The Future of Banking and Lending: Assessing the Impact of Digital Banking on Consumer Financial Behavior and Economic Inclusion

Abstract

Through digital banking, technology, and software have already begun to disrupt and reconstitute the banking and financial landscape in numerous ways. By 2020, digital banks held an estimated 4.3 percent share of the global personal banking market. Some believe that digital banks could account for over 20 percent of the market by 2023. If this proves true, the market share of digital banks will have grown by more than 15 percent in just one decade. The shift to digital banking may be upending the previous practice of large and profitable financial firms seeking to attract clients who have relatively high incomes. In place of this segment, digital banks have increasingly sought to attract middle- and low-income clients. In the first two sections of this paper, we use a dataset of over 75,000 checks from digital bank clients to accomplish two primary goals. We measure the extent to which clients make use of two key products offered by digital banks: credit-builder loans and paycheck advances. We then go on to assess which clients take advantage of such loans, and how the repayment of these products affects consumer behavior and balance sheet positions over time. Concerning credit-builder loans, those with lower credit scores and cash flows are far more likely to take out such loans than other consumers. However, a similar distinction is not observed when it comes to paycheck advances, which are also considerably more likely to be borrowed relative to credit-builder loans.Changes in the ways that even a single consumer goes about the process of borrowing and repaying debt could have important long-term implications for economic inclusivity. The purpose of the next section is to answer these questions. If a large and representative segment of American consumers engages in digital banking and borrowing, these transactions could again serve as a useful lens through which to view at least one facet of the rapidly changing financial landscape. In the sections that follow, the paper will lay out the relationship between digital banks' business practices and consumer behavior over time. The usual caveats apply: since the dataset is only that of a single digital bank, we do not have an external control arm with which to compare the digital bank clients. Furthermore, while our check-level dataset is large, it is collected over a limited period. An important advantage, however, is that digital banks did not exist until the present decade. For this reason, the uniqueness of the dataset should, in principle, allow one to consider any findings regarding consumer behavior as not carrying a significant endogeneity or self-selection concern.