Effect of Digital Banking on Profitability of Commercial Banks in Kenya

Abstract

The financial industry has acknowledged the revolutionary power of digital banking. Digital banking is one of the models of promoting operational efficiency by reducing transaction costs and the need for a physical infrastructure, leading to potential cost savings for banks. This efficiency can directly contribute to improved firm profitability and enhance customer experiences as well as expands market reach by providing convenient and accessible banking services. Kenyan commercial banks are currently embracing digital banking more and more to facilitate clients may conduct a variety of financial activities and manage their accounts at home or on the go with mobile devices thanks to digital banking's increased accessibility and convenience. Digital banking reduces the need for a physical branch network and allows banks to automate various processes, resulting in lower operating costs, expansion in the customer base and improved customer retention, which, in turn, influences firm profitability. The investigation thus sought to determine the effect of digital banking on Kenyan commercial banks' profitability. The study was guided by innovation diffusion theory, the agency theory and the technology acceptance theory. A descriptive research design was used in the study. The target population included 38 commercial banks in Kenya. Secondary data was used and was collected from the financial reports of the commercial banks under study for the period 2019 to 2023. Data analysis included both descriptive and inferential statistics. From the results, internet banking, ATM transactions, mobile banking and bank size had a positive and significant effect on financial performance. Point of sale had a positive and insignificant effect on financial performance. The study recommended that the commercial banks ought to tap on the benefits of the adoption of internet banking because of the perceived benefits of its adoption. The commercial banks under study ought to adopt the point of sale terminal. Even though the results indicated an insignificant effect of point of sale on the financial performance of the banks, it enhances the level of customer satisfaction by allowing customers to carry out a number of activities including fund transfers, pay for items and check their balances without necessarily dealing with cash. The commercial banks under review ought to increase the number of ATM machines to be accessible in the remote places of the country. The commercial banks ought to tap on the benefits of the adoption of mobile banking because of the perceived benefits of its adoption. Finally, the commercial banks under study out to focus on enhancing the asset capacity. Further research should consider investigating effect of emerging fiscal technologies, such as block chain, cryptocurrency, and artificial intelligence, on bank performance.