The Role of Information Technology in Operating Cost and Operational Efficiency of Banks: An Application of Frontier Efficiency Analysis

Abstract

This study explores how information technology, operating cost, and operational efficiency are related to each other in banking. It is well known that the adoption of information technology can reduce organizational operating cost and improve operational efficiency. However, the intuitive impacts should be evaluated in greater detail. This paper proposes a framework for measuring the performance of information technology application, which provides us with empirical evidence as follows. First, low operational efficiencies exist in the banking industry during the study period. These inefficiencies are in nature ascribable to a combination of both wasteful overuse of information technology resources and inappropriate scale of information technology investments. Second, operational efficiencies measured by two frontier efficiency analyses, data envelopment analysis and stochastic frontier approach, present a significant strong relationship. Third, for an individual inefficient bank, the operational efficiency can be enhanced if the total amount of information technology investments is enlarged. Fourth, the different ownership type has a significant effect upon the performance contributions of information technology application. Fifth, to enhance performance, banks can reduce operating costs by increasing the number of financial cards issued and improve operational efficiency by installing more automated teller machines and providing customers with a wide variety of information technology services. Furthermore, the mutually-owned banks require a cutback in information technology personnel as well to enhance performance.