Abstract
We produce the first systematic study of the determinants and implications of in-person banking. Using survey data from the U.S., we show that firms which are informationally opaque or operate in rural areas are liable to contact their primary bank in-person. This tendency extends to older, less educated, and female business owners. We find that a relationship based on face-to-face communication, on average, lasts 17.88 months longer, spans a wider range of financial services, and is more likely to be exclusive. The associated loans mature 3.37 months later and bear interest rates which are 11 basis points lower. For good quality firms, in-person communication also relates to less discouraged borrowing. These results are robust to multiple approaches for endogeneity, including recursive bivariate probits, treatment effect models, and instrumental variables regressions. Overall, our findings offer empirical grounding to soft information theory and a note of caution to banks against suppressing channels of interpersonal communication.
Highlights
Modern technology has revolutionized communication with banking institutions, offering users a high degree of autonomy and geographic liberalization
Relationship banking is distinguished by the capacity to operationalize soft information— an impossibility under alternative banking technologies
The empirical evidence that could put the postulated benefits in perspective, with the extant studies tracing relationship banking effects at an aggregate level only
Summary
Modern technology has revolutionized communication with banking institutions, offering users a high degree of autonomy and geographic liberalization. We document the incremental significance of small business owners’ characteristics on determining the nature of the relationship with the main bank; the inclusion of proxies for demographics and educational attainment increases the explanatory power of our probit model and reveals the high marginal effects of these variables On this basis, we sketch the profile of owners more liable to steer their firms towards in-person banking as predominantly female, older and less educated individuals. The most important contribution of this paper, is our ability to assign the observed effects to soft information and know that soft information, rather than any other element of the bank-firm relationship, represents the actual cause In this vein, we provide empirical grounding to the theoretical predictions of the relationship banking literature (Stein 2002; Berger and Udell 2002, 2006; Liberti and Petersen 2019) and demonstrate the salience of soft information with evidence that is both objective and measurable.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
