Digital banking, social media boost deposit rate sensitivity

The study, using US branch-level data, finds that digital banks offer higher deposit rates than traditional banks, particularly for savings and small time deposits.

These rates are also more reactive to policy rate changes, indicating greater customer price sensitivity.

This effect is amplified in areas with high social media activity, such as high Twitter usage, where digital banks respond even more sharply to policy rate shifts.

The paper highlights that digital banks' branches in high social media counties raise deposit rates more than their counterparts in low social media counties, a differential not observed among traditional banks.

This suggests that rapid information dissemination through social media intensifies competition for deposits among digital-first institutions.

Two major digital trends – the digitalization of banking and the widespread adoption of social media – are reshaping deposit markets.

These developments empower depositors to more easily compare interest rates and transfer funds, significantly increasing their price sensitivity.

Consequently, digital banks, which primarily operate online with lower overheads and less reliance on traditional customer relationships, are expected to offer more competitive deposit rates and exhibit greater responsiveness to policy rate changes than traditional banks.

Social media further amplifies these effects by accelerating the speed and scope of information dissemination, intensifying competition for deposits.