Digital transformation is an institutional-wide transformation led by digital technologies adoption [12,13,14]. Digital transformation is characterized by the highly intensive adoption of digital technology in achieving significant advancements and improvements in organizational performance and the organization’s position in the industry [15]. Digitalization, which uses cutting-edge digital technologies, intuitively improves the business process and generates a firm competitive advantage in the digital era, as it can deliver the expected services to the customers [12,16]. Digital transformation is not a simple matter of IT implementation as discussed in a general perception, whereas digital transformation is often related to the capabilities needed for optimum operations [17]. Nowadays, digital transformation involves more complex elements, namely vision reconstruction, processes, capabilities, organizational structure, and culture [18].

Digital transformation is recognized as an action to enhance an object by changing its essential structure with an emphasis on connecting information, systems and technology, communications, and the overall connectivity of digital technology [19]. Nowadays, as digital technology develops, the digital transformation’s definition has become specific. Digital transformation is defined as the implementation of current digital technologies, for example artificial intelligence, cloud, Internet of Things (IoT), and blockchain, to carry out significant changes in organization activities in providing customers high-value experiences, simplifying operations, or creating new business models [18]. Digital transformation is also related to new digital technologies such as big data analytics to improve technological capability and management efficiency from various dimensions of technology, information, and platforms to overcome corporate productivity problems [20].

Digital transformation is a process of advancing and enhancing operations, activities, skills, and competencies, to benefit from the transition to digital technology that has significantly influenced the society [21]. Digital transformation is known to encourage an excellent performance by conditioning organizational elements both inside and outside, thoroughly [22]. Digital transformation is marked by the massive adoption of technology in enabling the significant development and improvement of organizational performance and its position in the industry [13]. Many implications can be brought by digital transformation, as it can generate the efficiency and optimization of business process, support the potential streamlining process of business operations, encourage value creation and business growth, and, in the end, boost profits.

Digital transformation requires a new vision, developed processes, digital tech capabilities, digital leadership in the organization’s structure, and a digital mindset in the organization’s culture [18,23,24,25]. These requirements are significantly different prerequisites when adopting new technologies in the past, which also caused different benefits and costs and raised uncertainty regarding digital transformation’s effects on company performance. Digital transformation is associated with the actions made by firms to improve customer engagement, business operations, and business models with digital technologies [18,21]. The wide range of the digital transformation’s scope notifies the huge investment behind the digital transformation process, not only for IT infrastructure for digital technologies but also for the digital talent and digital innovation management expenses [26], as well as marketing expenses to encourage customer adoption in the digitalization process.

The main elements of digital transformation are data collection, data processing, and digital technology application for decision-making processes [27]. Digital transformation develops the organization’s capabilities of processing data and information by connecting the business process, management information systems, and supply chain data. The integrated process enables management decisions that can achieve accurate services supported by data penetration and intelligent comprehensive analysis. By undergoing a digital transformation, companies expect that they can reduce operational costs as they improve the efficiency of their business process, and they can create new business opportunities from their innovations [28].

Digital transformation is a single comprehensive variable that is difficult to measure [29], so it is understandable if the effect of digital transformations is also difficult to assess. That is why even though the digital transformation’s impact is important, only limited research has examined this issue [30]. Contrary to the academic field, industry is more focused on the digital transformation’s impact in terms of the financial performance of the companies by analyzing financial indicators such as market value, income, and profitability. Currently, there are no supporting results that can describe the correlation between digital transformation and financial performance [31].

Initially, digital transformation was defined as organizational changes in terms of new investments in digital business models to improve the customer’s digital interactions at every single touch point related to the customer life cycle [32]. Digitalization in banking is determined as the employment of digital technology to facilitate banking transactions [33] and to minimize operational costs, as the digital transformation has a significant impact on bank operations. Digital transformation in the general concept of the banking industry involves the digitization of documents, designation, digital learning, video conferences, virtual and online trading, virtual shops, e-bank account statements, and online payments [34]. Banking digitalization provides many advantages for banks and customers as it can provide time and cost efficiency with fewer employees and standardize internal processes, as well as optimizing risk management, monitoring, and control, while also enabling banks to improve product and service quality. On the customers’ side, digital banking products and services enable them to save time in carrying out secure banking transactions [35,36].

Digital transformation focuses on improving operational processes instead of boosting growth, as digitalization will reduce operational costs and increase efficiency [37]. The positive relationship between banking’s digital transformation and banks’ efficiency improvement has been proven in some studies in China, although the IT investment impact on financial performance still needs further research [38]. Therefore, digitalization also requires a financial structure transformation [39]. Another empirical study in China also discussed that digital banking transformation improved the operational capabilities of commercial banks [40]. Banking digitalization provides many advantages for banks and customers [29]. Digital technologies enable banks to be more efficient in delivering service and operational costs; monitoring optimum performance, risk management, and control methods; and improving the quality of products and services. Digital transformation significantly decreases bank risk-taking, mainly in small- and medium-sized regional banks, while large and national banks perform no substantial reduction [41]. Digital transformation decreases the systemic risk of the banks as digital technology can help banks mitigate financial risk. The digital transformation that brings innovation and cost impact contributes to decreasing the systemic risk for the bank [42,43].

Customers using digital banking services can reduce the time between transactions and complete them securely. The main goal of digitization is to increase customer satisfaction, in terms of time and security to settle transactions, and to create profiles of potential clients needed in the future [44]. Digitalization has become one of the main sources for banks to increase profitability, differentiate themselves in the market, change the core business of banking, reduce costs, improve quality, and enable the development of new financial products. The digital concept in the banking industry includes services to customers through all channels and points of interaction supported by analytical and automated processes, which require product and service innovation, information technology, as well as organization and human resources [45]. The digital transformation in banks has two perspectives: on one side, the customer base is offered new digital products and services, and 24/7 banking transactions even without a physical banking presence; and on the other side, human resources, with their significant influences [2]. The bank’s IT capabilities to serve customers without the presence of physical banking has become evidence of the bank’s digital capabilities, which has been proven during the COVID-19 pandemic. The better the bank’s IT capabilities, the more online banking activities they can carry out, as is described by the increasing website traffic, internet use, deposits, and loans [46].

In practice, banks still find some problems in carrying out digital transformation, because some bankers think that digital transformation is about the flows of work and platforms, instead of focusing on customer experience [47]. Evaluation of the correlation between determinants and performance in Russian banks found that digital banks with more customers and transactions that communicate via digital channels show better performance [48]. The use of digital technologies will bring the simplification and optimization of banking operations, mitigating fraud, creating advanced personalized offerings based on customer requirements, as well as transforming the customers’ interaction model [49].

Research on the determinants of bank profitability has been carried out by many researchers (among others, [50,51]). In addition, there is research that analyzes the effect of efficiency and market power on the profitability of banks with sustainable business activities [52], as well as the level of banking competition and their impact on bank profitability [53]. Another study evaluates the interest rates of European Union countries as a determinant of profitability [54]. Other factors such as inflation, exchange rate, economic growth, bank size and capitalization, and bank products and services are acceptable as explanatory variables for interest margin and profitability. Macroeconomic conditions such as high inflation push up high interest rates and deteriorate bank profitability because of higher potential credit risk, while new loan disbursements also decrease. The entire research was conducted focusing on traditional banks, not digital banks.