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.