Speaker：Dr Hongju LIU

Site：B129

Time：9：30-11：30 Friday Dec.15 2017

Most U.S. banks started to offer Internet banking in late 1990s. Since then the retail banking industry has been expected to substitute the costly branch network with the far more cost-efficient Internet channel. However, we find that the expansion of online banking did not reduce the total number of brick-and-mortar branches, and furthermore, large, national banks expanded their branch network at the cost of small, local banks. Using detailed data on branch location and performance, we estimate a dynamic entry/exit model to investigate the relationship between the technology advancement and the market structure evolution. Our findings suggest that the advent of online banking has provided significant competitive advantages to large banks over small banks. Specifically, large banks are in a better position to take advantage of the increasing residential broadband penetration rate by investing more in online banking services, and hence improve efficiency and reduce the costs in operating offline branches. Our model can disentangle how different factors contribute to the market structure evolution. Through counterfactual simulations, we show that the reduction in operating costs for large banks is the most significant factor in driving the evolution of the U.S. banking industry, followed by higher entry costs and higher deposits due to greater online presence.