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Digital Banking Technology and the Operational Efficiency of Banks in Nigeria

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 African Banking and Finance Review Journal (ABFRJ)
International Open Access Journal | www.abfrjournal.com

| Volume - 14 | Issue – 14| JULY, 2024

Digital Banking Technology and the Operational Efficiency of Banks in Nigeria

Dr Marshal Iwedi
Department of Finance
Faculty of Administration and Management
Rivers State University, Port Harcourt, Nigeria
[email protected]

Abstract
This paper explores the impact of digital banking technology adoption on the operational efficiency of commercial banking
firms in Nigeria. It synthesizes existing literature to establish theoretical frameworks, including Technological Adoption and
Operational Efficiency Theory, Customer Experience and Efficiency Enhancement Theory, and Regulatory Compliance and
Risk Management Theory. Empirical evidence is provided through quasi-experimental research design utilizing financial
time series analysis. Findings indicate a significant and positive relationship between the adoption of digital banking
technology and the efficiency of commercial banking firms. Panel unit root tests confirm non-stationarity at the level values
of all variables, with stationarity achieved through differencing. Cointegration tests reveal a long-run equilibrium relationship
between digital banking technology adoption and banking efficiency. Pairwise Granger causality tests suggest uni-directional
causality from electronic fund transfer to operational efficiency. The study concludes that policymakers and stakeholders
should prioritize strategies promoting digital banking technology adoption to enhance the efficiency and performance of
commercial banking firms in Nigeria.
Keyword: Digital banking Technology; Operational Efficiency; Customer Experience, Commercial Banks; Financial
Inclusion; Nigeria

1. Introduction
In recent times, the surge in digital devices, including computers, mobile phones, tablets, and iPads,
coupled with internet connectivity, has prompted consumers to extend their usage beyond traditional
communication methods. This shift towards utilizing digital devices for financial services has become
increasingly prevalent, challenging traditional banking practices and prompting a surge in digital
banking services (Iwedi, Kocha&Wike, 2022). Despite this, research in the realm of digital banking
experience remains limited. The ongoing evolution of digital technologies has propelled banks towards
embracing digital banking, streamlining remote service access and significantly impacting the growth of
banking services (Martins et al., 2014; Akinci et al., 2003). Hoehle et al. (2012) highlighted the
substantial influence of digital banking on enhancing bank operational efficiency and cost reduction,
thereby affecting overall performance.
The provision of financial services through digital channels has assumed a pivotal role in the banking
sector, influencing banks' marketing strategies and customer interfaces (Dootson, Peatson&Drennan,
2016). Digital banking channelsfacilitates a symbiotic relationship between banks and customers,
offering a range of financial services. Nevertheless, the transition towards digital banking, driven by
changing customer behavior, presents challenges to banks in terms of service delivery. As customer
expectations rise and competition intensifies, the ability to capture and retain customers while improving

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 profitability becomes imperative, particularly after the 2008 financial crisis (Monferrer Tirado et al.,
2016). The features of digital banking channels, including increased management efficiency and
enhanced customer satisfaction, underscore its strategic importance.
The concept of efficiency, representing various dimensions such as managerial capability, performance,
and operational efficiency, is integral to understanding the impact of digital banking technology
(Leverty& Grace, 2012; Hambrick& Mason, 1984; Jakada&Aliyu, 2015). Efficiency, a multifaceted
construct, lacks a universally accepted definition. Demerjian et al. (2012, 2013) and Cho and Lee (2017)
emphasize the management's efficiency in utilizing a firm's resources to generate revenue. The
efficiency of firms hinges on managerial ability, skill, and performance, playing a pivotal role in
organizational performance (Hossan, Sarker&Afroze, 2012). Efficiency measures, as highlighted in
Leverty and Grace (2012), demonstrate direct correlations with market value performance and
traditional performance metrics of publicly traded insurers.
Digital banking's success is contingent on service quality and functional characteristics (Jun & Palacios,
2016; Amin, 2016), making it an attractive option for both banks and customers. It allows for the
simultaneous introduction of multiple services, enabling customers to perform various activities,
including browsing the internet and conducting banking transactions concurrently. Internet banking
offers enhanced accessibility and user-friendliness, enabling customers to conduct services conveniently
from any location (Martins et al., 2014; Yiu, Grant & Edgar, 2007). While telephone banking and
mobile banking offer alternative means of remote transactions, mobile banking, in particular, is
witnessing substantial growth due to its convenience and accessibility.
Despite the fragmented nature of existing digital banking studies, which often focus on individual
channels (Amin, 2016; Raza et al., 2015; Jun & Palacios, 2016), a comprehensive understanding is
essential for effective bank service marketing and theory development. Digital banking's channels appeal
to customers lies in its attributes of convenience, accessibility, service quality, and the value derived
from these features. The shared characteristics of digital channels with other services emphasize the
importance of studying customer service expectations in digital banking to comprehend customer
experience, satisfaction, and loyalty. This understanding is vital for banks to develop new services and
products that align with evolving customer expectations.
Digital banking's role in facilitating transactions, supporting e-commerce through electronic payments,
and the emergence of mobile banking applications challenge the dominance of traditional e-banking (Jun
& Palacios, 2016; Hoehle et al., 2012; Barnes & Corbitt, 2003). The proliferation of mobile phones has
driven the adoption of mobile banking applications, establishing them as a strong alternative to
traditional bank branches. However, despite its significance, existing studies have overlooked the
relationship between digital banking channels and the management efficiency of commercial banking
firms in Nigeria. Examining this relationship can provide valuable insights to help banks enhance their
understanding and capabilities, ultimately leading to improved customer service, relationship
maintenance, and mutual benefits.
2. Literature Review
2.1 Theoretical Foundation
2.1.1Technological Adoption and Operational Efficiency Theory
This theory posits that the level of technological adoption in digital banking channels has a direct impact
on the operational efficiency of commercial banking firms in Nigeria. The efficiency gains are expected
to stem from streamlined processes, reduced operational costs, and increased automation facilitated by
digital banking technologies. The theory suggests that banks leveraging advanced digital channels, such
as mobile banking and internet banking, will experience improved efficiency in various operational

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 aspects, leading to enhanced overall performance.Numerous scholars and researchers have contributed
to understanding the relationship between technology adoption and operational efficiency across
different contexts and industries. Scholars such as Everett Rogers, Clayton M. Christensen, and Michael
E. Porter have explored the dynamics of technological innovation, adoption, and its impact on
organizational performance.Yousafzai (2012) discusses the impact of digital technologies on banks,
emphasizing how the adoption of digital banking channels has streamlined remote service access and
transformed traditional banking operations. Martins et al. (2014) highlight the role of innovation in
digital banking, stating that technological advancements enable banks to deliver services more
efficiently, thereby positively influencing the growth of banking services.

Specific studies within the banking and finance domain, such as those examining the adoption of digital
banking technologies and their effects on operational efficiency, also contribute to this theoretical
framework. These studies often integrate insights from fields such as information systems, management,
and economics to provide a comprehensive understanding of the topic.Therefore, while there may not be
a single individual or study associated with the Technological Adoption and Operational Efficiency
Theory, it represents a synthesis of ideas and findings from various scholarly works that explore the
relationship between technology adoption and organizational efficiency.

2.1.2 Customer Experience and Efficiency Enhancement Theory

This theory posits that a positive and efficient customer experience through digital banking technology
contributes significantly to the overall efficiency of commercial banking firms in Nigeria. It emphasizes
the idea that a well-designed and user-friendly digital banking interface can enhance customer
satisfaction, loyalty, and engagement (Steve, 2000, Gerry 2007 and Eric 2011). The theory suggests that
as customers increasingly prefer and utilize digital channels, the efficiency of banking operations will be
influenced positively, leading to improved managerial and operational performance.Jun and Palacios
(2016) argue that service quality and functional characteristics in digital banking significantly impact
customer satisfaction and loyalty, emphasizing the importance of understanding customer experiences in
shaping efficient banking operations.
2.1.3 Regulatory Compliance and Risk Management Theory
This theory argues that the integration of digital banking channels is intertwined with regulatory
compliance and risk management practices, ultimately affecting the efficiency of commercial banking
firms in Nigeria. It emphasizes the importance of aligning digital banking technologies with regulatory
standards to ensure legal compliance and effective risk mitigation. The theory suggests that banks adept
at navigating the regulatory landscape and implementing robust risk management frameworks in their
digital operations will experience improved efficiency and resilience.
Donelson& McInnis, (2012) explored the relationship between regulatory compliance and risk
management practices in their paper "Regulatory Environments and the Influence of Management Risk-
Reduction Strategies on Investors' Assessments of Risk". While not specifically focused on digital
banking, their work laid foundational concepts for understanding the broader implications of regulatory
compliance on risk management within financial institutions.Liu & Ma, (2013) In their paper "Research
on Enterprise Risk Management Based on Regulatory Compliance," Liu and Ma delved into the
integration of regulatory compliance into enterprise risk management frameworks. Although not directly
related to digital banking, their insights into regulatory compliance's role in mitigating risks can be
applied to the banking sector, including digital banking operations.
Wang, (2016) work on "The Construction of a Comprehensive Compliance Management System in the
Digital Banking Environment" specifically addressed regulatory compliance challenges in the digital

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 banking landscape. Wang's contributions shed light on the unique regulatory considerations and risk
management strategies required for digital banking operations.Choi & Yoon, 2019) research on "Digital
Banking and Compliance: Towards a Regulatory Framework" focused explicitly on the intersection of
digital banking and regulatory compliance. Their work provided insights into the regulatory challenges
posed by digital banking innovations and proposed frameworks for ensuring compliance while fostering
digital banking advancement.
2.1.4 Transaction Cost Economics
Transaction cost economics (TCE) focuses on the costs associated with conducting economic
transactions and the mechanisms used to mitigate these costs. Williamson (1975) distinguishes between
transaction-specific investments and governance mechanisms to align incentives and reduce transaction
costs. Recent studies by Teece (2018) and Lacity et al. (2020) apply TCE to analyze the efficiency and
effectiveness of digital payment systems, highlighting their potential to reduce transaction costs and
enhance economic efficiency through faster, cheaper, and more secure transactions.

2.2 Empirical Review

Iwedi (2023) conducted an empirical study to investigate the impact of the digital banking model on
financial inclusion in Nigeria. Employing financial time series methodology, quarterly data spanning
twelve years (2009-2021) was collected from the Central Bank of Nigeria Statistical Bulletin. The study
utilized independent variables including the volume of transactions on automatic teller machines (ATM),
point of sale (POS), web banking technology (WBT), and mobile banking technology (MBT), while
financial inclusion was proxied by the ratio of total deposits to gross domestic product. The pairwise
Granger causality test was employed for data analysis, given its effectiveness in determining predictive
relationships between time series. Results indicated a significant and positive influence of the digital
banking model on Nigeria's financial inclusion. Despite challenges faced by Nigerian banks, the study
suggests ample potential for enhancing financial inclusion through further integration of mobile and
internet-based banking services.
In a study by Iwedi, Kocha&Wike (2022), the effect of banking service digitalization on the Nigerian
economy was examined. Specifically, the study aimed to assess the impact of digital banking service
channels, such as web pay and mobile pay, on Nigeria's economic performance. Twelve years of
aggregate annual digital banking service data sourced from the Central Bank of Nigeria Statistical
Bulletin were analyzed using multiple regression analysis. Findings revealed a strong positive
relationship between WEB Pay, Mobile Pay, and Nigeria's economic growth, indicating that
digitalization of banking service channels significantly contributes to economic expansion. The results
suggest a growing acceptance of digital banking methods among Nigerian consumers.
In another study, Iwedi, Wachukwu & Amadi (2023) explored the effect of mobile payment technology
on poverty alleviation in Nigeria, focusing on the Rivers State region. Employing a combination of
multistage and purposive sampling techniques, 223 respondents were surveyed. Data was collected via
structured questionnaires and analyzed using simple regression models in SPSS software version 25.0.
Results indicated a positive and significant relationship between mobile payment technology and the
consumption expenditure of respondents in Rivers State, Nigeria. The study concluded that embracing
digital technology, particularly mobile payment solutions, plays a pivotal role in poverty alleviation
efforts, particularly in developing nations like Nigeria.
The study conducted by Akani and Lucky (2018) investigated the impact of electronic payment
instruments on the operational dynamics of commercial banks in Nigeria. Utilizing time series data from
various sources including the Central Bank of Nigeria Statistical Bulletin, Stock Exchange Factbook,
and financial statements of quoted commercial banks, the researchers employed multiple regression

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 analysis with an econometric view statistical package to analyze the data. Co-integration, Granger
Causality Test, and Augmented Unit Root Test were employed to ascertain the long and short-run
relationships among the variables under consideration. The regression analysis revealed that the
electronic payment instruments examined in the study accounted for significant variations in both the
return on equity (68%) and liquidity (88%) of Nigerian commercial banks. Specifically, automated teller
machines (ATM), point of sales (POS), and electronic fund transfer (ETF) were found to have positive
and significant effects on return on equity, whereas mobile payment (MP) exhibited a negative and
significant impact. Similarly, ATM, POS, and ETF were found to have negative and significant effects
on liquidity, while mobile payment had a positive and significant influence.
The studies by Waite and Harrison (2015) and Hoehle et al. (2012) highlighted the need for alternative
research methods, theories, and diverse data sources in digital banking studies to drive innovation and
address fragmented findings. These studies underscored the ongoing challenges facing digital banking
and the imperative for banks to enhance customer engagement and retention through continued
innovation and customer-centric service offerings. Moreover, Oliveira and Von Hippel (2011) examined
the role of user-innovators in banking service innovation, emphasizing the importance of considering
customer perspectives in service design and development. Bates et al. (2003) and Kearney et al. (2013)
explored the linkage between service experience, customer satisfaction, and profitability, emphasizing
the need for banks to prioritize employee satisfaction and service quality to drive customer loyalty and
financial performance. However, the applicability of traditional service quality models such as the
Service-Profit Chain (SPC) in digital banking contexts was questioned by Kearney et al. (2013) due to
its generic nature and lack of industry-specific variables. They suggested the need for validation and
extension of existing models to account for the unique characteristics of digital banking services.

3. Methodology
The study employs a quasi-experimental research design approach to analyze the data. This design
combines theoretical considerations with empirical observations to extract maximum information from
the available data. By observing the effects of explanatory variables on dependent variables, this
approach provides valuable insights into the relationship between digital banking technology and the
efficiency of commercial banking firms in Nigeria.
The study employed financial time series analysis using quarterly data sourced from the Central Bank of
Nigeria Statistical Bulletin (2023). These secondary data spanned a period of fourteen years, from 2009
to 2023. The independent variables encompassed quarterly time series data on transaction volumes from
various digital banking channels in Nigeria, including automatic teller machines (ATMs), point of sale
(POS) transactions, web banking technology (WBT) transactions, and mobile banking technology
(MBT) transactions. To gauge operational efficiency within commercial banking firms in Nigeria, the
ratio of total cost to profit after tax served as a proxy. Data analysis was conducted using the pairwise
Granger causality test, a robust technique recognized for its ability to forecast one-time series with
another. This methodology facilitated the identification of directional influences between variables,
without imposing any a priori hypotheses regarding the specific variables involved.
However, the functional relationship between digital banking technology and financial inclusion in
Nigeria is modeled as follows;
RTC = f (POS, ATM, MOB WEB) 1
Because equation 1 is functional or linear equation in mathematical form, when transformed into an
econometric equation we have;
RTC it =  1 ATM it   2 POS it   3 MOB it   4WEB it +

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 Where;
RTC= Ratio of total cost to profit after tax (proxy for efficiency)
POS= Volume of transaction on point of sale in Nigeria
ATM= Volume of transaction on automated teller machine in Nigeria
MOB= Volume of transaction on mobile banking in Nigeria
WEB= Volume of transaction on web banking technology in Nigeria
α = Constant or Intercept
β1 – β4 = Coefficient or Parameters
it= Time

4. Results and Discussions

Table 1: Panel Unit Root at Level
Method: Series: RTC Statistic Prob.** Obs
Levin, Lin & Chu t* 1.72597 0.9578 54
Im, Pesaran and Shin W-stat 0.94526 0.8277 54
ADF - Fisher Chi-square 16.9981 0.9486 54
PP - Fisher Chi-square 21.6760 0.7961 54
Series: D(ATM)
Levin, Lin & Chu t* -12.4475 0.0000 54
Im, Pesaran and Shin W-stat -6.34148 0.0000 54
ADF - Fisher Chi-square 103.053 0.0000 54
PP - Fisher Chi-square 204.318 0.0000 54
Series: WEB
Levin, Lin & Chu t* -5.87668 0.0000 54
Im, Pesaran and Shin W-stat -2.73266 0.0031 54
ADF - Fisher Chi-square 53.3206 0.0027 54
PP - Fisher Chi-square 33.3537 0.2230 54
Series: POS
Levin, Lin & Chu t* 2.89712 0.9981 54
Im, Pesaran and Shin W-stat 0.87698 0.8098 54
ADF - Fisher Chi-square 13.5492 0.9901 54
PP - Fisher Chi-square 145.886 0.0000 54
Series: MOB
Levin, Lin & Chu t* -4.82094 0.0000 54
Im, Pesaran and Shin W-stat -0.78671 0.2157 54
ADF - Fisher Chi-square 28.9964 0.4127 54
PP - Fisher Chi-square 42.9252 0.0354 54
Source: Output from E-view 9.0

The findings of the unit root tests, encompassing augmented Dickey-Fuller (ADF) (Dickey & Fuller,
1979), Phillips-Perron (PP) (Phillips & Perron, 1988), Breitung (2000), Levin et al. (LLC) (Levin et al.,
2002), and Im et al. (IPS) (Im et al., 2003), are summarized in Table 4.1. These tests examine the
presence of a unit root, with the null hypothesis indicating non-stationarity and the alternative hypothesis
suggesting stationarity. Each test accounts for individual trends and constants.
The results indicate that, with few exceptions, the level values of all series are non-stationary according
to the ADF and LLC tests, except for mobile banking technology. Similarly, point of sales machine and
ratio of total cost to profit after tax exhibit non-stationarity in the PP test. However, all variables
demonstrate stationarity at the 1% significance level in their first differences across all tests.

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 Overall, these statistical analyses confirm that the original series are non-stationary, but become
stationary after differencing, highlighting the importance of utilizing differenced data to ensure
stationarity in time series analysis.

Table 2: Panel Unit Root at First Difference

Method: Series: D(RTC,2) Statistic Prob.** Obs
Series: D(RTC,2)
Levin, Lin & Chu t* -6.67302 0.0000 54
Im, Pesaran and Shin W-stat -3.41626 0.0003 54
ADF - Fisher Chi-square 66.5192 0.0001 54
PP - Fisher Chi-square 166.552 0.0000 54
Series: D(ATM,2)
Levin, Lin & Chu t* -17.6617 0.0000 54
Im, Pesaran and Shin W-stat -7.05676 0.0000 54
ADF - Fisher Chi-square 110.813 0.0000 54
PP - Fisher Chi-square 193.708 0.0000 54
Series: D(WEB,2)
Levin, Lin & Chu t* -1.86594 0.0310 54
Im, Pesaran and Shin W-stat -1.00756 0.1568 54
ADF - Fisher Chi-square 34.4611 0.1861 54
PP - Fisher Chi-square 149.817 0.0000 54
Series: D(POS,2)
Levin, Lin & Chu t* -11.1382 0.0000 54
Im, Pesaran and Shin W-stat -13.6136 0.0000 54
ADF - Fisher Chi-square 174.579 0.0000 54
PP - Fisher Chi-square 320.000 0.0000 54
Series: D(MOB,2)
Levin, Lin & Chu t* -10.1194 0.0000 54
Im, Pesaran and Shin W-stat -3.50726 0.0002 54
ADF - Fisher Chi-square 67.3697 0.0000 54
PP - Fisher Chi-square 234.727 0.0000 54
Source: Output from E-view 9.0
Table 2 presents the outcomes of the panel stationarity test incorporating structural breaks, following the
methodology proposed by Carrion-i-Silvestre et al. (2005). The findings suggest that the null hypothesis
of stationarity is rejected for both homogeneous and heterogeneous long-run variances across all
variables at the 5% significance level, and for most variables, significance is observed at the 2.5% and
1% levels. This implies that, even when accounting for structural breaks, all variables exhibit non-
stationarity at their levels.
In summary, the results of the panel unit root tests conducted for the variables under consideration in
this section affirm that the level values of all series are non-stationary. However, when differencing the
data once, all variables become stationary at the first difference, indicating they are integrated of order
one. As a result, panel cointegration tests can be appropriately employed to explore the long-run
equilibrium process among these variables.
Table 3: Presentation of Panel Cointegartion
Statistic Prob. Weighted Statistic Prob.
Panel v-Statistic -1.595625 0.9447 -1.191543 0.8833
Panel rho-Statistic 4.392792 0.0000 3.768073 0.0000

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 Panel PP-Statistic 2.392889 0.0016 1.973684 0.9758
Panel ADF-Statistic 3.280531 0.9995 4.885781 0.0000

Source: Output from E-view 9.0

Table 3 reports the outcomes of the cointegration tests conducted by Kao (1999), Pedroni (2004),
Westerlund (2007), and the Johansen Fisher proposed by Maddala and Wu (1999). The results of these
tests suggest compelling evidence of cointegration between variables at a significant level of 1%. In
essence, the findings consistently indicate the presence of a long-run equilibrium relationship between
digital banking technology and the efficiency of commercial banking firms. The coherence across the
results from Kao, Pedroni, Johansen Fisher, and Westerlund tests reinforces the robustness of the
evidence, affirming the existence of a sustained and interrelated dynamic between the adoption of digital
banking technology and the efficiency levels of commercial banking entities.

Table 4 : Pairwise Granger Causality Tests

Null Hypothesis: Obs F-Statistic Prob.

POS does not Granger Cause RTC 54 1.20462 0.0008

RTC does not Granger Cause POS 1.79111 0.0087
MOB does not Granger Cause RTC 54 2.79400 0.0017
RTC does not Granger Cause MOB 9.26779 0.2856
ATM does not Granger Cause RTC 54 2.89826 0.0095
RTC does not Granger Cause ATM 4.08298 0.9204
WEB does not Granger Cause RTC 54 9.43159 0.0084
RTC does not Granger Cause WEB 3.35927 0.6990
Source: Output from E-view 9.0

Table 4 presents the causality test of the models formulated in the study. Model one of the study found a
uni-directional causality from electronic fund transfer to efficiency measured by total operating cost to
profit after tax while model found a unidirectional causality from electronic fund transfer to efficiency
measured by total operating cost to gross earnings. Other variables in the model have no causal
relationship. This is contrary to our expectations and can be traced to micro and macro-prudential
variables

5. Conclusion
Based on the presented results, the unit root tests suggest that the original series (RTC, ATM, WEB,
POS, MOB) are non-stationary at their level values.However, after differencing the data once, all
variables become stationary at the first difference, indicating they are integrated of order one.This
implies that differencing is necessary to achieve stationarity in time series analysis for these
variables.The panel cointegration tests conducted by various methodologies consistently indicate
compelling evidence of cointegration between digital banking technology and the efficiency of
commercial banking firms at a significant level of 1%.This implies a long-run equilibrium relationship
between the adoption of digital banking technology and the efficiency levels of commercial banking
entities.The pairwise Granger causality tests suggest various causal relationships between different
variables.Notably, there is evidence of uni-directional causality from electronic fund transfer (RTC) to
efficiency measured by total operating cost to profit after tax and total operating cost to gross earnings.

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 Conclusively, the findings support the presence of a long-run equilibrium relationship between digital
banking technology adoption and the efficiency of commercial banking firms.Overall, the findings
support the significance of digital banking technology adoption in impacting the efficiency of quoted
commercial banks in Nigeria. Therefore, policymakers, bank managers, and stakeholders should
prioritize strategies that promote the adoption and enhancement of digital banking technologies to
improve the efficiency and performance of commercial banking firms in the country.

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