Digital transformation: how it impacts bank performance for emerging economies

Purpose This paper investigates the impact of digital transformation (DT) on the performance of commercial banks in the context of an important emerging economy. From a theoretical perspective, it exposes a major dilemma of bank management concerning the benefits of investment in DT. Also, to gain a clear understanding with robust empirical evidence, it introduces critical moderators in the relationship between bank performance and DT. Design/methodology/approach We examined the impacts of DT on component-wise bank performance indicators using panel data analysis for all 32 commercial banks listed on the Indian Stock Exchanges, covering the period from 2016 to 2021. We have considered both fixed and random effects in analyzing secondary data of the Indian banks. We also explored the moderating factors by adding interaction terms in our models. Findings Our results confirm that DT increases bank performance, particularly in terms of revenue and profitability. For a short initial span, it incurs a rise in cost. Soon thereafter, the cost is significantly reduced. Moreover, bank size, bank age and customers’ technological literacy levels serve as important moderators in the positive relationship between bank performance and DT. Originality/value The originality of this study lies in an in-depth investigation of the effects of DT on various component-wise bank performance parameters with a well-structured DT index at a country level. It also contributes to the finance and banking literature of the emerging economies in highlighting the role of a number of critical moderators in the fundamental relationship between bank performance and DT.