The digitalisation of banking and social media: implications for deposit pricing

Digitalisation and social media make retail deposits more sensitive to interest rate changes. Digital banks pay higher deposit rates than traditional banks, especially on savings and small time deposits.

This paper published by the Bank for International Settlements examines the implications of two coincident digital trends – the digitalisation of banking and the widespread adoption of social media – for the pricing of deposits in the United States.

Digital banks pay higher deposit rates than traditional banks, especially on savings and small time deposits. They also adjust those rates more strongly in response to changes in monetary policy. Deposit rate sensitivity differs across products: chequing accounts are the least responsive, while small time deposits are the most responsive. Consistent with earlier evidence on deposit pricing, the pass-through is asymmetric: deposit rates respond more strongly when monetary policy is easing than when it is tightening.

Social media activity strengthens competition among banks, especially digital banks. In counties with higher Twitter usage in the period 2016–19, branches of digital banks raise deposit rates more strongly after policy rate increases, particularly for small time deposits. This suggests that faster information flows and more attentive depositors increase price competition.

Overall, our findings suggest that digitalisation and social media make retail deposits more sensitive to interest rate changes and can accelerate the transmission of monetary policy to banks’ funding costs, especially for higher-yielding deposit products. This has implications for banks’ funding strategies, deposit franchise values and the speed of monetary transmission.