The bank robberies sweeping the small towns of Brazil are swift and destructive. Teams of ten people or more from sophisticated crime syndicates hit a bank in the middle of the night, blowing open its vaults, seizing its cash, and destroying the rest of its physical infrastructure with explosives. By the time local inhabitants have risen, the criminals are long gone. The bank—in some cases the only one in the municipality—has been reduced to rubble and customers in search of cash must either travel farther away to another bank branch or adopt a digital banking method that allows for cashless transactions.
We found that there were 1396 bank branches robbed between 2018 and 2021 in a study we undertook of more than half of Brazil’s states. While those robberies were highly disruptive to the banks and their customers, they also offered a silver lining: they allowed us to examine the effect of physical bank branches on the uptake of digital technologies.
A Traditional Preference for Cash
People with a ready access to cash from ATMs and cashiers often stick with cash because they live in environments where stores and other businesses also prefer it. They may also be reluctant to adopt digital banking methods because of behavioral biases, lack of information, and mistrust. That can all change, however, when a shock like a bank robbery increases the costs of using cash. Traditional banking customers may suddenly start using digital banking rather than making costly trips to far away and unaffected physical branches. And in what is known in economics as adoption complementarities, the local economy’s preference for cash may begin to diminish, creating new opportunities for digital methods and digital banks.
The financial industry in Brazil is concentrated, with the five largest commercial banks accounting for more than 68% of assets and more than 63% of credit in 2021. This lack of competition contributes to high fees. But in November 2020, the Brazilian Central Bank launched a new instant payment system call Pix, which allows payments from all types of accounts using a simple key (email, ID or phone number). Pix is user friendly, free to individuals and fast and has been a significant factor in the greater digitalization of the Brazilian banking industry. Forty percent of the adult population in Brazil, however, still does not use any digital method to make financial transfers.
The Shock of Bank Robberies
We wanted to see how the removal of physical bank branches could change that and catalyze the move to a more digitalized financial sector. Taking advantage of the fact that robberies usually make cash unavailable at a bank branch for a couple of months, we studied the effect on Pix usage in municipalities hit by the robberies (our treatment group) and similar municipalities not hit by them (our control group). We found that in the aftermath of a robbery in a municipality, there is an uptake in digital use, with the number of Pix users increasing and Pix transactions rising by roughly 9%. Those effects, moreover, persisted long after the robberies took place, indicating a lasting change in consumer behavior. There was also a boost in long-distance (inter-municipal) digital transfers and, in the affected municipalities, a large rise in the use of digital payment institutions and digital banks (13.8% and 18.6%, respectively). Local reliance on physical bank branches and cash, it appears, reduces the competitiveness of digital financial institutions, while the removal of cash increases it.
The Benefits of Digitalization and Greater Competition
Growing competition tends to be a positive force. Greater competition in payment services can result in more competition in other bank services (credit, investment, management services, deposit collection). As more people use Pix throughout the banking system, for example, banks can use payment data to provide better-tailored credit services. Indeed, our study shows that the number of people with loans from digital institutions rose after the robberies. The move to towards greater financial digitalization is a complex process, impeded by numerous factors, including the habits of consumers and mistrust. But when a local economy gets accustomed to digital services—as in the wake of a bank robbery or other shock—changes in behavior can build on themselves, leading to more and better options for consumers and businesses alike.