What Mobile Banking Means for the Digital Economy?

Everyone talks about “fintech.” But, fintech is nothing more than clever applications of financial technology to solve problems for consumers and businesses.

Going Digital

Between 2004 and 2016, the digital economy expanded at an annual rate of 5.6%, which was nearly four-times as fast the rate of the non-digital economy. Technological advances are making it possible to do things that we would have thought were science fiction just a decade ago.

One of these simple advances is mobile banking. The introduction of the iPhone provided consumers with a supercomputer at their fingertips, so it was only a matter of time before financial services companies began creating apps that allowed consumers to pay bills and borrow anywhere and anytime.

According to some estimates, mobile banking has grown from 16% to 28% of the population simply between 2014 and 2019. Focusing on those who have bank accounts in the first place, that percent is even higher—possibly as high as 50% as of 2017.

Boon or Bane? Understanding the Pain Point in Banking

While mobile banking, and more generally online banking, is now made available by every major banking institution, a big question is how it has impacted consumers. For example, some people critique the rise of mobile banking, arguing that it is just one of the ways that companies are automating tasks so that they can save on costs and get away with lower quality customer service.

But, before we jump to any conclusions, we need to be clear about the pain point that consumers face in banking activities. Consumers want *convenient* access to capital, plain and simple. That’s part of the reason automated teller machines (ATMs) were introduced—to provide consumers with the option of getting cash from their account even if their nearest bank was not open.

However, not all communities are lucky enough to have banks on every corner as there are in large metropolitan areas, like Washington DC. In fact, some census tracts lack a bank within 10 miles of the center, making it potentially challenging for consumers to commute to a bank.

While concern for consumers to have access to banking activity is important, economists at the New York Federal Reserve found that most “banking deserts” are located in areas that are underbanked, suggesting that the absence of banks might be due to a lack of demand, rather than availability problems. In fact, the Federal Deposit Insurance Corporation (FDIC) found in a 2015 survey that “only 2 percent of unbanked respondents cited ‘inconvenient location’ as the main reason why they did not have a bank account.”

Transformation of Financial Services

In a research paper with Hugo Dante, I explored the impact of mobile banking of physical bank locations: are they substitutes, or complements? We found that mobile banking is a fairly strong substitute for physical locations: banking deserts are 1.3-4.7% more likely to have mobile banking and that an additional net bank branch opening is associated with a 0.3-0.7% decline in mobile banking.

While mobile banking is more common in more educated and younger areas, we found that some of the greatest benefits reside in the more rural communities. That shouldn’t be surprising—rural areas are, by definition, more spread out. That means having lots of banks is going to be more costly to maintain. So, mobile banking provides an alternative means of allowing consumers to live their lives without having to go in person as much to a physical branch.

Yes, mobile banking can have disadvantages. By definition, you’re not interacting with people as much. But, how many people went to banks for a social outing in the first place? The more substantive argument is that in person interactions allows banks to incorporate soft information about borrowers, providing a more tailored set of financial options to consumers. And, there is some evidence of that: an individual’s digital footprint is complementary to traditional credit bureau information.

But, whether the average consumer still needs to go in person to conduct their banking activity is still up for debate. We found that, while the closure of a nearby bank branch is associated with a decline in the use of credit, once we look at areas with similar levels of mobile banking, there is no relationship between branch closures and credit. This suggests that, even if at some point nearby banks were important for accessing credit, there are now simple alternatives.

Implications for the Data-driven Investor

The rise of mobile banking tells us something about successful consumer technologies: they are technologies that increase convenience without sacrificing the quality of the underlying service.

Mobile banking has taken off because the vast majority of consumers really don’t need to interact with someone in person to conduct most of their banking transactions. If it’s just paying a bill or transferring money, you can do that on your web browser or phone. This is already reshaping the occupational concentration of the financial services sector. Whereas the number of bank tellers has actually declined over the past decade, the number of science, technology, and mathematics (STEM) workers has increased substantially.

Look for ways to leverage technology to drive operational efficiencies in your schedule. And, when you see a technology that you really think is delivering value, you can bet that investment is going to take off sooner or later as more people start becoming aware of it.