Does digital transformation pay off? Evidence from financial inclusion and bank profitability in Ecuador

Digital transformation has rapidly reshaped banking systems worldwide, yet empirical evidence on its profitability implications remains limited and context-dependent, particularly in emerging and dollarized economies. This study examines the relationship between digital transformation, financial inclusion, and bank profitability in Ecuador, a small financial system characterized by structural constraints and accelerated digital adoption following the COVID-19 shock. Using panel data from 24 private commercial banks over the period 2019–2022, the analysis employs quantile regression to capture heterogeneous effects across the lower tail of the profitability distribution. The results indicate that financial inclusion is positively associated with asset profitability, while digital transformation, proxied by banks’ engagement in digital transaction channels, exhibits a positive and statistically significant relationship with return on equity among lower-performing banks. In contrast, credit risk consistently undermines profitability, highlighting the importance of portfolio quality. These findings suggest that digitalization and inclusion-oriented strategies may play a stabilizing role for more vulnerable banks, rather than uniformly benefiting the entire banking sector. By focusing on distributional effects rather than average outcomes, this study contributes context-specific evidence to the literature on digital banking in emerging economies. The results offer policy-relevant insights for regulators in resource-constrained, dollarized systems, emphasizing the need for targeted digital and inclusion policies that strengthen the resilience of lower-performing institutions.