The impact of digital transformation on non-interest income: evidence from Chinese commercial banks

Abstract

This study investigates how digital transformation affects commercial banks' non-interest income in emerging markets, examining the moderating roles of banking competition intensity and net interest margin to clarify boundary conditions that shape digitalization outcomes. Drawing on panel data from 135 Chinese commercial banks over 2011–2021, this study develops a theoretical model distinguishing productivity enhancement and resource reallocation mechanisms, then employs two-way fixed effects estimation with instrumental variable and system GMM robustness checks. Digital transformation significantly increases non-interest income through both direct productivity gains and induced resource shifts toward fee-based activities. Competition intensity positively moderates this relationship, amplifying digital investment returns in contested markets. Net interest margin negatively moderates the relationship, such that margin compression strengthens digital transformation's promotional effects. State-owned banks and capital-constrained institutions derive comparatively larger benefits from digitalization. Banks should calibrate digital strategies to their specific competitive and profitability contexts, with those facing intense competition or margin erosion benefiting most from comprehensive digital repositioning that aligns platform investments with fee-based business expansion. This study advances understanding of digital transformation in emerging market banking by integrating dual moderating mechanisms within a unified theoretical framework, clarifying how external competitive pressures and internal profitability conditions jointly shape the returns to digital investment in non-interest income.