Transforming banking: Examining the role of AI technology innovation in boosting banks financial performance

With the ongoing advancement of technology, artificial intelligence is increasingly being integrated into banking and finance, with the transformative potential to reshape the financial performance of economies worldwide. This research investigates the dynamic relationship between banking and finance artificial intelligence technology innovation and banks' financial performance across 20 countries using the feasible generalized least squares and the generalized method of moments techniques. The results show that banking and finance artificial intelligence technology innovation positively impacts banks' return on assets, highlighting its role in enhancing financial performance. The interaction term between artificial intelligence innovation and economic growth emphasizes their collaborative positive impact on financial performance. Mediation analysis highlights information and communication technology development's role in transforming artificial intelligence innovation into improved financial outcomes. Considering lagged effects, initial innovation surges correlate with improved financial performance, but prolonged exposure leads to diminishing returns. Moreover, the findings indicate that non-performing loans negatively affect financial performance, underscoring the importance of asset quality. Additionally, regulatory capital and economic growth are positively associated with financial performance, while government regulations exhibit a negative impact. This study highlights the essential role of artificial intelligence technology innovation in banking and finance, emphasizing the need to consider economic and technological factors for maximizing its benefits in enhancing financial performance. Policy recommendations include promoting an artificial intelligence innovation ecosystem, adapting regulatory frameworks, and investing in information and communication technology infrastructure to harness artificial intelligence innovation's benefits while addressing associated challenges. • We explore how AI innovation in banking impacts banks' financial performance. • The FGLS and GMM techniques were employed for the analysis. • AI innovation in banking boosts banks' return on assets. • Non-performing loans, on the other hand, negatively affect financial performance. • Our results indicate promoting AI innovation, updating regulations, and investing in ICT.