The rise of new technology, the arrival of fintech, and the shift from a physical branch-based business model to an increased reliance on digital services have all caused significant changes in the financial industry in recent years. These developments may encourage financial services competition and democratization.
Furthermore, we demonstrate how the accessibility and acceptance of digital payment technologies can open doors for the growth of digital institutions and enhance competition in the financial sector.
The provision of payment services, particularly by keeping and dispersing currency, is a crucial duty of bank branches. Due to decreasing withdrawal and deposit fees, using cash as a form of payment becomes more appealing in areas close to branches. Since payment mechanisms have complementary adoption patterns, coordination issues may occur and impede the uptake of alternative technologies. Furthermore, adopting new techniques can be hampered by the expense of learning and a lack of information and confidence. Therefore, even when new, welfare-enhancing technologies become available, physical branches might encourage a community to utilize more currency.
In general, the decision to suspend branch services by banks is influenced by various factors, including the adoption of technology. For example, banks may close branches in areas where people are more inclined to use digital services. To address this challenge, we examine the effects of temporary branch closures that disrupt in-person services and increase costs associated with handling cash. We utilize a specific event in Brazil where criminal activity renders a branch inoperable for several months. Criminal groups employ explosive methods to access cash stored in the branch's vault and ATMs. These attacks typically occur in smaller cities during the late hours of the night, taking advantage of empty streets and reduced police presence. Often, the branch is completely destroyed as a result of these activities.
This particular type of bank robbery necessitates skilled individuals, thorough training, meticulous planning, and expensive equipment. Therefore, these attacks are carried out by organized groups from outside the local area, and they are not related to other criminal activities or local factors that could influence decisions regarding financial technology. To analyze the effects of such incidents, we examine weekly and monthly data, comparing trends in cash holdings and the usage of digital payment methods between cities that have experienced these criminal events and cities that have not.
Our findings indicate that these shocks have a significant impact on the cash inventory of affected bank branches. In comparison to branches in control cities, the branches affected by the attacks have nearly no cash immediately following the incidents (a decrease of 97%). However, these attacks do not have a significant short-term effect on the deposit stock of the affected branches. This suggests that the primary consequence of the attacks is the depletion of cash stored in the branches, rather than affecting the overall deposit levels.
We then examine the impact on Pix, an instant payment technology introduced by the Central Bank of Brazil in November 2020. Pix offers free transfers, user-friendly features (such as aliases), round-the-clock availability, and only requires a bank or payment institution account and internet connectivity. Prior to Pix, alternative options for transfers were more expensive, not instant, or less user-friendly. From its launch until December 2021, approximately 96 million individuals (54% of the adult population) conducted at least one transfer using Pix. In January 2022, users made over 1.3 billion transactions. However, despite its success, around 71 million adults (40% of the adult population) still did not utilize any electronic transfer system.
Following the bank robberies, we observe a rise in the number of Pix users, as well as the quantity and value of Pix transactions in the affected cities, compared to municipalities unaffected by the robberies (Figure 2). Analyzing the dynamics of these effects, we find that Pix usage increases for approximately two months after the events and then stabilizes at a higher level, indicating persistent effects of temporary branch closures. Pix not only substitutes cash but also traditional electronic payment methods. Prior to Pix, people relied on debit cards and a prevalent electronic transfer method called TED to manage the impact of cash shortages. However, after the introduction of Pix, individuals increased their usage of both Pix and debit cards, while the number of TED transfers did not see significant growth.
Figure 1: Number of Pix Transactions before and after Bank Robberies
We monitor spillovers for organizations operating in the targeted municipalities without an attached branch. We demonstrate that after a bank robbery in the municipality, the number of Pix transactions and users of digital institutions and non-robbed private branch banks increases. Of particular, non-branch-based organizations are seeing significant growth in Pix users. These institutions need a physical branch and ATM network. Customers must pay to use the network of other institutions when they wish to withdraw or deposit funds. As a result, the competitiveness of digital institutions is reduced by a growing local reliance on the currency.
We also demonstrate that the number of people with outstanding loans from digital institutions rises following robberies. This growth is noticeably bigger after the Pix introduction in the upcoming version of the article, which will be released soon (Figure 3). Our findings imply that digital institutions flourish as payment and credit providers, increasing competition in the local financial sector whenever local cash reliance is reduced and there is an alluring cash substitute.
Our study reveals spillover effects on institutions operating in the affected municipalities that did not experience direct bank robberies. We find that the number of Pix transactions and users increases for non-robbed private branch-based banks and digital institutions following a bank robbery in the municipality. Notably, the rise in Pix users is particularly prominent for non-branch-based institutions. These institutions lack a physical branch and ATM network, which means that customers who require cash withdrawal or deposit services must utilize other institutions' networks, incurring additional costs. Consequently, a greater reliance on cash locally diminishes the competitiveness of digital institutions.
In the forthcoming version of our paper, which will soon be available, we also demonstrate that the number of individuals with outstanding loans from digital institutions grows after the robberies. Moreover, this growth is significantly more substantial after the introduction of Pix (Figure 3). These findings suggest that once local dependence on cash diminishes and a compelling alternative for cash emerges, digital institutions expand their presence as both payment and credit providers. This expansion enhances competition within the local financial market.
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