Public Statement

The digitalisation of banking and social media: implications for deposit pricing

The increasing adoption of digital platforms in the financial sector has significant implications for the pricing of retail deposits. A recent study by the Bank for International Settlements Research Department explores how two overlapping trends – the shift towards digital banking and the rapid diffusion of social media – shape deposit rates in the United States.

By comparing branch-level data from digital banks, which operate mostly with virtual customer interfaces, to traditional banks that rely on physical branch networks, the study finds that digital banks pay higher deposit rates, especially on savings and small-time deposits. These differences are not only reflected in the interest rates offered but also in how quickly and strongly these rates adjust to changes in monetary policy. The study's findings suggest that digitalisation makes retail deposits more sensitive to interest rate changes and can accelerate the transmission of monetary policy to banks' funding costs, particularly for higher-yielding deposit products.

The analysis also reveals that social media activity strengthens competition among banks, especially digital banks. In counties with higher Twitter usage, 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, leading to a more responsive transmission of monetary policy. The study's insights have implications for banks' funding strategies, deposit franchise values, and the speed of monetary transmission in a digital financial environment.

Why it matters

The impact of digitalisation on trade finance practices is increasingly being felt beyond the realm of retail deposits. As banks and financial institutions adapt to new technologies and communication channels, they are re-evaluating their approach to risk management, pricing, and customer engagement. The shift towards digital banking has led to a more competitive landscape, where banks must balance the need for efficient operations with the demands of price-sensitive customers.

In this context, the implications for trade finance practices are significant. As deposit rates adjust more strongly in response to changes in monetary policy, banks may be forced to reassess their approach to risk management and pricing in international transactions. The increased sensitivity of deposit rates to interest rate changes has the potential to accelerate the transmission of monetary policy to banks' funding costs, particularly for higher-yielding deposit products.

Ultimately, the interplay between digitalisation and social media activity is likely to shape the way trade finance practices are executed and priced in the years to come. As the financial landscape continues to evolve, it is essential that practitioners stay attuned to these changes and adapt their strategies accordingly.

Key points

* The study of the impact of digitalisation on deposit pricing in the US reveals that digital banks tend to offer higher interest rates than traditional banks, particularly for savings and small-time deposits. * Digital banks also exhibit greater sensitivity to changes in monetary policy, adjusting their deposit rates more strongly in response to policy rate changes. * A comparison of branch-level data from 2016 to 2019 shows that chequing accounts are the least responsive to interest rate changes, while small-time deposits are the most responsive. * The findings suggest that digitalisation and social media activity enhance price competition among banks, with branches of digital banks increasing deposit rates more strongly in response to policy rate increases, particularly for higher-yielding products. * In counties with higher Twitter usage, digital banks' responses to monetary policy tightening are exacerbated, highlighting the role of social media in influencing deposit pricing decisions. * The study's analysis contributes to a deeper understanding of how digitalisation and social media shape the transmission of monetary policy to banks' funding costs, with implications for banking strategies and regulatory oversight.

Institutional context

The institutional context for retail deposits in the United States is characterized by a complex interplay between traditional banks with extensive physical branch networks and digital banks operating primarily through virtual customer interfaces. This dichotomy has significant implications for deposit pricing, as digital banks are found to offer higher interest rates across various product categories, including chequing, savings, and small-time deposits.

The regulatory environment plays a crucial role in shaping the behavior of these institutions. The Federal Reserve's monetary policy decisions have a direct impact on deposit rates, with digital banks adjusting their rates more strongly in response to changes in the policy rate. Furthermore, the widespread adoption of social media has increased competition among banks, particularly digital banks, which are found to respond more aggressively to changes in monetary policy.

The regulatory framework governing banking practices and deposit products is also evolving in response to technological advancements. The increasing use of digital channels by consumers has led to a reevaluation of traditional banking models, with some regulators exploring new approaches to deposit regulation and supervision. As the financial industry continues to digitize, it is essential for policymakers and regulators to remain attuned to these changes and develop strategies that promote stability and competition in the retail deposit market.

Practical considerations

Practical considerations for practitioners include understanding the implications of digitalisation on deposit pricing and its potential impact on banks' funding strategies. Digital banks, which operate mostly with virtual customer interfaces, tend to offer higher interest rates on deposits compared to traditional banks that rely on physical branch networks. This difference in pricing can affect banks' funding costs and their ability to attract depositors.

To navigate these changes, practitioners should be aware of the varying sensitivity of different deposit products to interest rate changes. For example, small time deposits are found to be more responsive to changes in monetary policy compared to chequing accounts. This information can help institutions tailor their deposit pricing strategies to specific product offerings and customer segments.

Furthermore, social media activity is also shown to strengthen competition among banks, especially digital banks. As a result, practitioners should monitor local social media trends and adjust their pricing strategies accordingly. For instance, in counties with higher Twitter usage, branches of digital banks may raise deposit rates more strongly after policy rate increases, particularly for small time deposits. This highlights the importance of staying informed about market conditions and adjusting pricing strategies to remain competitive.

Source: BIS Research Papers