Dual Effect of Income Diversification and Digital Transformation on Banks' Profitability in Asian Countries

Abstract

Background: Income diversification and digital economic transformation are inevitable trends in banking activities today, in line with the development of technology and customer needs; further diversifying income increases a bank's financial efficiency and has the power to positively regulate other factors towards increasing profitability.

Objective: The purpose of the study was to provide more empirical evidence on the digital impact on the economy, whether high-tech sectors increase the business performance of banks or not. An empirical examination of the dual effect of income diversification and digital transformation on banks' profitability.

Methodology: This study uses the vector autoregressive panel model (PVAR) according to generalized method of moments (GMM) regression to examine the causal relationship between the digital transformation of the economy and income diversification, including the promotion of non-interest income and profits in the business performance of banks in Asian countries.

Result: The research results show that when the economy increases investment in financial technology, it will support the business activities of banks; digital technology has positive impacts on non-interest income but accounts for an enormous cost in the investment phase, so it does not have much effect on the business performance of banks in Asia.

Conclusion: The authors also found that the results supported banks in considering investment policies in digital technology to bring good business performance but not affect banks' profits.

Unique Contribution: This study illuminates the precarious equilibrium between banks' profitability and the hefty upfront costs of digitization and offers crucial insights into how investments in financial technology generate non-interest income.

Key Recommendation: Financial institutions should design digital services with the client in mind, prioritizing ease of use, accessibility, and convenience. As a result, digital product engagement and customer satisfaction can rise, boosting profitability and enhancing digitalization efforts in the banking industry with incentives and policies.