La Jornada: Social networks benefit neobanks to capture savings

The speed with which information circulates through digital platforms has changed the way in which banks compete to attract deposits. What previously required million-dollar advertising campaigns or a wide network of branches, today can begin with a simple publication that shows which institution pays the most for savers’ money.

A new study by the Bank for International Settlements (BIS) found that social networks make it easier for users to compare returns, search for alternatives and move their resources with unprecedented ease, which has increased competition among financial institutions to attract and retain savings.

The phenomenon is especially visible among digital banks or neobanks, which are forced to more quickly adjust the rates they offer their clients to avoid the outflow of deposits when other institutions present better returns, says the report “The digitalization of banking and social networks: implications for deposit pricing.”

It should be noted that, although the phenomenon of digitalization is global, the findings of the international financial institution are based on an in-depth analysis of the United States market. By tracking data by county, researchers were able to document how the intensity of digital conversation in specific communities directly impacts the speed with which savers move their capital from one bank to another.

reaction speed

The researchers found that digital banks tend to offer higher returns than traditional financial institutions, especially on savings products and term deposits. The difference, they explain, is due to the fact that their clients are more sensitive to changes in rates and have fewer obstacles to moving their money towards a more profitable alternative.

The study indicates that this behavior intensifies in regions with greater activity in Internet environments.

In the specific case of the United States, in communities where there are more publications, the so-called neobanks not only pay more to raise resources, but also react more quickly when the interest rates set by central banks change, a sign that information travels faster and savers respond more quickly. According to the BIS, a 100 basis point increase in benchmark rates translates into steeper increases in the remuneration offered by digital banks compared to traditional institutions.

In some term savings products – those that pay better returns – these companies end up passing on almost the entire increase in market rates to their clients, which is an example of the growing pressure they face to retain the resources of their savers.

Information moves money

The study specifies that, for years, central banks have used interest rates as one of their main tools to influence the economy. When they raise them, they seek to make credit more expensive and encourage savings; When they reduce them, they try to stimulate consumption and investment.

However, the BIS suggests that the digitalization of financial services and the rise of social networks have modified the speed with which these decisions reach savers; In other words, monetary policy no longer only depends on the movements of central banks, but also on how quickly information circulates among users.

The researchers found that digital banks more quickly adjust the yields they offer when benchmark rates change. While traditional banks tend to transfer these movements gradually, neobanks react more quickly to the risk that their clients find better options and decide to move their money.

“Digital banks’ deposit rates are higher and react more quickly to changes in interest rates. In addition, they offer higher returns and react more strongly to changes in rates in regions with greater social media activity,” the study’s authors note.

The branch loses ground

The transformation is not only reflected in the rates that banks pay for savings, it has also modified one of the historical advantages of traditional banking: physical proximity to clients.

According to the BIS, financial companies with extensive branch networks used to have a greater capacity to retain deposits thanks to the relationship they build with their users and the presence they maintain in the markets where they operate. But digitalization changed that dynamic, since institutions that operate through online platforms depend less on the face-to-face relationship and more on the ability to offer competitive products.

As a result, he clarifies, his clients show a greater willingness to compare alternatives and transfer their money when they find better conditions.

The study’s authors argue that this difference explains why digital banks tend to react more quickly to changes in interest rates and pay higher returns than traditional institutions, especially on higher-paying savings products.

“High activity on social networks is associated with a faster transmission of changes in interest rates by digital banks,” indicates the BIS study.