The nexus between data analytics and firm performance

Abstract

The increased access and availability of information technology solutions have brought structural shifts in traditional business models, processes, and activities worldwide. As a result, the innovative ways of doing business and practices have disrupted the traditional businesses and technologies. This study investigates the impact of investment in data analytics on the financial performance of banks in Pakistan. A sample of 32 banks including commercial and microfinance banks for 2010 to 2019 was selected. Random effect panel estimation and instrumental variable two-stage least square were employed to quantify the impact of data analytics on firm performance. The results indicate that investment in data analytics increases the productivity of banks by 10%. However, the impact of investment in DA on profitability measures including return on assets, return on equity, and net interest income was negative, reflecting the “profitability paradox.” In the current era of digitalization, the banks need to invest in innovative technologies which have analytical capabilities to remain competitive and sustainable.

Keywords:

• Data analytics
• Digitalization
• financial sector
• productivity
• financial performance

PUBLIC INTEREST STATEMENT

This study is motivated by the fact that digitalization has disrupted traditional business models particularly in the wake of pandemic Covid-19. Although the financial sector works as a growth engine for economic development, approximately 50% of Pakistan’s population is unbanked. The increased focus on digitalization in the country in general and the financial sector in particular is promising. This research seeks to establish a linkage between modern technologies that emerged through digitalization and firm performance in an emerging economy context. The research will help regulators and decision-makers understand the potential role of modern technologies driven by the banking industry. However, this study suggests that banks’ survival against disruptive business models is possible through investing in modern technologies with analytical and decision-making capabilities.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Raazia Gul

Raazia Gul is a PhD-candidate in the Department of Business Administration at Foundation University Islamabad, Pakistan. She has been working as a lecturer at various universities and business schools. Ms. Gul has also been working as a freelance researcher, writer, copy editor and proofreader for more than a decade. She has won gold-medal in MPhil and BSc programs. Her research interests include data analytics, intellectual capital, value creation and firm performance. She has presented in reputable conferences across the world.