The Effect Of Digital Transformation On Operating Costs Of Commercial Banks In Kenya

Abstract

Digital transformation in banking has significantly transformed the way in which banks deliver their services, with mobile banking, Internet banking and e-services becoming the main delivery channels. Banks are increasingly embracing technologies to grow their markets, to enhance client service, to minimize operating costs, to increase profitability and for achieving efficiency. The study purposed to evaluate the effect of digital transformation on operating costs of commercial banks in Kenya. A descriptive research design was employed centered on the key areas of concern. The target population comprised of the 40 active commercial banks operating in Kenya as at August 2017. The study took a census approach since the population was not big. Secondary data accumulated from filed CBK returns and published financial statements for a period of 5years (2012-2016) was utilized. Diagnostic tests were performed on the data to check for the assumptions of a linear regression model. We relied upon regression analysis in determining the relationship between the dependent and independent variables. The study revealed that the operating costs of commercial banks in Kenya increased with an increase in the number of transactions carried out through Mobile banking, ATM Withdrawal, Electronic Card Transfer, and Agency Banking. The study established an intercept of 0.5605 for the period of 2012-2016. Specifically, the study established the coefficients for mobile banking (0. 0.314827 p value = 0.015) meaning that the number of mobile banking transactions positively affect operating costs of commercial banks in Kenya. Additionally, the study found a strong positive correlation between operating costs of commercial banks in Kenya and number of ATM withdrawals transactions as shown by the correlation coefficient of 0.04559 (p value = 0.005), between operating costs of commercial banks in Kenya and number of electronic card transfer transactions as shown by the correlation coefficient of 0.62423 (p value = 0.026) and finally a strong positive correlation between operating costs of commercial banks in Kenya and number of Agency Banking transactions as shown by the correlation coefficient of 0. 0.743281 (p value = 0.000). The study found that there exists a positive relationship between digital transformation and operating costs of commercial banks in Kenya. The findings of the study found the existence of a positive correlation between operating costs of commercial banks in Kenya and the independent variables (mobile banking, ATM Withdrawal, Electronic Card Transfer, and Agency Banking). The commercial banks in Kenya should consider investing and coming up with strategies that not only gain them competitive advantage and more customers but also ensures that they increase their operational efficiency. Banks should increase the use digital channels to differentiate their products and for service delivery in order to attract and maintain customers. This will in turn drive the volume of transactions performed through digital channels to above critical mass level which would translate to lower operating costs. The regulatory authorities ought to ceaselessly monitor transactions carried out through these digital platforms to identify associated risks and to put in place effective risk management measures. Lastly, in spite of the contributions of this study, numerous research opportunities still exist and more work needs to done towards a superior comprehension of the effects of digital transformation on operating costs of commercial banks.