Digital Transformation of Banking in Improving Efficiency: A Study on Indonesian Digital Banks

Abstract

This study aims to examine the effect of digital transformation on bank efficiency in Indonesia by considering the Capital Adequacy Ratio (CAR) and inflation as control variables. The growing adoption of digital banking is driven by technological advancements, increasing internet penetration, and changing customer preferences, particularly among millennials and Generation Z, who are more familiar with digital financial services. These developments have encouraged banks to improve operational efficiency through digital transformation, although the benefits may differ between the short and long term. This study employs a quantitative approach using secondary data from five banks during the 2018–2025 period. The data were analyzed using a panel Autoregressive Distributed Lag (ARDL) model to examine the short-term and long-term relationships among the variables. The findings indicate that digital transformation has no significant effect on bank efficiency in the short term but has a positive and significant effect in the long term. CAR has a positive but insignificant effect in both periods, while inflation has a significant negative effect on bank efficiency in the long term. These findings suggest that improvements in banking efficiency through digital transformation take time to materialize, as banks need to adapt their operational processes and optimize digital infrastructure. This study contributes to the banking literature by providing empirical evidence on the different short-term and long-term effects of digital transformation on bank efficiency in Indonesia, with implications for digital investment and operational management.