Did Financial Consumers Benefit from the Digital Transformation? An Empirical Investigation

Soojin Park,Prida Erni Kesuma,Man Cho

doi:10.3390/ijfs9040057

Abstract

This study aimed to test, through empirical investigation, how the rapid advancement of digital transformation (DT) has impacted the price of financial services. To this end, we compiled a set of macro-level indicators on the aggregate outcomes of the financial services sector in Korea over the last three decades and conducted an analysis to gauge the effects of DT on the country using those indicators. Using the ARDL-ECM (autoregressive distributed lag error-correction model), we show that, over time, the unit cost of financial intermediation in Korea has tended to move in tandem with the growth in economic output, although the profit portion of the unit cost has not exhibited a long-term relationship with the GDP trend. The long-term effect of the DT trend is negative (i.e., cost-saving) for labor input, capital expenditure, and the total unit cost of financial intermediation, which are all shown to be statistically significant. Consequently, we conclude that DT contributed to enhancing consumer benefit, mainly by achieving the operational efficiency of labor and capital, from 1990 to 2019 in Korea. From a policy perspective, our finding implies that DT-driven innovation in the sector can benefit financial customers if excessive levels of profit are restrained through market competition.

Highlights

It is well established that there is generally an endogenous, or mutually reinforcing, relationship between financial development and economic growth (King and Levine 1993; Rajan and Zingales 1998; Manning 2003; Pagano and Pica 2012)
Our empirical results show that, over time, the unit cost of financial intermediation in Korea has tended to move in tandem with the growth in economic output, the profit portion of the unit cost did not exhibit a long-term relationship with the GDP
The main findings are that, over time, the unit cost for financial intermediation in Korea has tended to move in tandem with the growth in economic output, the profit portion of the cost has not exhibited a long-term relationship with the GDP trend

Summary

Introduction

It is well established that there is generally an endogenous, or mutually reinforcing, relationship between financial development and economic growth (King and Levine 1993; Rajan and Zingales 1998; Manning 2003; Pagano and Pica 2012). As in the case of many emerging-market countries, the financial sector in Korea has played a direct role in promoting socio-economic growth, as is evidenced by the various credit programs during the high-growth period of the 1970s to the 1990s. Whether growth in the financial sector in Korea has contributed to key macroeconomic outcomes in any meaningful fashion, such as in industrial productivity or income inequality, has rarely been examined. Philippon (2015, 2016) reported that that the financial services sector in the US has been overpriced since the early 1980s, as evidenced by its realized per-unit cost of providing the service continuously exceeding the projected optimal level. Studies argue that the disruptive innovations in the sector introduced by digital transformation, often labeled as FinTech, can contribute to enhancing the operational efficiency of existing financial institutions

Objectives

Findings

Discussion

Conclusion