Banking on Inattention

We demonstrate that depositor inattention gives rise to banks’ deposit market power. Using transaction-level data on millions of U.S. depositors, we document that unscheduled income remains in low-rate accounts much longer than scheduled income, and interpret this reaction-time gap as inattention. Inattention varies widely across depositors, and more inattentive depositors adjust their balances less in response to monetary policy changes. We then develop and test a theory of temporal monopoly to analyze the implications of inattention for bank funding. Banks face an intertemporal trade-off in deposit rate setting between current spreads and the future deposit base, modulated by inattention. In line with this theory, we find that banks serving more inattentive depositors set lower rates, have weaker pass-through, and experience less deposit flow sensitivity. Using these estimates, we calibrate how the value of banks’ deposit franchise rises with inattention and varies nonmonotonically with the policy rate. Our results shed new light on how digital banking and monetary policy affect deposit funding.