Digital Finance and the Changing Composition of Banks

The number of banks has declined substantially since the 1980s, while bank branches continued to expand until the late 2000s before also beginning to decline. This paper examines these long-term changes and considers how the banking industry may continue to evolve over the next three decades. Using historical FDIC data from 1934 through 2023, I analyze trends in the number of banks and branches and estimate reduced-form time-trend regressions to characterize changes in industry structure. I also examined recent indicators of digital finance, including decentralized finance (DeFi) and stablecoin growth, as additional evidence of the changing financial environment. An out-of-sample evaluation shows the limitations of mechanically extending historical trends, particularly for bank branches. To account for this uncertainty, I use a Monte Carlo simulation to examine Conservative, Base, and Aggressive scenarios for future bank and branch contraction. The results suggest that continued consolidation could lead to fewer banking institutions and a smaller physical branch network, although the magnitude of these changes depends on the assumptions used in each scenario.