Bank Competition Amid Digital Disruption: Implications for Financial Inclusion

Abstract

We study how digital disruption impacts bank competition, considering consumers' heterogeneous digital preferences. We find that the rollout of 3G networks reduced the size of bank branch networks and led to divergence in branching and pricing strategies across banks. These developments benefited young consumers but increased the unbanked rate among poorer and older consumers. A structural model shows that increased perceived digital quality among young borrowers drove banks' adjustments, causing surplus losses for older savers. Counterfactual exercises illustrate that subsidizing older savers opting for mobile banking could effectively offset these disparities at minimal cost, facilitating a smoother digital transition.

Keywords: technology, bank competition, consumer preference, digital inequality, financial inclusion