ABSTRACT: Digital financial innovation has expanded rapidly across emerging banking markets, yet evidence on how specific innovation channels affect bank performance remains fragmented. Existing studies rely largely on aggregate indicators, obscuring bank-level heterogeneity and the role of macroeconomic conditions. This study addresses these gaps using detailed channel-level data from Nigerian Deposit Money Banks. The analysis draws on a bank-level panel covering 2012 to mid-2025, capturing six major digital transaction channels—ATM, POS, WEB, MMO, NEFT, and NIP. A multi-theoretical framework integrates Schumpeterian creative destruction, Merton's functional intermediation view, Modigliani–Miller rent erosion logic, and incomplete markets arguments to align theoretical mechanisms with measurable innovation variables. Methodologically, a Panel ARDL model is employed to distinguish short-run dynamics from long-run relationships, while dynamic GMM estimation addresses persistence, endogeneity, and unobserved heterogeneity. Standard diagnostic tests confirm stationarity properties, cointegration, and model adequacy. Innovation–macro interactions are included to assess whether systemic conditions amplify or weaken performance effects. Three key findings emerge. First, ATM activity consistently enhances Return on Equity (ROE), while NIP shows marginal positive effects, reflecting the performance relevance of high-volume, reliability-critical payment channels consistent with Schumpeterian and functional intermediation theories. Second, POS, WEB, MMO, and NEFT exhibit no robust effects on ROE or ROA, suggesting commoditization pressures, thin margins, or operational inefficiencies typical of mature, fintech-intensive environments, in line with Modigliani–Miller predictions. Third, once macroeconomic moderators are introduced, the exchange rate emerges as the sole significant influencer of ROE. Its inclusion attenuates the baseline significance of ATM and NIP, indicating that macro stability conditions the profitability gains from digital adoption. Across specifications, innovation shows no significant effects on ROA, implying slow materialization of asset efficiency benefits due to cost burdens and organizational adjustment frictions. Findings underscore the need for banks to prioritize investments in infrastructure-relevant channels such as ATM and NIP while applying stronger cost-benefit evaluation to commoditized platforms. Policymakers should strengthen exchange rate stability, interoperability frameworks, and prudential oversight to ensure that digital expansion translates into sustainable profitability. Improved measurement of channel-specific costs, better capture of regulatory shocks, and deeper analysis of bank heterogeneity will enhance future policy design and empirical insights.
Paseda et al. (Sun,) studied this question.