Abstract
Abstract A banking system is functional when it expands the potential to provide more liquidity to the economy, especially for development finance. The advances of Information and Communication Technology (ICT) can contribute to increasing banks’ potential to offer more products and services, expanding their capacity to be more functional. Diversifying financial instruments can encourage them to operate with more profitable operations in the short term to the detriment of the supply of credit in the long term, decreasing their ability to be more functional. This article aims to analyze the relationship between ICT and the functionality of Brazilian banks between 1995 and 2016. We created an index of functionality. The Panel Data estimation verified an ambiguous impact of ICT on banks’ functionality. The use of electronic devices and services for software-driven data processing and transmission has had a positive effect on this index. However, the influence of ICT on functionality was to enhance the negative effects of financial innovations on the supply of credit by banks because of the agents” incentives to invest in short-term and more liquid assets, vis à vis of financing long-term investments, harming the capacity for financing Brazilian development.
Highlights
The banking industry operates in a complex and competitive environment, characterized by changing conditions which are highly dynamic and undergoes rapid changes due to technological innovation
Services provided by fintechs1, and the diversification of services related to consumer banking, asset and investment management, etc
The central hypothesis of this article is that by contributing to the advancement of new products, services, faster and more interconnected transactions, Information and Communication Technology (ICT) may impact negatively on the functionality of the Brazilian banking system, which traditionally focuses on short-term, more profitable and less risky operations vis à vis long-term financing, which involves more uncertainty
Summary
The banking industry operates in a complex and competitive environment, characterized by changing conditions which are highly dynamic and undergoes rapid changes due to technological innovation. In order to increase profits and competitive advantages, banks have concentrated their operations on short-term (and speculative) investments vis à vis credit operations for productive activities of companies, implying a functional separation between financial and productive capital (Herman & Paula, 2011; Perez, 2002).
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