Online banking applications and community bank performance

Purpose - The purpose of this paper is to examine the impact of online banking intensity on the financial performance of community banks. Design/methodology/approach - This study estimates online banking intensity and bank performance indices using a combination of primary and secondary data. Online banking intensity is specified as a latent construct and estimated using web feature data collected from bank websites. An empirical profit function of a nonstandard Fourier flexible form is estimated using bank's financial data to derive a theoretically consistent performance measure. The actual impact of online banking on performance is measured by regressing the profit efficiency index against a number of correlates including online banking intensity measure. Findings - Study results indicate that the increasing use of internet as an additional channel of marketing banking services has significantly improved the financial performance of community banks. Practical implications - These results show that online banking improves the financial performance and should encourage community banks to adopt new information technologies and offer targeted online services. Originality/value - This paper is the first of its kind that applies a structural equation modeling framework to develop a comprehensive online banking intensity measure, which accounts for a wide array of products and services offered online by a bank, and utilizes the estimated index in measuring the impact of internet banking intensity on bank performance.