Revolutionizing Banking: Neobanks’ Digital Transformation for Enhanced Efficiency

Response to Reviewer 1 Comments

1. Summary

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below and the corresponding revisions/corrections highlighted in yellow and in track changes in the re-submitted files.

2. Questions for General Evaluation

Reviewer’s Evaluation

Response and Revisions

Does the introduction provide sufficient background and include all relevant references?

Yes

Thank you

Are all the cited references relevant to the research?

Can be improved

Is the research design appropriate?

Can be improved

Are the methods adequately described?

Yes

Are the results clearly presented?

Can be improved

Are the conclusions supported by the results?

Can be improved

3. Point-by-point response to Comments and Suggestions for Authors

Comments 1: In the start of Abstract, make it worth reading. Consider changing "banking customer preferences...", and give it a good touch.

Response 1: Thank you for pointing this out. We agree with this comment. Therefore, We have changed it to become “..customer behavior..” in the beginning of abstract. [line 10]

Comments 2: Since, the study is based on 'neobanks', then authors must have to be focused on traditional banks and banking systems as well. So, please change it in the Abstract section accordingly. Or, bring some transformation from traditional to neobanks.

Response 2: Agree. We have, accordingly, modified the sentences as below, to emphasize this point.

Neobanks emerges as innovation and enter the banking system to compete with the  traditional banks by offering new customer experience. Neobanks transform traditional banking product and services which delivered by physical interaction, into a digital channel delivery. [ Abstract line 12-14]

Comments 3

• Why Stochastic frontier analysis SFA is used and preferred, why not others. This should be considered in Methodology section. However, authors can write a brief line in abstract as well.
• Without details, write about SFA, PMG ARDL...

Response 3: Thank you for pointing this out. We have modified the abstract [line 17-19] and Methodology section [Section 3 – line 361-365].

[ Abstract line 17-19]

“Efficiency is measured using Stochastic Frontier Analysis (SFA) as it more accurate in estimating the efficiency score. This study also uses Pooled Mean Group (PMG) of Panel ARDL (Autoregressive Distributed Lagged) as it is powerful for analyzing the relationship between variables in panel data, to investigate digital transformation determinant neobank’s efficiency, as well as to examine the existence of short-term and long-term relationship between digital transformation and efficiency.”

[Section 3. Methodology – line 361-365].

The SFA has a better statistical control than the other approach in measuring efficiency, such as Data Envelope Analysis (DEA) as it more accurately in estimating the score of efficiency. As a parametric method, SFA has substantial benefits in efficiency analysis because it can distinguish the random noise and inefficiency (Asmare and Begashaw, 2018; Huang and Wang, 2002).

Comments 4

• The introduction can be tightened by combining some sections. For instance, authors can merge the explanations of digital transformation phases (King, 2018) and neobanks (BaFin, 2021) into a single paragraph highlighting the evolution of banking and the emergence of neobanks.

Response 4:

Thank you for pointing this out. We agree with this comment. Therefore, we have modified it as belows.

[Section 1. Introduction – line 52-63]

The changing of customer behavior aligns with the banking transformation as stated by King (2018) who mentioned that digital transformation in banking from the phase 1.0 with traditional bank office activities, then phase 2.0 which started to use ATM technology, continued with phase 3.0 that supported by smartphone mobile banking innovation, and currently phase 4.0 with digital transformation and the emergence of neobanks with digital-based products or services. Neobanks or challenger banks focus only on digital banking product and services, and delivered it via digital channels (BaFin, 2021). 

[Section 2 Literature Review - line 151-154].

The rest of the paragraph (Neobanks definition according to Delgado (2021) is moved to Section 2 – Literature Review.

Comments 5

• Strengthen the explanation of the research gap by explicitly stating how this study addresses limitations in existing research.

Response 5:

Thank you for pointing this out. We agree with this comment. Therefore, we have modified it as follow:

[Section 1 – Introduction, line 66-73]

This study comprehensively explores digital transformation of traditional banks into neobanks and its implication on the efficiency. Findings from this study addresses the limitations in existing research as mostly the discussion are about efficiency in traditional bank and determinants of efficiency but not digital transformation. Neobanks is one of the novelties from this study, besides analyzes on digital transformation as determinants of neobanks’ efficiency, and the longevity relationship in U-shape relationship between digital transformation and efficiency since there is an indication of short run and the long run relationship between digital transformation and efficiency.

Comments 6

• Focus on neobank efficiency, and its long-term impact on DT.

Response 6:

Thank you for pointing this out. We have modified the paragraph about it and focus of this study in Section 1 – Introduction [line 87 and 92-93] as follow:

Neobanks’ digital transformation and its long-term impact on efficiency are the focus of this study. It demonstrates its novelty which focuses on three analyzes. Firstly, the efficiency is analyzed by implementing the SFA to measure the alternative profit efficiency theory with translog approach. Secondly, the digital transformation is investigated whether it is the determinant of bank efficiency. Thirdly, this study analyzes the digital transformation’s long-term impact on neobanks’ efficiency.

Comments 7

• Literature review is well written, however, it can be divided under headings to make things more clear. Examples: Neobanks role, transformation, etc.
• Digital transformation has a wider perspective and is not limited to the banking sector.

Response 7: We have modified the Literature Review with headings. [Section 2 – Literature Review, First Paragraph – Line 143-153].

We agree that digital transformation is not limited in banking sector, that is why the first paragraph in Literature Review is talking about digital transformation in other sector such as manufacturing sector.

Comments 8

• Also, mention hypothesis in the review section. What do authors want to achieve? Make it more clear.

Response 8: We have revised the hypotheses in the end of Literature Review Section to be more clear, as follows:

[Section 2 – Literature Review, line 347-351]

‘…, the hypotheses proposed are: Digital transformation increases the neobanks’ efficiency and digital transformation is one of determinants of neobanks’ efficiency, also there is a long-term relationship between digital transformation and neobanks’ efficiency.

Comments 9

• Methodology and results are well composed. However, there is a need to mention all the seven banks' names.
• Also, there is a need to divide methodlogy into sections, prefer headings.

Response 9:

• Here are the seven banks’ names, but we think this information only for reviewer because even though the financial data was published, the analysis will become a sensitive issue for banks. The banks’ names are Neo Commerce Bank, Raya Bank, Blu BCA Bank, Seabank Indonesia, Jago Bank, Allo Bank Indonesia, and Aladin Bank.
• Methodology with headings is done already, in line 378 and 400.      

Comments 10: In the conclusion, authors must strengthen the research questions and objectives.

Response 10: We have revised the conclusion and stated the research questions and objectives in the beginning of Conclusions with the following sentences [line 692 - 700]:

This study finds to analyze the digital transformation implications on neobanks’ efficiency, to analyze whether digital transformation is one of determinants of bank efficiency, also to investigate the long-run relationship between digital transformation and efficiency.  

Comments 11: Condense the key findings about the impact of digital transformation on efficiency, including the short-term dip and long-term benefits.

Response 11: We have revised the conclusions – Paragraph 1 [line 773-778]

“…, it can be summarized that digital transformation enhances neobanks’ efficiency as indicated by the increasing of efficiency score. Based on the efficiency measurement by using SFA approach, the overall neobanks’ efficiency improved in the long-term, align with their digital capacity development in delivering the relevant product and services for customer efficiently. The profit efficiency trend shows that the efficiency deteriorates in short-term,  during digital transformation process due to huge cost required…” 

Comments 12: Briefly state the limitations (number of neobanks, variables) without excessive details.

Response 12: We have re-arranges the last paragraph to briefly state the limitations [line 888 – 896]. The paragraph is as follow:

As commonly studies do, this study has some limitations.The object of this study was limited to the seven neobanks in Indonesia, future research might be added with next newcomer of neobanks. The determinants of digital bank efficiency are limited to test five independent variables namely digital transformation, capital adequacy, liquidity, net interest margin, and economic growth, while there are many other factors that can influence bank’s profit efficiency. Furthermore, the next research can be completed with the optimum strategy in implementing digital transformation to accelerate the efficiency goal achievement.

4. Response to Comments on the Quality of English Language

Point 1: English language fine. No issues detected

Response 1: Thank you

5. Additional clarifications: No issues.

[Here, mention any other clarifications you would like to provide to the journal editor/reviewer.]

Response to Reviewer 2 Comments

1. Summary

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below and the corresponding revisions/corrections highlighted in green and in track changes in the re-submitted files.

2. Questions for General Evaluation

Reviewer’s Evaluation

Response and Revisions

Does the introduction provide sufficient background and include all relevant references?

Yes

Thank you

Are all the cited references relevant to the research?

Can be improved

Is the research design appropriate?

Can be improved

Are the methods adequately described?

Yes

Are the results clearly presented?

Can be improved

Are the conclusions supported by the results?

Can be improved

3. Point-by-point response to Comments and Suggestions for Authors

Comments 1: the literature review was enhanced by presenting relative studies that have already been conducted in Asia, Europe and USA using the same methodology and commenting on their variables.

Response 1: Thank you for pointing this out. We have added the article studies regarding neobanks in the literature review, although study about neobanks with the same methodology is still very limited [2. Literature review paragraph 4, line 173-182].

A study by Banerjee et al (2022) using Chow Test and pooled regression found that adoption of neobanking as a form of digital transformation in United Arab Emirates (UAE) has impacted the financial performance of the bank which is indicated by bank specific factors such as NPL, ROE, NIM, and cost efficiency. International Monetary Fund’s  study on neobanks development in 18 economies around the globe including Asia, Europe, America, and Russia stated that neobanks grows and become systemic importance in each respective market. Neobanks in emerging market tend to have better performance than those in advanced economy, even though neobanks shows higher operational expense and less cost-efficient than traditional banks due to higher customer acquisition cost and IT security cost (IMF, 2022).

Comments 2: the conclusions were further upgraded, evaluating, and critically discussing the findings of the present study to those of previous studies analysed in the literature review.

Response 2: Thank you for pointing this out. We have added the analysis regarding this study and previous studies discussed in the literature review as follow [6. Conclusion - paragraph 1 line 777-783 ].

This study confirms the previous study in the literature review that digital transformation reduce operational cost and scale up customer satisfaction. It also supports the previous findings that digital transformation has positive implications on neobanks performance such as cost efficiency, NPL, ROE, dan NIM. This finding also emphasizes the earlier study which stated the systematic relationship between digital transformation and the bank efficiency as represented by the bank digital evolution.   

4. Response to Comments on the Quality of English Language

Point 1: English language fine. No issues detected

Response 1: Thank you.

5. Additional clarifications: No issues.

[Here, mention any other clarifications you would like to provide to the journal editor/reviewer.]