Digitalization and banks’ efficiency: Evidence from a European analysis

The International Review of Financial Analysis journal published on November 2024 the paper “Digitalization and banks’ efficiency: Evidence from a European analysis”, co-authored by EMEA President Prof. Rym Ayadi, Professor at Bayes Business School, City University of London; EMEA Research Fellow, Doriana Cucinelli, University of Parma; Laura Chiaramonte, University of Verona; and Milena Migliavacca, Catholic University of the Sacred Heart.

The paper firstly investigates the impact of digitalisation on bank efficiency and then analyses potential non-linearities in this relationship, as well as the possible moderating role played by bank business models, covering a sample of European banks over the period 2006–2021. The results suggest that IT investments improve bank efficiency – more on the profit side than on the cost side – but that this interplay has an inverted U-shape, which indicates that excessive investment in IT technologies may be detrimental to both profit and cost efficiency.

Moreover, the empirical findings show that the digitalisation-efficiency linkage is sensitive to the business model adopted by banks; in particular, retail-oriented banks benefit more from digitalisation compared to those that are market-oriented. The overall results, including those countries where digitalisation is overall low, are consistent across different robustness tests and model specifications. This study could be helpful in guiding a cognisant digital transition for European banks.

Highlights

• Digitalization improve European bank efficiency, but more on the profit side than on the cost side.
• We also find a non-linear relationship between IT investments and bank efficiency: beyond a certain threshold, IT investments cease to exert their positive effect on bank efficiency.
• Retail-oriented banks seem to benefit more from the digital transition, compared to those that are market-oriented.
• More digitalised banks experienced a lower contraction in their cost-efficiency compared to other banks during the pandemic.

The International Review of Financial Analysis (IRFA) is a non-affiliated refereed journal whose primary goal is to provide an outlet for high quality Financial Research. The journal is open to a diversity of Financial Research topics and will be unbiased in the selection process.

Link to the paper