The influence of digital finance development on bank efficiency: evidence from China

Digital finance has enhanced financial service accessibility, reduced costs, and disrupted traditional business models. Based on the functional view of finance, a theoretical model including commercial banks, households, and enterprises is constructed to analyze the impact of digital finance on bank efficiency and explore its mechanisms through liabilities and assets. In this paper, a three-dimensional framework including digital financial foundation, digital banking business and new financial services is constructed and a digital finance index is calculated to represent the development of digital finance at the city level. Then, using the stochastic frontier analysis (SFA) method, the efficiency of commercial banks is measured with the data of Chinese banks between 2011 and 2020. This empirical study shows that digital finance significantly improved the efficiency of China’s commercial banks. For every extra unit of digital finance, bank’s cost efficiency will increase by 0.72% and its revenue efficiency will increase by 3.17%. This conclusion is still valid after multiple robustness checks, including substitution of explanatory variables, cutting samples and regression with instrumental variables. These findings also indicate that the influence of digital finance on the change in bank efficiency varies across different regions, scales, and types of ownership, among which high GDP regions, large-scale banks, and state-owned banks have a relatively strong effect on efficiency. A further analysis of the mechanism shows that digital finance affects liability structure of banks, i.e., banks are usually inclined to have a smaller proportion of interbank liabilities as digital finance advances. Concurrently, digital finance also alters banking risks, which in turn affects their asset side. The core process through which digital finance enhances banking efficiency is more closely connected to the strong optimization impact of digital finance on the liability side than to weakening effect on the asset side. First published online 23 December 2025