Discussion on Banking Efficiency and Determinants in the Digital Finance Environment - Evidence in Taiwan

Abstract

This study aims to examine the determinants of banking efficiency in the digital finance environment using data from 35 banks in Taiwan. We use a two-stage DEA model to measure service penetration efficiency and profit creation efficiency. Then, we adopt Tobit regression to evaluate how the key factors affect banking efficiency. Our results show that 13 banks (out of 20 high profit-creating banks) are profit creators but not service penetrators, suggesting that financial inclusion can generate profits, but it is not a necessity. Although IT infrastructure of ATMs and e-banking plays a crucial role in fostering financial inclusion, ATMs are still the backbone of efficient banking, while digital banking in Taiwan is merely a strategic necessity rather than strategic advantage. Further, although financial holding banks are more efficient than their nonfinancial holding counterparts, our research suggests that banks should still specialize in a few products rather than diversify too widely.