Risk and Return of Online Channel Adoption in the Banking Industry

48 Pages Posted: 5 Mar 2020

See all articles by Dongwei He

Dongwei He

Shanghai Jiao Tong University (SJTU)

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics

Li Xu

Shanghai Jiao Tong University (SJTU)

Date Written: February 5, 2020

Abstract

Online banking has become an important distribution channel for commercial banks. We construct a bank-specific indicator of online channel adoption to study the risk and return of online channels based on a sample of 118 Chinese banks in the period 2002-2016. Our empirical results find that online channel adoption improves the profit efficiency (i.e., positive return) of the adopting banks. Even though cost efficiency deteriorates, such improvement can be attributed to the rise in non-interest income efficiency. In reference to risk management, online channel adoption weakens the loan quality of the adopting banks, which also raises their solvency risk accordingly. Overall, our results suggest that online channel adoption alters the risk-return trade-off of adopting banks. Such risk-return effects are heterogeneous depending on the size, management skill and labour intensity of adopting banks. However, there is no significant return related to the costly content enrichment of online channels. Finally, our results are robust to alternative specifications, alternative sample selection, alternative measures of bank efficiency and risk, alternative estimation methods, and omitted variable biases.

Keywords: Information Technology, Multichannel Retailing, Efficiency, Risk, China

Suggested Citation

He, Dongwei and Ho, Chun-Yu and Xu, Li, Risk and Return of Online Channel Adoption in the Banking Industry (February 5, 2020). Available at SSRN: https://ssrn.com/abstract=3532215 or http://dx.doi.org/10.2139/ssrn.3532215

Dongwei He (Contact Author)

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics ( email )

1400 Washington Ave
Albany, NY 12222
United States

Li Xu

Shanghai Jiao Tong University (SJTU) ( email )

KoGuan Law School
Shanghai 200030, Shanghai 200052
China

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