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Since 2010, across counties in the U.S., small community banks have shrunk, owing to transformations in mobile tech infrastructure and consumer preferences. New research by Finance Professor Charlotte Haendler of ������ Cox reveals how mobile technology is altering the competitive landscape between large financial institutions and smaller community banks. In her paper "Keeping Up in the Digital Era: How Mobile Technology is Reshaping the Banking Sector," Haendler looks at the changes that uptake in technology has triggered. 

“My paper shows that for banks to withstand fintech competition, they also need a digital footprint, and the way [mobile technology] has rolled out has made banks compete with each other,” Haendler offers. Her research is likely the only one with a local shock perspective and the small business lending angle. Other research has focused on demographic changes, such as how digitalization is leading banks to prioritize younger customers over older ones.

In the research, Haendler found that small community banks that were slow to provide banking apps to their customers lost deposits to better-digitalized, larger banks. She collected new data that maps when each bank in the U.S., from the tiniest to the largest, started providing mobile banking services to their customers by offering an app on Google Play or Apple’s App Store. “I examined the evolution of this adoption over time,” Haendler notes. “I found that adoption has been very staggered.”

Bigger grows in digital era

To understand what drives app adoption, Haendler developed a bespoke framework. Due to regulations in place since the Great Depression until the 1980s, the U.S. banking sector has had a legacy of many very small banks. “After banking deregulation in the ‘80s and ‘90s, we started seeing greater concentration with the largest banks like Bank of America and Wells Fargo emerging, as banks were able to cross state boundaries,” Haendler says.

Given the presence of both small banks alongside large banks, her research analyzed which banks adopted technology first. “I found that small community banks struggled the most, having the slowest adoption pace across the banking sector,” she adds. "In 2010, about three years after the iPhone launched, only the biggest banks had developed mobile apps," Haendler notes. "By 2019, that number had grown significantly, but still only 80% of banks offered mobile banking applications."

The research finds a direct correlation between mobile app availability and deposit retention. As mobile network infrastructure expanded across the U.S. between 2010 and 2019—particularly with the rapid 4G expansion in the 2010s—consumer behavior shifted dramatically. “When a county gets better mobile signal quality, we observe a migration of depositors from small banks without apps to larger banks providing mobile services," Haendler explains. This pattern held true even when controlling for other factors, suggesting that consumers increasingly value digital convenience over traditional relationship banking.

"Small community banks are not only losing deposits and closing branches, but they're also decreasing their small business lending," Haendler found. This is notable because community banks have historically excelled at relationship lending, using personal knowledge of local businesses and entrepreneurs to make informed credit decisions.
While larger banks have increased their small business lending in some areas, Haendler discovered this tends to happen primarily in locations where these institutions don't maintain physical branches. "They're substituting direct daily interaction with digital tools," she explains, but cautions that "it's not a one-to-one substitution, so we lose some potential for economic growth in the process."

Spectrum expansion

In order to parse the competitive effects of mobile technology on the banking sector, Haendler identified and measured the spread of mobile network operator spectrum expansions. Her work maps increases in mobile coverage in the United States from 2010 to 2019. Haendler utilized data to measure the increase in mobile internet connection speed provided by the Federal Communication Commission (FCC); they manage the electromagnetic spectrum frequencies that AT&T, T-Mobile, and others need to transfer data. “I'm basically measuring an increase in local mobile data transfer capacity,” she explains.

Haendler mentions the greater need for data transfer capacity with the introduction of smartphones and especially social media —from Facebook and Instagram to YouTube and TikTok videos which are heavier to stream on phones. She notes that the FCC auctioned off increasingly more frequencies, with the highest auctions in 2014 and 2016. “It was really driven by demand,” she offers. “These auctions have been happening since 1G and 2G, but companies paid billions for 4G because of the bidding race to outbid competitors in each geography.”

FCC spectrum auctions in 2014 and 2016 indeed saw companies bidding billions of dollars for frequencies that would allow them to meet consumer demand for faster mobile data, Haendler notes. This technological infrastructure expansion created the foundation for mobile banking's growth. From 2014 to 2015, mobile banking adoption crossed the 50% threshold and continued climbing rapidly, alongside changing consumer expectations about financial services. 

Banked and digital 

In spite of the post-deregulation consolidation, thousands of small community banks persisted throughout the country—protected partly by their specialized knowledge of local markets and personal relationships with customers. Now, mobile technology appears to be eroding this final competitive advantage.

"There's been a longstanding debate about whether we really need small community banks," Haendler notes. "Prior to my research, the consensus was that while small banks might not be the most efficient for customers, they excelled at small business lending and relationship banking. What I found is that this competitive advantage becomes harder to maintain once they lose their deposit base."

The substitution of digital interaction for personal relationships in banking is happening rapidly, Haendler concludes. "We need to understand both what we're gaining and what we might be losing in the process."

"Keeping Up in the Digital Era: How Mobile Technology is Reshaping the Banking Sector," by Charlotte Haendler, of ������’s Cox School of Business, is under review.

Written by Jennifer Warren.