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 the remaining branching banks gain market power among non-digital customers that 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. We provide empirical evidence by exploiting the staggered expansion of 3G networks, instrumented by regional distribution of lightning strike frequency. Using a structural model, we further quantitatively decompose the benefit and costs of digital disruption resulting from banks' pricing, branching, and entry decisions. The results highlight the role of banks' endogenous responses to digital disruption in widening the gap in access to banking services.