The Impact of Information and Communication Technologies on Banks’ Profitability Performance and Intermediation Costs: Evidence from European Countries
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Abstract
This paper examines how information and communication technology (ICT) shaped bank performance and intermediation costs in Europe over 2011–2021. We analyze a panel of 27 countries, covering EU members and selected non-EU economies. A composite, banking-anchored ICT index is constructed via principal component analysis (PCA) from ATM and branch intensity, fixed broadband and mobile subscriptions, and the shares of individuals using the internet and internet banking. Using country fixed effects regressions and Dynamic OLS (DOLS), we find that higher ICT intensity is positively associated with profitability (ROA, ROE) and negatively associated with intermediation costs, with results that are robust across various specifications. The findings carry clear policy implications: targeted investment in digital infrastructure and skills, interoperable and efficient payment rails, secure data-sharing frameworks and cybersecurity standards, and supportive yet prudent regulatory environments can compress intermediation wedges and broaden access while mitigating transition frictions across heterogeneous banking systems. For practice, banks that prioritize process automation, data-driven pricing and risk tools, and disciplined channel optimization (including reconfiguration of branch/ATM networks) are better positioned to lift ROA/ROE and sustain lean cost-to-income profiles. Overall, prudent digitalization is associated with greater efficiency, competitiveness, and financial inclusion across European banking.
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