High-Tech Investment Activity and Efficiency. Is There a Stable Relationship?

Our study examines the high-tech investment activity of the banking system from 2009 to 2020. To gain understanding of the effect of the increasing interest of banks in high-tech investments, this research provides evidence of the relationship between the level of efficiency achieved by Euro Area banking groups and their high-tech investment aptitude. This paper is purely exploratory given that, to the best of our knowledge, it is one of the first to address this specific research question. We analyze in detail the association between bank efficiency (measured using a stochastic frontier approach) and different high-tech investment indicators, as well as the direction of this connection to provide an explanation for the relationship. We find a stable and overall significant relationship between banks’ efficiency and their high-tech investment aptitude. Moreover, we find that only medium efficiency banking groups that adopt a more diversified investment acquisition strategy have a positive relationship with high-tech investment aptitude; otherwise, the relationship between bank efficiency and high-tech investment indicators seems to be negative. Although banking groups are clearly fostering their high-tech investments to appear more innovative and to keep up with fintech and techfin, their high-tech investment strategies are implemented in the context of great competition in the technology sector that is populated by firms whose value is very difficult to evaluate, which leads to the possibility that some acquisitions are achieved at prices higher than the real fair value. We conjecture those new entrants to the banking market (e.g. fintech and techfin companies) that are more specialized in the production of patents and high-tech instruments can benefit from lower production costs compared with incumbent financial firms. For this reason, we suggest further research to investigate the differences between investments in high-tech internal divisions or companies and acquisitions of high-tech companies. Open banking regulation aimed to increase competition in the banking sector to reduce customers’ costs. However, our paper reveals that to compete with new entrants (fintech and techfin), banking groups are investing in resources that, on average, have not yet generated a positive effect on efficiency. Regulators should be aware of this acceleration in the enhancement of high technology either because it can reduce the stability of banking groups or because an increase of intangibles assets (such as patents) could also be motivated by an interest rather than by an earnings management strategy.