Digitalization and banks' efficiency: Evidence from a European analysis

This paper firstly investigates the impact of digitalisation on bank efficiency and then analyses potential nonlinearities in this relationship, as well as the possible moderating role played by bank business models, covering a sample of European banks over the period 2006–2021. Our results suggest that IT investments improve bank efficiency - more on the profit side than on the cost side – but that this interplay has an inverted Ushape, which indicates that excessive investment in IT technologies may be detrimental to both profit and cost efficiency. Moreover, the empirical findings show that the digitalisation-efficiency linkage is sensitive to the business model adopted by banks; in particular, retail-oriented banks benefit more from digitalisation compared to those that are market-oriented. The overall results, including those countries where digitalisation is overall low, are consistent across different robustness tests and model specifications. This study could be helpful in guiding a cognisant digital transition for European banks.