As a PhD student studying finance at Columbia University, Naz Koont learned how the personal relationships bankers develop with their clients build trust and help sell products. Does digitization pose risks to the financial system’s stability? “I’ve always been interested in understanding the world through an economic lens and curious to find tools to understand the world in a quantitative way,” she says.
As more banks adopted digital platforms and apps, and customers forwent brick-and-mortar branches to do their banking online, she was curious how this shift was impacting competition among banks and whether it had altered the makeup of bank deposits and loans. “I wanted to see, are these innocuous changes, is it lossless, or is this really something that we have to take into account?”
Too Digital to Fail?
Koont found that in the digitized banking world, there are, on average, 8% more banks providing services in a given market, even as the average bank closes nearly 6% of its physical branches. Mid-sized banks with assets between $10 billion and $100 billion have gained the most market share amid the shift to digital. They provide 29% more services within the banking sector and serve nearly 7% more markets, as digitization enables them to compete more effectively with bigger firms.
“There’s the notion of banks being too big to fail. This suggests an increase in the number of banks that have the potential to disrupt the financial system,” she says. Policymakers may want to consider whether mid-sized banks warrant stricter regulation now that they’re growing due to digitization.
What’s likely at play here, Koont says, is a greater reliance on metrics such as credit scores in the absence of intangible knowledge that’s gained through in-person interactions. Personal relationships and trust used to factor into banks’ in-person local lending decisions, she says. “If you allow people to bank with you digitally, then you interact with them less, and it’s harder to know them,” Koont says. “It turns out that these in-person relationships are actually really important for low-income customers to get access to credit. There’s something lost there.”
Read the full article here / By Deborah Lynn Blumberg / Stanford Insights
