The impact of digitalisation on the profitability of large US banks

According to knowledge-based theory, we propose a model to explain how digitalisation impacts bank performance. We identify four capabilities stemming from the digitalisation process that create sustainable competitive advantage: market-learning digital capabilities, organisational digital capabilities, technical digital capabilities and industry digital capabilities. Using a sample of 96 large listed US banks from 2007-2017, we create a unique new multisource dataset (Annual reports, Bloomberg, World Bank, and OECD EMI) that enables mapping the digitalisation of the US banking industry and testing the proposed model. The results of our empirical analysis demonstrate that digitalisation positively affects bank profitability; specifically, digitalisation leads to sustainable competitive advantages for banks through market-learning digital capabilities, technical digital capabilities and industry digital capabilities. Furthermore, we provide evidence that the digitalisation process both reduces and increases banks' numbers of branches and employees, as is common when strong technological innovations emerge through creative-disruptive mechanisms.