Innovation and Cost Efficiency in the Banking Industry: The Role of Electronic Payments

This paper presents new evidence on the assessment of banks' cost efficiency gains stemming from ICT adoption. With respect to the existing literature we introduce two novelties. First, banking operating costs are explained in terms of a commonly used measure of IT innovation (the relative diffusion of ATMs) and a new variable defined as automated payment transactions. Second, the results obtained via standard parametric estimation methods are compared with those obtained via nonparametric estimation techniques. Using an original dataset of Italian banks observed in the period 2006-2010, we do not find clear cost efficiency enhancing effects due to ATMs diffusion. On the other hand, the diffusion of electronic payments shows a significant effect in terms of cost inefficiency reduction.