The impact of information technology on the banking industry

• Published in: The Journal of the Operational Research Society 2010-02, Vol.61 (2), p.211-221
• Main Authors: Ho, S J, Mallick, S K
• Format: Article
• Language: English
• Subjects: Applied sciences; Bank earnings; Bank markets; Banking industry; Banking services; Banks; Business and Management; Case-Oriented Paper; Case-Oriented Papers; Competition; Computer science; control theory; systems; Cost efficiency; Exact sciences and technology; Financial investments; Firm modelling; heterogenous competition; Impact analysis; Information systems. Data bases; Information technology; Inventory control, production control. Distribution; Investment banking; Management; Market share; Memory organisation. Data processing; Network effects; Operational research and scientific management; Operational research. Management science; Operations research; Operations Research/Decision Theory; Profits; Software; Studies
• ISSN: 0160-5682; 1476-9360
• DOI: 10.1057/jors.2008.128

This paper analyses the effects of investment in information technologies (IT) in the banking sector using bank-level data from a panel of 68 US banks over the period 1986-2005. Although IT can improve bank's performance by reducing operational cost (supply side), it can bring in competition among banks in order to embrace new technology (demand side). Since most empirical studies have adopted the production function approach, it is difficult to identify which effect has dominated. In a differentiated model with network effects, this paper characterizes the conditions to identify these two effects. The results suggest that (at individual firm levels) the bank profits can decline due to adoption and diffusion of IT investment, reflecting negative network competition effects in this industry. Using panel cointegration tests, we confirm that the estimated profit equation is indeed a long-run equilibrium relation.