Conceptual model for explaining the IT investment paradox in the banking sector

Abstract

This paper discusses the IT productivity paradox in the banking sector (US banking in particular) and the fundamental justifications for the continuing and expanding IT investment in the banking industry. Given the dramatic increase in IT investment in the banking industry despite the inconclusive evidence of IT productivity gains, this study explains why heavy investment in IT continues amidst conflicting evidence of positive returns. A set of three exogenous forces: (1) technological turbulence, (2) market turbulence, and (3) regulatory turbulence are proposed as key drivers behind IT investments by banks. The contribution of this paper is the development of a conceptual model that proposes that IT investments in banks can be viewed as guided by two logics: strategic, and operational. Driven by the discussion of whether IT matters (Carr, 2003), we propose a framework for analysing whether IT investments in banks are indeed driven by the need for creating competitive advantages (strategic) or by the operational requirements of the bank.