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The impact of information technology on the banking industry

Author

Listed:
  • S J Ho

    (National Chengchi University)

  • S K Mallick

    (Queen Mary, University of London)

Abstract

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.

Suggested Citation

  • S J Ho & S K Mallick, 2010. "The impact of information technology on the banking industry," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(2), pages 211-221, February.
    • Handle: RePEc:pal:jorsoc:v:61:y:2010:i:2:d:10.1057_jors.2008.128
    DOI: 10.1057/jors.2008.128
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    4. Gangopadhyay, Partha & Jain, Siddharth & Bakry, Walid, 2022. "In search of a rational foundation for the massive IT boom in the Australian banking industry: Can the IT boom really drive relationship banking?," International Review of Financial Analysis, Elsevier, vol. 82(C).
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    8. Wu, Cheng-Han, 2019. "Licensing to a competitor and strategic royalty choice in a dynamic duopoly," European Journal of Operational Research, Elsevier, vol. 279(3), pages 840-853.
    9. Del Gaudio, Belinda L. & Porzio, Claudio & Sampagnaro, Gabriele & Verdoliva, Vincenzo, 2021. "How do mobile, internet and ICT diffusion affect the banking industry? An empirical analysis," European Management Journal, Elsevier, vol. 39(3), pages 327-332.
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    14. Hussain, Matloub & Papastathopoulos, Avraam, 2022. "Organizational readiness for digital financial innovation and financial resilience," International Journal of Production Economics, Elsevier, vol. 243(C).
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