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Examining the Contribution of Information Technology Toward Productivity and Profitability in U.S. Retail Banking

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  • Baba Prasad
  • Patrick T. Harker

Abstract

There has been much debate on whether or not the investment in Information Technology (IT) provides improvements in productivity and business efficiency. Several studies both at the industry-level and at the firm-level have contributed differing understandings of this phenomenon. Of late, however, firm-level studies, primarily in the manufacturing sector, have shown that there are significant positive contributions from IT investments toward productivity. This study examines the effect of IT investment on both productivity and profitability in the retail banking sector. Using data collected through a major study of retail banking institutions in the United States, this paper concludes that additional investment in IT capital may have no real benefits and may be more of a strategic necessity to stay even with the competition. However, the results indicate that there are substantially high returns to increase in investment in IT labor, and that retail banks need to shift their emphasis in IT investment from capital to labor.

Suggested Citation

  • Baba Prasad & Patrick T. Harker, 1997. "Examining the Contribution of Information Technology Toward Productivity and Profitability in U.S. Retail Banking," Center for Financial Institutions Working Papers 97-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:97-09
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    Cited by:

    1. Rajiv Kohli & Sarv Devaraj, 2003. "Measuring Information Technology Payoff: A Meta-Analysis of Structural Variables in Firm-Level Empirical Research," Information Systems Research, INFORMS, vol. 14(2), pages 127-145, June.
    2. K. Ravirajan & K. R. Shanmugam, 2023. "The Effect of Technology on Financial Performance of Indian Banks," Working Papers 2023-252, Madras School of Economics,Chennai,India.
    3. A Mukherjee & P Nath & M Pal, 2003. "Resource, service quality and performance triad: a framework for measuring efficiency of banking services," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(7), pages 723-735, July.
    4. Martín-Oliver, Alfredo & Salas-Fumás, Vicente, 2008. "The output and profit contribution of information technology and advertising investments in banks," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 229-255, April.
    5. Prakash, Navendu & Singh, Shveta & Sharma, Seema, 2021. "Technological diffusion, banking efficiency and Solow's paradox: A frontier-based parametric and non-parametric analysis," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 534-551.
    6. Sarv Devaraj & Rajiv Kohli, 2003. "Performance Impacts of Information Technology: Is Actual Usage the Missing Link?," Management Science, INFORMS, vol. 49(3), pages 273-289, March.
    7. Abdur Chowdhury, 2003. "Information technology and productivity payoff in the banking industry: evidence from the emerging markets," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 693-708.
    8. Fatima Chalabi, 2020. "The Impact of Innovation on Banking Performance: Evidence from Lebanese Banking Sector," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(6), pages 1-9.
    9. Kunsoo Han & Robert J. Kauffman & Barrie R. Nault, 2011. "Research Note ---Returns to Information Technology Outsourcing," Information Systems Research, INFORMS, vol. 22(4), pages 824-840, December.
    10. Gervais Thenet, 2006. "Une Validation Des Temps Standards D'Operation Dans Le Secteur Des Services," Post-Print halshs-00548049, HAL.
    11. Philipp Köllinger, 2005. "Why IT Matters: An Empirical Study of E-Business Usage, Innovation, and Firm Performance," Discussion Papers of DIW Berlin 495, DIW Berlin, German Institute for Economic Research.
    12. Majid Karimzadeh & Mohammad Reza Sasouli, 2013. "Contribution of Internet Banking toward Profitability of Banking in India," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 9(6), pages 57-69, December.
    13. Ngwenyama, Ojelanki & Guergachi, Aziz & McLaren, Tim, 2007. "Using the learning curve to maximize IT productivity: A decision analysis model for timing software upgrades," International Journal of Production Economics, Elsevier, vol. 105(2), pages 524-535, February.
    14. Dr. Nader Alber, 2011. "The Effect Of Banking Expansion On Profit Efficiency Of Saudi Arabia Commercial Banks," Journal of Global Business and Economics, Global Research Agency, vol. 3(1), pages 11-23, July.
    15. Christina Beneki & Avraam Papastathopoulos, 2011. "A LOG LINEAR ANALYSIS OF FACTORS AFFECTING PERFORMANCE OF EUROPEAN MANUFACTURING SMEs," International Journal of Management and Marketing Research, The Institute for Business and Finance Research, vol. 4(3), pages 75-93.
    16. Carmen Galve Gorriz & Ana Gargallo Castel, 2004. "Impacto de las tecnolog�as de la informaci�n en la productividad de las empresas espa�olas," Documentos de Trabajo dt2004-05, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
    17. Martín-Oliver, Alfredo & Ruano, Sonia & Salas-Fumás, Vicente, 2013. "Why high productivity growth of banks preceded the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 688-712.
    18. Stiroh, Kevin J., 2000. "How did bank holding companies prosper in the 1990s?," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1703-1745, November.
    19. Ann P. Bartel, 2000. "Human Resource Management and Performance in the Service Sector: The Case of Bank Branches," NBER Working Papers 7467, National Bureau of Economic Research, Inc.

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