Role of Payment Innovation on Bank Performance: What Happens to the Bank if Cash Goes Away?

Over the past 10 years, Indonesia has significantly grown in payment system innovation. Banks have no choice but to adjust to these advancements while still taking their ability to earn a profit into account. The study aims to examine how payment system innovation impacts bank performance in Indonesia. Country-level data from 2013 to 2020 are used to assess the research hypotheses. Data are gathered from the Global Economy and Bank Indonesia. For examination, we employ ordinary least squares methods. We also develop two econometric models to evaluate the relationships among the variables under the hypotheses. We employ principal component analysis for variables linked to electronic transactions as a proxy for payment innovation due to the failure of the assumption test for the profitability model. The findings show a statistically significant negative link between bank profitability and payment innovation. In the risk model, we find that the number of ATMs has a statistically negative impact on bank risk, but the number of debit cards has a positive effect. Banks must be aware of innovations in payment systems that lead to more significant revenue than before because improvements to payment systems will raise operational risk; as a result, the bank must also be aware of any potential for new risks to materialize because of implemented innovations.