The Economic Effects of Technological Progress: Evidence from the Banking Industry

Abstract

This paper examines technological progress and its effects in the banking industry. Banks are intensive users of both IT and financial technologies, and have a wealth of data available that may be helpful for the general understanding of the effects of technological change. The research suggests improvements in costs and lending capacity due to improvements in “back-office” technologies, as well as consumer benefits from improved “front-office” technologies. The research also suggests significant overall productivity increases in terms of improved quality and variety of banking services. In addition, the research indicates that technological progress likely helped facilitate consolidation of the industry. This paper examines the available evidence on technological progress and its effects in the banking industry. Innovations in information processing, telecommunications, and related technologies—known collectively as “information technology” or “IT”—are often credited with helping fuel strong growth in the U.S. economy, although questions remain about the relative importance of IT versus other factors. The extensive research on the banking industry may help in the general understanding about the effects of technological change. The category of Depository and Nondepository Financial Institutions—of which banking is an integral part—is the most IT-intensive industry in the U.S. as measured by the ratio of computer equipment and software to value added (Triplett and Bosworth 2002, Table 2).