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Risk and return of online channel adoption in the banking industry

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  • He, Dongwei
  • Ho, Chun-Yu
  • Xu, Li

Abstract

Online banking has become an important distribution channel for commercial banks. We construct a bank-specific indicator of online channel adoption to study the risk and return of online channel based on a sample of 118 Chinese banks over the period of 2002–2016. Our empirical results find that online channel improves profit efficiency (i.e. a positive return) of the adopting banks. Even though cost efficiency deteriorates, such improvement attributes to the rise in non-interest income efficiency. In reference to risk management, online channel weakens loan quality of the adopting banks, which also raises their solvency risk accordingly. Overall, our results suggest that online channel increases the return of adoption banks albeit at a higher risk. Such risk-return effects are heterogeneous depending on the management skill, labor intensity and size of adopting banks. However, there is no significant return relates to the costly content enrichment of online channel. Finally, our results are robust to alternative specifications, alternative measures of bank efficiency and risk, alternative sample selection and estimation methods, and omitted variable biases.

Suggested Citation

  • He, Dongwei & Ho, Chun-Yu & Xu, Li, 2020. "Risk and return of online channel adoption in the banking industry," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:pacfin:v:60:y:2020:i:c:s0927538x19304858
    DOI: 10.1016/j.pacfin.2020.101268
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