South SFV Today

As digital banking becomes more prevalent, questions about its impact on the financial system are being raised. Naz Koont, a finance scholar and assistant professor at Stanford Graduate School of Business, is exploring how this shift affects banks and their customers.

Koont observed that while personal relationships in banking foster trust, many bank branches remain empty as customers increasingly use mobile apps for transactions. This observation led her to investigate whether digitization poses risks to financial 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.

Her research indicates that digital banking has altered competition among banks. By 2019, 60% of U.S. banks had mobile apps, compared to only a few in 2010. In the digitized environment, there are 8% more banks offering services in a given market, though nearly 6% of physical branches have closed.

Mid-sized banks with assets between $10 billion and $100 billion have gained market share due to their ability to leverage digital technology. “These mid-sized banks had sufficient scale to develop high-quality digital platforms,” Koont notes.

However, she warns that these banks' expansion could lead to regulatory concerns: “There’s the notion of banks being too big to fail.” Policymakers may need to consider stricter regulations for mid-sized banks as they grow digitally.

Community banks with assets under $10 billion have struggled with digitization due to limited resources for technological investment. As a result, they have lost market share and profitability.

Koont's findings also reveal an increase in uninsured deposits—those above the Federal Deposit Insurance Corporation's insured limit—which grew by 9%. Larger banks attracted most of these funds, raising concerns about potential instability since uninsured deposits can be withdrawn quickly during economic distress.

Digitization has also affected lending practices. While access to credit for high-income borrowers increased post-digitization, low-income borrowers faced reduced opportunities. Banks received fewer applications from low-income individuals and rejected more applications from them after adopting digital platforms.

Koont highlights that intangible knowledge gained through personal interactions plays a crucial role in lending decisions for low-income customers: “It turns out that these in-person relationships are actually really important for low-income customers to get access to credit.”

She suggests that better data would aid researchers and regulators in understanding digital banking's full impact. Currently, banks aren't required to differentiate between digital and physical deposits or provide detailed disclosures on them.

“There is some movement to get banks to report more,” Koont states, but notes there's little incentive for them under current regulations which haven't adapted fully to the digital age.

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