Abstract
We study how digital disruption impacts bank competition, considering consumers' heterogeneous digital preferences. Exploiting the rollout of 3G mobile networks, we find that digital disruption geographically expands bank lending but contracts bank branch networks. Meanwhile, more (less) branch-reliant banks increase (decrease) prices. These developments result in a distributional effect, reducing the unbanked rate among young consumers while increasing it among the elderly. A structural model shows that increased digital preference of young borrowers drives banks’ branch adjustment, causing significant surplus losses for older savers. Regulating branch closures could mitigate the distributional impact as the banking sector undergoes digital transformation.
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