The digitalisation of banking and social media: implications for deposit pricing
Summary
Focus
We study how two overlapping digital trends – the shift towards digital banking and the rapid diffusion of social media – shape the pricing of retail deposits in the United States. Using branch-level evidence, we compare digital banks, which operate mostly with virtual customer interfaces, with traditional banks that rely on physical branch networks. We test whether digital and traditional banks differ in: (i) the interest rates offered on chequing, savings and small-time deposits; and (ii) how quickly and strongly these rates adjust to changes in the Federal Reserve's policy rate. We also examine whether local social media activity strengthens banks' responses to monetary policy in a more digital financial environment.
Contribution
We contribute to the literature in two ways. First, we provide a comprehensive assessment of how digitalisation changes banks' pricing of retail deposits. By comparing digital banks with traditional branch-based institutions, we move beyond focusing on deposit outflows and franchise values to study directly how banks set deposit rates across products and over time. We show how business models based on virtual channels affect both deposit rates and the pass-through of monetary policy to chequing, savings and small time deposit rates. We also show that banks respond differently during periods of monetary tightening and easing.
Second, we show how digitalisation and social media networks together affect deposit pricing and monetary policy transmission. By linking local social media activity to differences in pricing across branches of the same bank, we isolate the role of faster information flows and more attentive depositors in strengthening policy rate pass-through at digital banks.
Findings
Digital banks pay higher deposit rates than traditional banks, especially on savings and small time deposits. They also adjust those rates more strongly in response to changes in monetary policy. Deposit rate sensitivity differs across products: chequing accounts are the least responsive, while small time deposits are the most responsive. Consistent with earlier evidence on deposit pricing, the pass-through is asymmetric: deposit rates respond more strongly when monetary policy is easing than when it is tightening.
Social media activity strengthens competition among banks, especially digital banks. In counties with higher Twitter usage in the period 2016–19, branches of digital banks raise deposit rates more strongly after policy rate increases, particularly for small time deposits. This suggests that faster information flows and more attentive depositors increase price competition.
Overall, our findings suggest that digitalisation and social media make retail deposits more sensitive to interest rate changes and can accelerate the transmission of monetary policy to banks' funding costs, especially for higher-yielding deposit products. This has implications for banks' funding strategies, deposit franchise values and the speed of monetary transmission.
Abstract
This paper examines the implications of two coincident digital trends – the digitalisation of banking and the widespread adoption of social media – for the pricing of deposits in the United States. Using branch-level data, we analyse how both trends interact to influence the level of deposit rates as well as their adjustment to changes in the policy rate. Our analysis distinguishes between traditional banks with physical branch networks and digital banks. Using panel regression analysis and local projections, we find that digital banks' deposit rates are higher and more reactive to changes in policy rates, consistent with the view that their customers are more price sensitive. We further find that digital banks offer higher deposit rates and react more sharply to policy rate changes in counties with higher social media activity, as measured by Twitter usage, supporting the notion that high social media use further increases price sensitivity.
JEL classification: E43, E52, G21, O33
Keywords: deposit rate pass-through, digital banking, monetary policy transmission, social media activity, branch-level data, policy rate
