Role of Digital Transformation on Digital Business Model Banks

Abstract

Digital technology has been raising the competition between banks and other financial service providers, and encourages banks to undergo digital transformation and introduce innovation in their products and services. However, the high investment required cannot be ignored when undergoing the digital transformation. A few research studies have examined the digital transformation effects on bank’s financial performance. This research aims to examine the digital transformation’s effect on bank profitability, specifically on banks with digital business models. Using digital banks’ profitability as the object is the novelty of this study, whereas previous research on bank profitability focused solely on traditional banks. This research utilizes the Panel of Autoregressive Distributed Lag (ARDL) and the panel data from 2016 to February 2023 of the digital business model bank population in Indonesia, which consists of seven banks. The result of the analysis indicates the U-shape relationship between digital transformation and bank profitability, as the digital transformation significantly supports the bank’s profitability in the long run, while it causes profitability deterioration in the short run due to the huge IT investment. This study recommends that banks need to consider the cost of IT investment as well as the required time and optimum strategy in undergoing the digital transformation and achieving targeted profitability.

Sustainable Value Chain for Sustainable Lending of State-Owned Banks in Indonesia

“…The main source of risk apart from credit policy is low analytical skills [53]. Another important factor is digital technology which significantly supports the bank's profitability in the long-term [54]. From the review of the primary activities (credit analysis) and support activities (credit portfolio, human resources, credit risk management, digital technology) included in the value chain concept, it shows its relationship with financial performance.…”

Digital Finance and Commercial Banks' Risk

“…Large-scale banks can take advantage of adapting to the wave of digitization more quickly, making it easier to complete the digital transformation and, thus, more easily offset the impact of digital finance on their traditional business (Shanti et al, 2023). They can further take advantage of digital technology's enabling role to help them achieve their business goals.…”

Sustainable Value Chain for Sustainable Lending of State-Owned Banks in Indonesia

“…Other support activities, such as human resources associated with the readiness of organizations to adopt innovation in the banking sector [54] and analytics skills [55], will strengthen company performance achievements. In addition, an important factor is digital technology, which significantly supports the bank's profitability in the long-term [56].…”