through what mechanism? Firm value is a key variable in corporate finance literature, potentially indicating what the market perceives about the potential and sustainability of an entity. In banking, firm value is usually proxied by Price-to-Book Value (PBV) as an indicator of performance, information of stability and expected return for investors. On the other hand, PBV in Indonesian banking sector are following a volatile trend in the last few years, which not only be affected by macroeconomic aspects and monetary policy but also by market expectation of the bank's innovative capability and future readiness Sartika & Choiriyah (2019), It is thus this empirical puzzle the disconnect between innovation activity and PBV performance which motivates this study examined using Indonesian banking data (2019–2023). Moreover, with the speedy improvement of digital technologies, the banking sector is experiencing considerable modifications with the emergence of monetary innovation and banking (Judijanto et al., 2023). The pace of innovations has redefined through businesses models that substantially impacted towards the changing nature of economic environment in financial institutions (Al Aidhi et al., 2023). As a strategic tool for retaining competitiveness in the financial services sub-sector, innovation has increasingly been embraced by banks to boost their revenues and performance, strengthen market efficiency Ashiru et al.(2023), and contribute to economic development (Jonah et al., 2021). This innovation in banking includes the creation of any novel financial products, services, and processes that use innovations in financial instruments and payment technology (Lerner et al., 2021). In the light of this increasing digital transformation, electronic banking as the financial innovation tool is been widely embraced by banks. Such innovations are meant to benefit consumers in terms of convenience as well as provide operational efficiencies and financial benefits to the company. Previous research discovered that electronic banking could lead to better excellence of bank operation Sutarti et al. (2019) and positively influence value of banking organization (Nuraini et al., 2022). Customers are able to consume financial services using internet banking, mobile phones, computer, point-of-sale (POS) terminals, and ATMs (Anifowose & Ekperiware, 2022). These types of technologies lower the necessity of physical (...truncated)