Khóa luận tốt nghiệp: The Impacts of Information & Communication Technology (ICT) on commercial banks: Empirical evidence from Vietnam

The practical and theoretical necessity ofevaluating profitability ROAA, ROAE and income diversification stems from the practicaland theoretical necessity of the influence of technology

VIETNAM NATIONAL UNIVERSITY, HANOI

UNIVERSITY OF ECONOMICS & BUSINESS

Faculty of Finance - Banking

I hereby declare that this thesis “ The Impacts of Information & CommunicationTechnology (ICT) on commercial banks: Empirical evidence from Vietnam” is my ownscientific research work

All references are duly sourced, properly published and fully cited The content of the thesis

is researched by myself honestly, scientifically and has not been published in any researchwork

Signature of Instructor Signature of Student

MSc Pham The Thanh Nguyen Ngoc Minh

Despite many efforts, it is impossible to avoid flaws in this thesis We hope that teachers and

experts will continue to provide assistance

Again, I sincerely thanks!

Signature of Instructor Signature of Student

MSc Pham The Thanh Nguyen Ngoc Minh

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LIST OF TABLES Ẽ.00080/(00).1215177776Ề 76 7 Ề 7

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1.1 Regarding the rationale of the Study 5< 5s ưe 9 1.2 Research objectives 1.3 Subjects and Scope of the SEUdẢ sec rrriee 12 1.4 Methods Of Study -s- 5à HH HH HH1 g1 12 1.5 Scientific and practical significance Of study -ccersexeerrerirerrrrrrrrree 14 1.6 Structure Of a research Paper uu cceessscsessecssessessesseesseeseesseesteseeseesecseestesseeateseesteaeeseeaeess 14 CHAPTER II: LITERATURE REVIEW AND THEORIES -c+ecsesseseesesseserssssrsersrs 16 2.1 Literature (2/2 8

2.1.1 Literature review on ICT for commercial banks 2.1.2 Literature review on ICT for the profitability commercial banks 18

2.1.3 Literature review on ICT for the income diversification commercial banks 2.1.4 Literature related reViCWS Qe eccseecseeseeseesteseeseeseeneesteeseeatesneeaeesseeateseeseesteeseeateeneeaeeees 21 2.1.5 Research Ø2DS ch HH HH HH HH HH HH 1g 24 2.2 Rationale for information and communication technologies (ICT) 24

2.2.1 COIC@DDE 5n HH HH HH HH HH HH1 11 24

2.2.2 Literature review of Information and Communication Technology (ICT) 25

2.2.3 Technology and Communication (ICT) for the banking industry 27

2.2.4 tung nuoc cố 30

2.2.5 Data of Information and Communication Technology (ICT) 30

2.3 The theory of bank profitability s-cccceerreerrerrrrrrirrrrrrrrrrrrrrrrrree 31 2.3.1 COIC€DE HH HH HH HH HH HH HH HH HHH.1.1 111111111111.L10 31 2.3.2 Theoretical basis of bank profitability csccesieiieiiiirke 32 2.4 The theory of bank income diversification series 33 2.4.1 COIC€DL SH HH HH HH HH HH HH HH TH 11.111111111 11111111 34

2.4.2 The theoretical basis of commercial bank income điversification 35

SUMMARY OF CHAPTER 2 0 eseessessssssessseesssesseesseecssesstesseesseesueesueesueesseesneeeseeeseeateeaeeseesseesseesaeess 37

CHAPTER III: RESEARCH METHOD nen nggnghnggnnhrrranrsrsrsnrsrsrsranrarsee 38

3.1 Research metho nn cesesssessessseesssesseesssessneesseesseesseecseessecaeessessseesneesseesseesaeesaeesateeateeneeeneensesaes 38

3.1.1 Research GeSigni cccsseessssesssesssessesssessessssssssesseesseesssessiesssesseesiessieesessesssesssteeseesanesans 38

3.1.2 Research DFOC€SS - 5c + HH HH HH HH HH HH H01 H111 11tr 39

3.2 Research models

3.2.1 Model to measure the impact of ICT on profitability of commercial banks 41

3.2.2 Model to measure the impact of ICT on income diversification ofCOMME Cial ban KS - 5-55 + H1 HH 11.1.11113.3 Research data on

SUMMARY OF CHAPTER 3

CHAPTER IV: RESEARCH RESULTS AND DISCUSSION -.-«-«-eeseseseseesesrsrsee 49

4.1 Research results of the model Impact of ICT on profitability of commercial

Danks in Vieta ee cecseecssessseesseecsescseecseessseesseesseecsssessecsecsueessessseesaeesseesaeeaeeseesaseeaseessessaeesaeenseesaeeeness 49

4.1.1 Finding and đÏSCUSSỈOTNS -5 - 5< HH gà Hà Hà HH nhàn 49

4.1.1.1 Descriptive statÏSÏCS HH HH1 49

4.1.1.2 Correlation AMALYSIS - ccsn t1 01011111011 11111rrkrrrrke 504.1.1.3 OLS T€SUÏẲS ó ch HH HH Hà KH KH HH TH TH TH HH HH HH Hành

4.1.2 Multicollinearity test

4.2 Research results of the model Impact of ICT on income diversification of

commercial banks in VietNAM c.ccccccssessecseseessessesseseessesessesseeseesesseeseeseeseeseeeseeeseseeseeseeseeseeaeeaeeaeens 54

4.2.1 Finding and điSCuSSÏOTNS - 5-5 5+ HH1 1101 544.2.2 Correlation analysis

Automated teller machines

Business Mix indicator of bank

Cost to Income Ratio of bank

Technical infrastructure index of bankHuman infrastructure index of bank

Information& Communication TechnologiesInformation& Communication Technologies cost efficiencyInternet technology

International Postal Union

Net-interest income

Net-interest margin

Non-interest income

Net-profit marginOrdinary Least SquareDiversify bank income

Return on asset

Return on average asset

Return on average equity

Return on Capital Employed

Return on equity

Technology application index of bank

Variance Inflation Factor

Asset Growth rate

Cost to Income Ratio

Size of bank

Bank's capital mobilization rate

Loan balance growth rate

Table 2 1:

Table 2 2:

Table 3 1:

Table 3 2:

LIST OF TABLES AND FIGURES

Summary of a study on the impact of diversification on bank stability 21Component Of ICT index eeeessessesessseceessesecsesssecseestesseestesseeseesseeseesseeseeatesaeeateeseeasesseeseeaseens 30

Variables expected impact on bank performance model 1 -‹ - 44Variables expected impact on bank performance model 2 - -«- 47

Table 4 1: Descriptive statistics of variables model 1 -‹s «-+sxcskserkerrrrrkerrkrrrkerriee 49

Table 4 2: Correlation matrix MOCel Lon eeessesssesesseesseestesseeseesseeneeseenesseesneeateeseeseesessesseeseeateeeeeaeness 50

Table 4 3: OLS model 1 oes 51Table 4 4: VIF coefficient model Lu ecesesssssessesssssssessstesseesseesseecsteesessesssessseesseesseesseesssersteenseesteensesses 53Table 4 5: Descriptive statistics of variables MOdel 2 «-c«+ccerexxsererkeeretrerererrree 55

Table 4 6: Correlation matrix MOE] Z2 -«- + 5<c+++x+rkE+ksEkEkkerkrtrkttkrrrirrkrrrirrirrrrrrirrerrkrrrree 56

Table 4 2055 J0 57

Figure 1 1 Summary of research S€QU€IC© - «(5< nhàng HH Hy nghi 13

Figure 2 1: The development of digital-based innovatiOI -cc+ccercexeereereerrererrree 28

and annual reports of 32 commercial banks in Vietnam for the period 2014-2020.

The general objective is to evaluate the impact of Information & CommunicationTechnology (ICT) on commercial banks The author adopts methods: Quantitative methodwith multivariate regression model on pooled cross-sectional data, combined withdescriptive and comparative methods (De Young and Rice (2004)) Research results showthat: ICT has a positive impact on commercial banks in Vietnam At the same time, the thesisalso suggests policies to help bank planners and administrators understand the role oftechnology and have appropriate solutions for business activities in the industrial age digital

art.

KEYWORDS: Information and communication technology (ICT), profitability, incomediversification, commercial banks

CHAPTER I: INTRODUCTION1.1 Regarding the rationale of the study

Countries around the world are currently undergoing substantial integration in allindustries, particularly finance and banking The banking industry is progressivelydemonstrating its vital role in the economy The banking sector is significant to practitionersand regulators due to its influence on macroeconomic factors such as economic growth,

entrepreneurship, resource allocation, poverty alleviation, education, and agriculture

(Githaiga & Yegon, Citation2019) Inefficient banking operations will derail economic growth

by reducing capital investment to produce goods and services (Dietrich & Wanzenried,

Citation2014) Most countries’ monetary stability is directly affected by banking activities.

Along with the strong development of commercial banks, banks are also implementing strongcompetitive plans on service fees based on investment, with more modern and strongertechnical infrastructure to satisfy the needs of clients Customers’ requirements must be met

on schedule

Along with the strong development of the Industrial Revolution 4.0, banks have many

opportunities to access and expand the supply of suitable banking products and services to

customers, contributing to promoting the implementation of financial orientationcomprehensive (Financial Inclusion) of the Government With the entry of Fintech firms,competition is heating up (Tran Viet Dung & Lu Huu Chi, 2020) Indeed, what Buchak et al(2018) refer to as these companies' participation in the shadow financial market has allowed

them to expand their own financial services at a fraction of the cost, cheaper and more

convenient, and thus directly affect traditional banks' profit and market share (Vives, 2019)

As a result, continuous investment in digital technology (cybertech) and continuous

improvement of the e-banking system have become each bank's survival strategy,

particularly following the financial crisis, despite its vulnerability to cybersecurity threatsglobally Over the last several decades, the banking industry has undergone transformationand development in both size and quantity, with significant investments in IT such as in core

banking systems and an increase in the proportion of digital banking processes ICT can be

partial or total Banking activities are taking over more and more sectors of countries’economies Banks might have embraced technology, investing in modern equipment in theiroperations and launching numerous outstanding utility products and services in

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collaboration with fintech companies The financial market is also more developed, withmany tools such as online savings, commercial documents, financial derivatives, e-wallets,smart banking, and so on, attracting more customers to transact electronically through smart

devices rather than going to a bank's headquarters or branch and bring great opportunities

for commercial banks In favor ofincreasing spending on technology, the researchers believethat the digitization of financial services will contribute to increased bank productivity due

to the advantages of scale through automation of the system payment system, which in turnhelps to speed up the financial intermediation process (Chemmanur, 2002; Hancock et al.,1999) The global technological revolution allows banks to expand services in a cost-effectivemanner (Agyekum & ctg, 2016), and to promote financial development through globalexpansion (Tchamyou & ctg, 2019)

While banks throughout the world increase their budgets for technology withincreasing spending levels over the years (Greer & ctg, 2019), financial losses continue tooccur Cybersecurity behemoths have exploded as well, especially in Vietnam (see also:CNBC, 2016) This raises a seemingly simple yet vexing question: does investment ontechnology benefit banks?

Especially in the context of having to pursue risky decisions to survive in rapidlychanging market conditions because of technological innovations (Uddin et al., 2020) As aresult, there exists a mutual link between banks and even between banks and Fintechcompanies In addition, the empirical evidence of Beccalli (2007) shows that highertechnology spending has a clear adverse effect on profitability, in addition to Gupta's (2018)results Another view is more neutral, typically a recent study by Uddin & ctg (2020) whichargues that the stability of banks can be improved by investment in technology, but when athreshold is reached, certain, further increase in spending will adversely affect the stability

of banks On the other hand, the opposing viewpoint has warned that excessive reliance on

technology can lead to banks taking more risks (Ngonzi, 2016), particularly in the context ofhaving to pursue decisions to take risks in order to survive in rapidly changing marketconditions due to technological innovations (Uddin et al., 2020) As a result, there is a mutualrelationship between banks, as well as between banks and Fintech companies Furthermore,Beccalli (2007) empirical evidence demonstrates that increasing technology spending has ademonstrable negative influence on profitability, and Gupta's (2018) research shows

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comparable conclusions There are many technology applications that are invested withexpensive costs but with low efficiency, even with high risks Banks must choose an effectivetechnology investment strategy or merge with businesses Furthermore, financial crimes

have evolved and become more sophisticated, making it difficult for banks to keep customer

information secure and safe in financial transactions To ensure safety, banks must invest insecurity technology

In Vietnam, the banking system has undergone significant changes in terms of

operational management, operational apparatus, technological application, and thedevelopment of modern financial services Fintech technology deployment in banks bringsboth benefits and challenges As a result, not only researchers but also regulatory authorities

are paying attention to the issue of quantifying the impact of investment in technological

development on the efficiency and stability of banking activities There is currently littleresearch in Vietnam that clearly illustrates the impact of information and communicationtechnology (ICT) on commercial bank operations The practical and theoretical necessity ofevaluating profitability (ROAA, ROAE) and income diversification stems from the practicaland theoretical necessity of the influence of technology and communication on the operation

of commercial banks in Vietnam The thesis tries to elucidate the aforementioned topic,which is extremely practical, important, and influential, and contributes to policy

recommendations for the system's comprehensive and steady development In terms of

competition and international integration, banking is a leading industry That is why thethesis "The Impact of Information and Communication Technology (ICT) on CommercialBanks: Empirical Evidence from Vietnam" was chosen by the author

1.2 Research objectives

The thesis investigates the following aims based on the study challenges stated in "The

Impact of Information and Communication Technology (ICT) on Commercial Banks:

Empirical Evidence from Vietnam":

The overall goal: It is clear that the effectiveness of Information and CommunicationTechnology (ICT) investment in bank operations is the top priority of bank administratorsand policymakers The thesis's overarching purpose is to examine the impact of ICT on theoperations of commercial banks in Vietnam This is critical empirical evidence for proposingremedies to assist Vietnam's commercial banking industry develop more steadily

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Detailed objectives: The thesis delves into the following specific aims from the broadobjective:

> Research on the impact of Technology and Communication (ICT) on commercial bank

profitability (ROAA, ROAE) in Vietnam

> Investigating the influence of Information and Communication Technology (ICT) on

the income diversification of commercial banks in Vietnam

To attain the aforementioned goals, the thesis focuses on resolving the following research

questions:

1/ What is the impact of ICT on ROAA of commercial banks in Vietnam?

2/ What is the impact of ICT on ROAE of commercial banks in Vietnam?

3/ What is the impact of ICT on income diversification of commercial banks in Vietnam?

4/ What are some policy recommendations regarding the use of technology and

communication (ICT) for commercial banks?

1.3 Subjects and Scope of the study

Subjects of study

The thesis investigates the following topics: Information and Communication Technology(ICT), profitability (ROAA, ROEE), income diversification, and commercial banks in Vietnam.Scope of study

> Spatial scope: 32 Vietnamese commercial banks

> Time span: Data on the ICT index and the profitability of Vietnamese commercial

banks are available from 2014 to 2020

1.4 Methods of study

The thesis employs a quantitative method with a multivariate regression model onpooled cross-sectional data, paired with descriptive and comparative methodologies, toaddress the goal of quantifying the impact of ICT on commercial banks (De Young and Rice2004)

In addition, to identify other factors influencing commercial banks, the author

employs several other independent variables that describe bank and ICT features Thesevariables were regarded as control variables, and they were included in all models todetermine the correlation with the dependent variable

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Figure 1 1 Summary of research sequence

Define the research problem

Objectives of the studyImpact of ICT on profitability of commercial banksImpact of ICT on income diversification of commercial banksImpact of ICT on commercial banks

Research MethodsUsing quantitative method with multivariate regression model on

pooled cross-sectional data, combined with descriptive and

comparative methods

Research resultsICT has a positive impact on profitability of commercial banks in Vietnam

ICT has a positive impact on income diversification of commercial banks in VietnamICT has a positive impact on commercial banks in Vietnam

Suggest policies on ICT for commercial banksand issues related to commercial banks in VietnamSome limitations and directions for future research are outlined

Source: The author summarizes the research process

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1.5 Scientific and practical significance of study

First, through studying the impact of ICT on commercial banks in Vietnam, the thesisprovides a theoretical overview framework on the correlation of ICT to commercial banks

Second, the study highlights characteristics such as profitability (ROAA, ROEE) and income

diversity in commercial banking activities by studying the database of Vietnamesecommercial banks The findings of this study can be used by bank planners andadministrators to foresee shifting trends in the usage of technology by banks to designfeasible investment strategies about profit and income diversification

Third, analyze the impact of ICT on Vietnamese commercial banks through two models: theimpact of ICT on the profitability of commercial banks and the impact of ICT on the income

diversification of commercial banks Banks can use the findings to alter rules and provide

adequate notification to avoid negative consequences and maximize positive effects on

banks

Fourth, this study can serve as a premise for future studies on the impact of information and

communication technologies (ICT) on commercial banks in Vietnam.

1.6 Structure ofa research paper

In addition to the table of contents, the list of acronyms, the list of tables, the list of figures,the list of references, and the appendices, the study is structured into four chapters.specifically:

CHAPTER I: INTRODUCTION

Chapter 1 provides a summary of the thesis's core research topics, such as research aims andresearch questions, research scope and objects, research methodologies, and the thesis'sscientific and practical value Thesis structure in general

CHAPTER II: LITERATURE REVIEW AND THEORIES

Chapter 2 offers the whole theoretical foundation on concerns such as ICT, profitability

(ROAA, ROAE), and income diversification of commercial banks The thesis also examines

prior empirical studies on the impact of ICT on commercial banks The author draws out

research gaps at the end of the chapter based on the theoretical overview and past studies.

From there, as a foundation for selecting research methodologies based on commercial bank

data from 2014 to 2020

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CHAPTER III: RESEARCH METHOD

The content of chapter 3 presents appropriate research methods to measure the impact ofICT on commercial banks in Vietnam

CHAPTER IV: RESEARCH RESULTS AND DISCUSSION

After performing a quantitative method with a multivariate regression model on pooledcross-sectional data, paired with descriptive and comparative methodologies in chapter 3.Chapter 4 presents research results and tests of models used to measure the impact of ICT

on NHM The last part of the chapter focuses on discussing the impact of other variables onVietnamese commercial banks in the research period 2014-2020

CHAPTER V: CONCLUSIONS AND RECOMMENDATIONS

With credible study results obtained in chapters 3 and 4, the substance of chapter 5 consists

of all the author’s recommendations concerning the influence of ICT on commercial banks in

Vietnam To assist policymakers and bank administrators in developing future ICT plans,

thus boosting the Vietnamese commercial banking system's sustainable and organic

development.

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CHAPTER II: LITERATURE REVIEW AND THEORIESThe chapter 2 offers the whole theoretical foundation on concerns such as ICT,

profitability (ROAA, ROAE), and income diversification of commercial banks The thesis alsoexamines prior empirical studies on the impact of ICT on commercial banks The authordraws out research gaps at the end of the chapter based on the theoretical overview and paststudies From there, as a foundation for selecting research methodologies based on

commercial bank data from 2014 to 2020

2.1 Literature Review

2.1.1 Literature review on ICT for commercial banks

Information and communication technology (ICT) has become the cornerstone of theeconomy over the past few decades The spread and wide application of telecommunicationsnetworks, the Internet, mobile phones, and the development of new technologies such as the

Internet of Things (IOT), cloud computing, big data science, and intelligence Artificial

intelligence shows the influence of ICT on economic activities In the past, the research on ITwas numerous and greatly increased due to its indispensable importance in all aspects of ourlives As Pritchard and Hughes (1997) and Cole and Conlon (1994), IT is a term that includesthe exploitation of electronic technology for business information at all levels, be it computer-based systems as well as technology and telecommunications for storing, processing, anddisseminating information

One of the greatest concerns of every business organization is customer satisfaction

In the banking industry, most customers are motivated by the accuracy of records and thetimely provision of services Particularly, most of them measure the service standard of banksbased on how timely transactions are completed The application of ICT in banks is donethrough the power and connectivity of personal computers, which have linked banks and

their operations locally and globally Woherem (2000) claims that only banks that overhaul

the whole of their payment and delivery systems and apply ICT to their operations are likely

to survive and prosper in the new millennium Harold and Jeff (1995) contend that the most

significant shortcoming in the banking industry today is a widespread failure on the part of

senior management in banks to grasp the importance of technology and incorporate it intotheir strategic plans accordingly Consequently, they believe that financial service providersshould modify their traditional operating practices to remain viable in the industry Laudon

& Laudon (2001) state that knowledge and information are becoming the foundation for

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many services and products Leonard-Barton (1995) confirmed that ICT products havebecome critical and strategic assets for managers They are needed to optimize the flow of

information and knowledge within the organization and to help management maximize the

firm's knowledge resources Woherem (2000) advises organizations that want to survive to

re-examine their service and delivery systems to properly position them within theframework of the dictates of the dynamism of information and communication technology.Adetayo, et al., (1999) and Boyett (1995) maintain that to succeed (or even survive) in thisdynamic world, organizations must keep pace with the ever-changing capabilities of ICT

Various information and communication technology devices have emerged toenhance the speed and quality of service delivery and radically change how banking servicesare handled worldwide Shokan (2005) identified electronic fund transfer, electronic fund

transfer at the point of sale, electronic check, electronic letter of credit, electronic card, debit

card, electronic cash, electronic billing, and automated teller machines Francesco

Campanella et al (2915) have studied and analyzed empirically 3190 banks located in 17

countries over the period 2008-2011 Empirical research results show that first, there is a

positive relationship between financial leverage and technological innovation related toenterprise resource planning, software systems, and credit risk management software That

is, increasing debt to invest in technology reduces business efficiency, showing that theresearch banks using technology resources are not commensurate with the costs Second,

innovation in resource planning and the use of credit risk management software have a

positive effect on the business performance of banks; that is, banks have human resourceplanning for technology, and using credit risk management software will increase business

efficiency for banks

In Vietnam, the ICT wave of banks has been strong in the past three to four years, asevidenced by the development of new products Tien Phong Commercial Joint Stock Bank(TPBank) introduced the TPBank LiveBank application in early 2017 OCB introduced theOCB OMNI application in early 2018 Following the Timo digital banking paradigm, VPBankintroduced the Yolo digital banking application in September 2018 Military Bank (MB) nowallows users to transfer money through the Facebook application and has established a newcommunication channel with youthful customers through the eMBee fan page application.BIDV Bank introduced the BUNO product, which allows you to transfer money using only therecipient's phone number, eliminating the need to memorize the account number

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Vietcombank has also focused on the digital banking development plan at the annual generalmeeting of shareholders since the inauguration ofthe Vietcombank Digital Lab in 2016 From

2019 to 2022, commercial banks increased their investment in and focused on the ICT area

In the past few years, research on ICT in the country has significantly increased due to its

indispensable importance in all aspects of our lives

2.1.2 Literature review on ICT for the profitability commercial banks

Research "Determinants of banks’ profitability: evidence from EU 27 bankingsystems" by the authors Nicolae Petriaa, Bogdan Caprarub, and Julian Ihnatovc assesses themain determinants of banks' profitability in the EU27 over the period 2004-2011 and splitsthe factors that influence bank profitability into two large groups: bank-specific (internal)factors and industry-specific and macroeconomic (external) factors The authors consider as

proxy for banks profitability the return on average assets (ROAA) and the return on average

equity (ROAE) The empirical findings are consistent with the expected results Credit andliquidity risk, management efficiency, the diversification of business, market concentration

and competition, and economic growth all have an impact on bank profitability, both on

ROAA and ROAE The result is the positive influence of competition on bank profitability inthe EU27

In this study, the authors use the following research model:

y=a+X Bi +X2PB2+X3B3 + yearByte

where:

e Ystands for the dependent variables ROAA or ROAE;

e X, isa vector of bank internal factors;

e X, is a vector of banking sector factors;

e Xz; is a vector of macroeconomic variables;

e cis the error term;

e year are the year dummies;

e ; is the matrix of variable coefficients;

The empirical findings are consistent with the expected results Credit and liquidity risk,management efficiency, the diversification of business, market concentration andcompetition, and economic growth all have an influence on bank profitability, both on ROAA

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and ROAE The result is the positive influence of competition on bank profitability in the

EU27

Using technology in the production process will increase productivity; using technology

creates greater efficiency (Chen,2004) Research used the DEA method has shown the

relationship between business performance and technology investment

Deregulation of technology has helped large banks in the US take advantage of the expansion

of production, continue market expansion, increase security, and better serve consumerloans In addition, ICT will reduce interest rates for customers and selling costs becausefinancial transactions are carried out more quickly As a result, ICT-driven diversification ismore profitable for banks than conventional credit operations (De Young and Hunter,2003)and (De Young et al, 2004)

However, some economists fear that information technology will pose a challenge tobanking operations The strategic application of information technology can both endangerand assist SMEs (Bli and Raymond, 1993) As a result, it had a negative influence on thebanking industry in 1991 and 1992, which in turn had a severe impact on Iran's IT industry.Furthermore, the study found that the cost of banking control for IT has significantlyincreased, impacting the bank's profits

The study warns that over-reliance on technology can lead to banks taking more risks

(Ngonzi, 2016), particularly in the context of needing to make riskier decisions in order to

survive in this climate Market conditions are rapidly changing because of technical

advancements (Uddin et al., 2020) As a result, there is a mutual relationship between banks

as well as between banks and fintech companies Furthermore, Beccalli's (2007) empirical

evidence demonstrates that increasing technology spending has a demonstrable negative

influence on profitability, and Gupta's (2018) research shows comparable conclusions

2.1.3 Literature review on ICT for the income diversification commercial banks

The role of information technology in the banking industry According to Lichtenberg(1995), there are significant benefits to investing in IT, especially in the banking industry.According to Mario Castello's (2006) research, the Indian banking industry has provided acompetitive advantage in all aspects of the Indian economy Banks have invested in cutting-edge technology to provide core banking services Business processes that have beenrestructured have increased delivery efficiency IT has been used in banking to improve

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communication and connectivity, as well as to help restructure the entire regulatory businessprocess IT enables sophisticated product development, improved market infrastructure, theimplementation of dependable risk-control techniques, and assists financial intermediaries

in reaching distant markets, allowing banks to be geographically diverse

The research of De Young and Hunter (2003) and De Young et al (2004) highlightsthe opposite side of the use of IT in establishing competitive chances for small banks in the

United States These banks take advantage of individual consumers who are not eligible to

participate in financial markets or get electronic financial products Additional items aregeared to this demographic in additional ways Despite the variations in cost and servicequality, small banks, including those that do not employ IT, attempt to benefit from their

diversification efforts by leveraging market gaps.

"The impact of technology on income diversification: suggestive of a fintech-bankingdevelopment trend in Vietnam", Huong et al., 2019 stated that the use of informationtechnology has a positive impact on promoting diversification in the banking industry IT hascreated numerous advantages to assist banks in gaining access to opportunities to developmodern electronic products and services This is also the general trend in the banking andfinance industry, as well as the economy, in the 4.0 era Other factors influencing bankdiversification include total assets, asset growth rate, and bank lending activities in variousdirections As a result, to improve the efficiency of business diversification, it is necessary topay attention to these factors in addition to IT to achieve the best diversification strategy

The authors used the following model:

R-Div;,= Bo +B ,ICT;,+B2Size;,+B3Growth;,+B,Loans;,+ B;Deposits;,.+ E¡:

R-Div: Income diversification

NON (Non - interest income) represents non- interest income

NET ( et- interest income) represents net interest income

NETOP is the bank’s net income calculated as the sum of NON and NET

2.1.4 Literature related reviews

Non-interest income

expenditure NII

Impact of incomediversification onbank risk and return

- Research results show that

when banks diversify income, especially expand non-

interest activities, reducerisks, and increase profits forbanks

- Research conducted on 23

domestic banks and 16foreign banks in the

Philippines from 1999 to2005

Gulmhussen et

al., 2014

OLS linearregression model

Bank risks

- The study was carried out

ona sample of 384 listedbanks from 56 countries, thedata was taken in the period

2001-2007

Table 2 1: Summary of a study on the impact of diversification on bank stability

For Vietnam, a developing country, this role is even more prominent when the size ofthe corporate bond market is small compared to the size of the economy Therefore, the

profitability and income diversity in the business of commercial banks is a topic that needs

attention because it directly affects the "Impact of technological development on banking

operations in Vietnam." Research by Trung et al., 2020 investigated the impact of technology

spending on the bank's operational efficiency and stability The findings indicate that

technology investment has a positive and significant impact on the bank's net interest income

(NIM) ratio However, no evidence of a link between technology spending and bank stability

was discovered The authors believe that the study will be beneficial to both bank

21

administrators and regulatory agencies in terms ofbank management and administration, aswell as development policy orientation.

“The Impact of the Fourth Industrial Revolution on the Banking Sector in Vietnam

Today," Thai Ha et al, 2020 The Internet of Things, advanced robotics, 3D printing

technology, cloud computing, wireless mobile technology, and other major new technologiesare combining to create the fourth industrial revolution Artificial intelligence,nanotechnology, advanced materials science, energy storage, and quantum informatics have

a significant impact on all fields, including the banking industry The significant impact ofdigital technology in the banking sector not only assists banks in lowering transaction,transportation, and management costs but also contributes to financial savings forVietnamese banks

A few studies examine the effect of income diversification on bank risk in Vietnamese

banking Batten and Vo (2016) suggest that Vietnamese commercial banks participating in

noninterest income activities are associated with higher risk This somewhat conflicts withthe findings of Nguyen, Vo, and Nguyen (2015), implying that non-interest income activitiescan reduce bank risk, especially for large banks In contrast, our study uses differentindicators of bank risk to examine whether income diversification reduces bank risk inVietnam Also considering the size effect, we evaluate whether this relationship differsbetween large and small banks’ efficiency in providing capital for businesses, as well as thestability of commercial banks and development of financial markets

Vo Xuan Vinh and Tran Thi Phuong Mai, (2015) to represent the assessment ofbusiness performance and the stability of Vietnamese commercial banks in general, used twoindicators, ROA and ROE

With:

+ ROE measures the return a bank generates to its shareholders based on equity.

+ ROA measures a bank's profitability based on its assets.

In the operation of commercial banks, measuring profitability and income diversity is veryimportant to ensure stability and enhance resilience in difficult times, especially in situations

of difficult monetary policy or economic crisis

In addition to ROE and ROA, other metrics such as bad debt ratio, coverage ratio ofNPLs (non-performing loans), capital disbursement ratio, credit growth rate andcost/income ratio are also included are other important indicators to evaluate the bank's

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performance All the above indicators provide important information to help evaluate theperformance of commercial banks However, these indicators may be prioritized differentlydepending on the investment purpose and the market.

Income diversification is also important for commercial banks In a study on the effect

of income diversification on the risk and return of banks in the Philippines in the period1999-2005, Meslier et al (2013) found that when banks increase non-interest activities, theyreduce risk for the bank, and at the same time, the bank's profit also improves Incomediversification means that the bank does not focus on a single business but must diversifyproducts and services to increase income and reduce risk This helps the bank reduce riskand promote financial health while generating returns for shareholders Incomediversification is usually achieved by developing new products and services, expanding thecustomer base, strengthening risk management, and investing in different economic sectors.Therefore, profitability and income diversity play a very important role in ensuring thesustainability of commercial banks and helping to increase customer and shareholder

confidence This is also the reason why the author chose these two factors to measure the

impact of ICT on commercial banks

To achieve high profitability and income diversity, commercial banks need aneffective business strategy, focusing on developing new products and services, optimizingbusiness processes, and investing in potential economic sectors Therefore, ICT a good lever

to help commercial banks stabilize and increase operational efficiency? This is the question

that commercial banks are facing

There are a lot of research works on the profitability and income diversification of

domestic commercial banks that have been approached by several authors from different

angles, scopes, and research subjects Some typical research projects related to this research

in recent years can be mentioned:

Research on the benefits and risks of income diversification by Vietnamesecommercial banks by Vo Xuan Vinh and Tran Thi Phuong Mai (2015) has shown the benefits

of increasing income when banks diversify their operations motion However, when it comes

to the risk factor, the more the bank offers income, the lower the risk-adjusted profit will be.The author's conclusion is that income diversification did not bring benefits to Vietnamesecommercial banks during the study period of 2006-2013

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Ngo Thi Lien Huong (2011) on "Diversification of services at Vietnamese commercialbanks": an overview of the basic issues of diversification in the banking sector, such asconcepts, characteristics, meanings, and indicators evaluate the degree of diversification.

From the analysis of factors affecting diversification, the author points out lessons learned

for Vietnam from several countries around the world Thereby proposing recommendations

to develop diversification of banking products and services in Vietnam based on the bankingdevelopment strategy up to 2020

2.1.5 Research gaps

There has been a little research effort in Vietnam to analyze the influence ofinformation and communication technology (ICT) on the profitability and incomediversification of Vietnamese commercial banks Although there has been research on the

influence of ICT on Vietnamese commercial banks, there have only been studies on the impact

of ICT on commercial banks in general

The research data is derived from ICT Index reports and commercial bank financial

accounts However, the index and data vary from year to year and are not uniform Asa result,

the research has been chosen to align with the research technique and research model

Analyze and discover that there is a link between the two factors of profitability andincome diversification in the system of commercial banks This is the basis for developingfurther research directions

Furthermore, the three studies in Vietnam presented in the previous review yieldedcontradictory results, implying that more research on this topic with diverse samples fromindustries, economic periods, study time, and so on is required to clarify the impact of

technology on the profitability and income diversity of Vietnamese commercial banks.

2.2 Rationale for information and communication technologies (ICT)

2.2.1 Concept

Information and communication technology (ICT) is a combination of information

technology and communication technology It is a broad term that covers all availablecommunication gadgets, such as television sets, personal computers, cell phones, etcetera.ICT includes both internet-connected devices and mobile ones supported by wirelesstechnology It merges computing with a high-speed communication link carrying data, sound,and video (Alabi, 2005) It deals with the collection, storage, manipulation, and transfer ofinformation using electronic means Communication technology refers to the physical

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devices and software that link various computer hardware components and transfer datafrom one physical location to another (Laudon, 2001).

2.2.2 Literature review of Information and Communication Technology (ICT)

The rapid spread of information and communication technology (ICT) during the last

few decades has resulted in a dramatic transformation of the globe into an informationsociety People, businesses, and governments today have far better access to information,knowledge, and wisdom in terms of volume, scope, and speed because of ICT infrastructuresuch as fixed-line telephones, mobile phones, the Internet, and broadband ICT disseminationhas significantly enhanced resource allocation efficiency, significantly decreased productioncosts, and promoted significantly increased demand and investment across all economicsectors (Jorgenson and Stiroh 1999; Vu 2011; Lee et al 2012; Grimes et al 2012; Pradhan et

al 2015)

Many theories acknowledge that ICT plays an increasingly important role in

accelerating economic growth, although empirical investigations on this link have generated

contradictory results (Vu 2011; Sassi and Goaied 2013) While a number of empirical studies

confirmed that ICT diffusion plays a positive and significant role in improving economicgrowth, especially in developed countries (Roller and Waverman 2001; Inklaar et al 2005;Koutroumpis 2009), other studies found that economic growth in many countries andregions of the world is negatively affected by ICT diffusion (Dewan and Kraemer 2000;

Pohjola 2002; Papaioannou and Dimelis 2007; Yousefi 2011; Pradhan et al 2015; etc.) Many

previous studies on developing countries have used various econometric models and

cross-country data to understand the relationship between ICT diffusion and economic growth

(Nasab and Aghaei, 2009; Andrianaivo and Kpodar, 2011; Sassi and Goaied, 2013; Pradhan

et al., 2015, 2018; Aghaei and Rezagholizadeh, 2017) These studies yielded unclear results,and there was considerable dispute among experts over the topic of the large growth-enhancing effect of ICT dissemination in poor nations As a result, this matter is still underinvestigation Recent studies have shown a particular interest in studying the effect of ICTdiffusion on the economic growth of developing countries in the Middle East and North Africa(MENA) region (Hassan 2005; Sassi and Goaied 2013) and the Sub-Saharan Africa (SSA)region (Andrianaivo and Kpodar 2011; Lee et al 2012; Wamboye et al 2015; Albiman andSulong 2016) This interest has grown as a result of a dramatic increase in ICT usage in mostMENA and SSA countries in recent years, as measured by several indicators such as fixed-line

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telephone and mobile cellular subscriptions, the number of Internet users, and the number

of broadband subscriptions (World Bank 2017; International Telecommunications Union

2017)

The existence of a considerable positive association between ICT and economic

growth has been noted by prominent modern ideas such as neo-Schumpeterian theories(Schumpeter 1934; Pyka and Andersen 2012) and neoclassical growth theory (Solow 1956).According to these ideas, ICT enters the economic supply in the form of capital and improvesthe production process by deepening capital and producing technological and labor forcequality advances As a result, ICT adds value at the business and sectoral levels, leading toincreased productivity and economic growth at the national level (Quah 2002; Aghaei and

Rezagholizadeh 2017)

In addition, a literature review shows that, compared to developed and Asian

countries, research on ICT in the MENA and SSA regions is still in its infancy stage and needsfurther exploration and discussions to produce a clear idea of the effect of ICT diffusion oneconomic growth in these regions

Vietnam is no exception In Vietnam, before the rapid development of IT in generaland the Internet in particular, IT was a means and opportunity to improve thecompetitiveness of the economy and narrow the gap with developed countries Theconference to summarize 10 years of implementation of Resolution No 20-NQ/TW was held

by the Central Propaganda Department in Hanoi on November 1, 2022 Science, technology,

and innovation, as well as the Fourth Industrial Revolution, are taking place strongly, with

great impact on a global scale Vietnam has registered in several areas of science andtechnology development For example, the level of development of basic sciences such asmathematics, physics, and satellite technology in Vietnam is among the leading countries inASEAN Even some fields of natural science, computer science, engineering, and technology

at some Vietnamese universities have reached an advanced level

The study "Impact of Technology and Communication on Economic Growth inVietnam" by author Ha Thanh Cong shows the results from the econometric model that theauthorities in Vietnam should increase investment in infrastructure ICT infrastructure Inorder to benefit from the drivers of economic growth, policymakers should enact a number

of important policies that enable the development of the financial sector and provide aregulatory and institutional environment for the development of the financial sector

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institutions, strengthen the economy, increase government priorities, and developinfrastructure.

The study "Impact of Technology and Communication on Vietnam's Economy" by

Dang Thi Viet Duc systematizes the impact assessment of ICT on the Vietnamese economy in

terms of macro, industry, and business Research results indicate that ICT has had a positiveimpact on Vietnam's economy

2.2.3 Technology and Communication (ICT) for the banking industry

Especially for the banking industry in Vietnam, ICT is having a strong impact on thedevelopment of banks In the past decades, banks have invested heavily in technology to

improve the efficiency of the system of financial innovations based on financial technology.

electronic point of sale (EFTPOS), automatic teller machine (ATM), SWIFT system, electronic

data exchange (EDI), mobile banking, peer-to-peer lending (Peer-to-Peer lending or P2Plending), crowdfunding (equity-based crowdfunding), mobile payment (mobile payment),and blockchain banking (blockchain banking) according to Wonglimpiyarat (2017) (shown

in figure) Continuous investment in digital technology (cybertech) and continuousimprovement of the e-banking system have become vital strategies for every bank, especiallyafter the period of the global financial crisis Accept your vulnerability to threats fromcybersecurity

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Diners Club/ American Express |

Credit card (Thẻ T&E)

Visa and MasterCard

Switch

EFTPOS/ Debit card Electronic money transfer at the point of sale

Traditional banking system

Chemical Banks, New York

Vodafone NFC Mobile Wallet |

Digital payment system - Digital currency like Paypal,

Google Wallet, Apple pay,

Alipay, LINE pay, WePay

Digital banking system

Source: Compiled from the authors

However, even though banks throughout the world are expanding their technologybudgets and spending levels over time (Greer et al, 2019), losses continue to occur.Cybersecurity-related financial harm has also skyrocketed, especially in Vietnam (see also:

CNBC, 2016) This raises a simple question: yet vexingly, does investment in technology

benefit banks?

In favor of higher spending, the researchers believe that digitization of financialservices will lead to increased bank productivity due to the benefits of scale achieved throughsystem automation Chemmanur (2002) and Hancock et al (1999) provide a payment systemthat aids in the speeding up of the financial intermediation process The worldwidetechnological revolution enables banks to cost-effectively expand their services (Agyekum &ctg, 2016), thereby promoting financial development through global expansion (Tchamyou

& ctg, 2019) Technological deregulation has allowed major US banks to take advantage of De

Young's expansion in production, marketing, increased security, and better servicing ofconsumer loans Hunter (2003), De Young et al (2004) In addition, IT will reduce interest

rates for customers and the cost of sales because financial transactions are done more

quickly

The opposing view has warned that excessive reliance on technology can lead to bankstaking more risks (Ngonzi, 2016), especially in the context of having to pursue riskydecisions to survive in rapidly changing market conditions as a result of technological

innovations (Uddin et al., 2020) As a result, there is a mutual link between banks and even

between banks and fintech companies In addition, the empirical evidence of Beccalli (2007)shows that higher technology spending has a clear adverse effect on profitability, and Gupta's(2018) results also show similar results Based on the database of 12 commercial banks inVietnam from 2011 to 2019, the authors of PGS, Dr Nguyen Duc Trung, Dr Tran Viet Dung,and Lu Huu Chi, conducted an empirical investigation of the impact of cybertech spending onbank performance and stability The results show technological investments positively affectthe efficiency of banking operations, but the extent is insignificant

However, to turn IT into an opportunity, Vietnam in particular and banks in Vietnam

in general must be prepared to be able to take advantage of and exploit the advantages of thistool, that is, to be "E-ready" or "ready for development and application of ICT." Indexes about

"e-readiness" or "readiness for development and application of IT and ICT" are one of theconvenient tools for that assessment, not only in Vietnam but also in other countries south,

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but also many countries around the world The ICT index includes all technical means used

to communicate, create, disseminate, store, and manage information, process information,and facilitate communications These technologies include computers, the Internet, radio-

mediated communications, and telephones, as well as the necessary software To reflect the

overall status of development of the IT and communications industries in Vietnam, theVietnam Informatics Association cooperates with the Office of the National SteeringCommittee on IT and the Enterprise Informatics Institute under the Vietnam Chamber ofCommerce and Industry According to the assessment method of the ITU, Harvard Universitydeveloped the Vietnam ICT Index to provide information on the current state of ITdevelopment and application and at the same time assess and rank readiness fordevelopment and application IT for selected units

2.2.4 Component of ICT index

The ICT index in the banking sector is measured by four groups of indicators (29 indicators):

IT-IICT technical infrastructure IT-IIT human resources infrastructure

(14 indicators) (4 indicators)

ICT application

Organizational environment and policies for

(9 indicators) ICT (2 indicators)

Table 2 2: Component of ICT index

These indicators are collected directly from the reports of commercial banks These reportsare prepared according to the form provided annually by the Vietnam Informatics

Association

2.2.5 Data of Information and Communication Technology (ICT)

Within the scope of the article, the author conducts experiments with the ICT Index, which is

extracted from the report of the Vietnam Informatics Association, Office of the National Steering

Committee on IT Data sets from 2014 to 2020.

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2.3 The theory ofbank profitability

2.3.1 Concept

Profitability is a number that indicates a company's ability to generate profits over a

long period of time under constant operating conditions

The measurement of bank performance is a complicated activity All performancemeasures, regardless of their specific objectives, use accounting and market data to assess

the financial condition of an institution at a point in time as well as to determine how well it

has been managed over a period of time (Jianu et al 2017) Profitability can be used as asummary index of performance (De Andres and Vallelado 2008; Liang et al 2013) There aretwo methods commonly used to measure the performance of businesses in general and banks

in particular: returns on assets (ROA), defined as the return on the average total assets ROE

is defined as the ratio of returns on equity The measure of bank performance differs from

that of Laeven and Levine (2007), who used Tobin’s Q (i.e., the sum of the market value ofcommon equity plus the book value of preferred shares divided by the book value of totalassets)

Ahmed and Khababa (1999), in their assessment of bank performance in Saudi Arabia,employed three ratios as measures of performance: ROE, ROA, and percentage change inearnings per share Sinkey (1992) posits that return on assets is a comprehensive measure

of overall bank performance from an accounting perspective and is a primary indicator ofmanagerial efficiency as it indicates how capable the management of a bank has been inconverting the bank’s assets into net earnings Rose and Hudgins (2006), however, maintainthat ROE is a good measure of accounting profitability from the shareholders perspective It

approximates the net benefit that the stockholders have received from investing their capital.

Akintoye (2004) also identified three ratios that can be used as proxies for organizational

performance, namely: net profit margin (NPMARG), return on capital employed (ROCE), andreturn on assets (ROA) Arising from the principles of both the resource-based view and thesociotechnical view They are another measure of organizational performance that depends

on the organization’s information and communication technology cost efficiency (ICTCE)

This is a measure of the ICT capability of an organization—the extent to which theorganization can assemble, integrate, and deploy valued resources to create or sustain acompetitive advantage in the industry to which it belongs (Russo and Fouts, 1997)

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2.3.2 Theoretical basis of bank profitability

Research on banking business or profitability mostly focuses on two main theories:

Market Power Theory (MP) and Efficient Structure Theory (ES)

MP theory has two approaches: structure - behavior - efficiency (SCP) theory and

relative market power (RMP) theory SCP holds that market structure determines companybehavior and behavior determines market outcomes such as profitability, technicalinnovation, and growth According to the SCP theory, the more concentrated the bankingmarket is, the higher the lending rates and the lower the deposit rates because of the reducedcompetition Meanwhile, according to Berger (1995), firms with large market shares anddifferentiated products can exercise market power and earn non-competitive profits Forexample, some large banks with superior brand names and product quality may increase theprices of products and services to gain more profits

However, ES theory suggests that the relationship between market structure and firmperformance is determined by firm performance, i.e firm performance that makes up the

market structure, Olweny and Shipo (2011) suggests that banks are more profitable because

they are more efficient Depending on the type of performance considered, the ES theory isproposed in two directions: With AI Muharrami and Matthews (2009) take the X efficiencyapproach (X - Efficiency), more efficient firms often achieve higher profits and larger marketshares, because they are able to reduce production costs anywhere any output And Olweny

and Shipo (2011) approach the scale efficiency (Scale Efficiency), the above relationship is

explained based on the scale Larger banks have lower production costs, resulting in higher

profits (economies of scale)

In summary, MP theory assumes that bank profitability is a function of market factors.While ES theory and portfolio theory argue that bank performance is influenced by internalefficiency and management decisions Accordingly, there are many studies based on theabove theories to introduce a number of variables to be included in the bank profitabilitymeasurement model, such as Olweny and Shipo (2011) which is a function that includes bothinternal and external factors outside In addition, to explain the change in bank profitability,the internal factors are analyzed based on the breaking framework, Camel product and theset of financial soundness indicators according to the IMF (Financial Soundness Indicators:FSIS)

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Thus, there are many criteria to evaluate the profitability ofa bank Empirical studiesshow that economists always flexibly apply the criteria in the two sets of criteria above toaccomplish their research purposes All performance measures, regardless of their specific

objectives, use accounting and market data to assess the financial condition of an institution

at a point in time, as well as to determine how well it has been managed over a period of time(Jianu et al 2017) Profitability can be used as a summary index of performance (De Andresand Vallelado 2008; Liang et al 2013) There are two methods commonly used to measurethe performance of businesses in general and banks in particular, including returns on assets(ROA), defined as the return on the average total assets ROE is defined as the ratio of returns

on equity In this thesis, the author chooses the most basic criteria, which are ROA, ROE (Ariss,

2010; Uhde and Heimeshoff, 2009), and ROAA, ROAE - Average assets and equities

Chiaramonte and Casu (Citation2017), Chen et al (Citation2018), and Sahyouni and Wang

(Citation2019) to represent the profitability of Vietnamese commercial banks These areindicators that are included in the above two sets of criteria, and are most commonly used in

Vietnam in empirical studies as well as practical management at commercial banks ROA,

ROE, ROAA, ROAE according to the following formula:

Net Return Net Return

ROA = —————_ ROE = ———_

Total Assets Total Equity

Net Return Net Return

ROAA= ———_ ROAE =H

Average Assets Average Common Stock Equity

In banking activities, increasing profits means banks face more and more risks

Therefore, in addition to the goal of increasing profits, banks need to diversify to spread risks(Chiorazzo et al 2008; Stiroh 2004a, 2004b)

2.4 The theory of bank income diversification

Diversification is essential in all banking activities and is a means of effectivelyoptimizing competitive tactics Thanks to economies of scope, diversification may improvebank stability through cost savings due to the joint production of a wide range of services andrevenue improvements via cross-selling various fee-based financial products as well as

traditional lending-based services (Klein & Saidenberg, Citation 2000) Therefore, the bank

can develop into new areas, pursue profitable prospects, enhance bank income, and

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