Strategic and Transactional Use of Information Technology in Banking

The primary objective of this paper is to examine the relationship between the use of IT and firm performance in the banking industry. Data Envelopment Analysis (DEA) is utilized to evaluate the relative efficiency of individual banks by estimating relations among the multiple IT inputs and multiple measures of bank performance (revenues, equity capital, and productivity). The data set consists of a cross-sectional sample of 59 banks from the Functional Cost and Profit analysis data set collected by the Federal Reserve Banks. The results indicate that strategic IT is used more efficiently than transactional IT to generate revenues and equity capital. Further, strategic IT is also used more efficiently than transactional IT to generate productivity (volume and operations-based drivers). These results reinforce arguments made in the banking industry on the importance of using IT strategically to increase market share rather than by only using technology to improve productivity or reduce costs.