Bank Competition amid Digital Disruption: Implications for Financial Inclusion

This paper studies how banks compete amid digital disruption and the resulting distributional effect across consumers. Digital disruption increases the geographic coverage of banking services, bringing new entrants to local markets. However, as digital customers shift from branches to digital services, banks close branches, and those specialize in branches gain market power among non-digital customers who rely on branches. Consequently, digital customers benefit from the intensified bank competition at the cost of non-digital customers who pay higher prices for branch services and face the risk of financial exclusion. Our empirical design exploits the staggered expansion of 3G networks as digital disruption proxies and further instruments 3G coverage with the regional distribution of lightning strike frequency to establish a causal interpretation. We then build a structural model of bank competition to understand how digital disruption transforms the banking sector. Through counterfactual, we show that digital disruption in loan market spills over to deposit market through banks’ branching decisions, leading to welfare losses of older depositors. Collectively, the results highlight the importance of considering the supply-side adjustment in understanding the distributional effects of digital disruption.