Technology, Banking and Small Business. Jonathan A. Scott* Temple University Philadelphia, PA

Transcription

1 Technology, Banking and Small Business Jonathan A. Scott* Temple University Philadelphia, PA William J. Dennis, Jr. National Federation of Independent Business Research Foundation Washington, DC. August, 2006 * Corresponding author jonathan.scott@temple.edu Phone:

2 Technology, Banking and Small Business USASBE Papers: Small Business Abstract This paper reports on the results of a recent survey of small business owners that addressed the question of technology use in the conduct of their banking business. The analysis focuses on three issues. First, what are the characteristics of owners who use technology in banking? Second, do the characteristics that explain the use of technology also explain their view of technology as an enabler of their banking business or whether technology implementation is being forced upon them? And finally, has technology implementation been disruptive enough to cause owners to shop for a new bank or take the more costly step of changing banks? Executive Summary Using recent survey data of small firm owners, we find that small business has been slow to adopt electronic banking, but the rate of adoption is increasing quickly. The importance of technology is less related to the size of the business and more to the age of the owner and education level of the owner. Owners appear free to accept the types of technology they are comfortable using and reject the types they are not. The only exception appears to be in the case of bank mergers where owners are more likely to report technology getting in the way of the conduct of their banking business and being forced to use more technology than the want. This research has direct implications for regulators and policy-makers, bankers attempting to establish, fortify or expand their share of the small business banking market, and small-business owners who use and do not use the technology driven services of their commercial bank. The practical implications are as follows: regulators and policymakers should have little concern about the pace of technology implementation among small firms or its effect on the value of relationship banking. However, regulators need to carefully monitor the effect of mergers on technology use and implementation. Owners at banks that merged are less likely to view technology as an enabler and more likely to report technology use forced on them. Small business owners have a mostly favorable view of technology implementation, thinking it as enabling rather than confining, especially among owners of the youngest, most information-opaque firms. The haves and have nots are not related to firm size, but owner age and education. For now, the only cost or alternative to those uncomfortable with the pace of technology change appears to be shopping for a new bank. In this regard, the advantages of technology in the conduct of owner s banking business are not just limited to those using large banks. Not only do small banks have just as much access to technology for their customers, but in their tradition of relationship banking they are less likely to be viewed as forcing customers into technology use. Finally, this research helps bankers better understand how to compete for its desired share of the small-business banking market.

3 Technology, Banking and Small Business The innovation and diffusion of technology into the delivery of banking services has the potential to be a disruptive force for small firms and how they conduct business with their bank. Petersen and Rajan (2002) argued that advances in technology are moving banks geographically further away from their customers and conclude that the importance of local information in small business lending has been reduced. If lender proximity benefits small firm credit availability (Berger and Udell, 2002), then technology could be disrupting a key element of relationship banking. One reason for the growing distance could be the result of growing concentration of the U.S. banking system. The increasing reliance of larger banks on investments in technology specifically credit scoring - adds to the concerns about the ability of small to benefit from relationship banking, especially from smaller banks (DeYoung et al, 2004, Akhavein et al, 2005, Berger et al, 2005). Despite these concerns, scant publicly available evidence exists regarding the effect of technology on the conduct of small firm banking business. For example, do larger firms with more resources to make the investments in people and systems, conduct their banking business electronically more frequently than more resource constrained businesses? What role does distance to the bank play? Do those located further away from their bank make more use of technology because it is a more efficient way to conduct their banking business? Banks that have made significant investments could be driving technology use to achieve their target return. They could be pulling owners along at a pace that owners are comfortable with or they could be pushing customers into using services they may not be 1

4 ready for or want. For example, the implementation of credit scoring could favor those owners who want to substitute relationship banking for more impersonal, but more efficient, technology transactions. However, owners who rely on relationship banking to meet their credit needs may consider changing banks if faced with credit scoring. Thus, it is of interest to bankers interested in capturing a share of the small business market to understand whether the owner characteristics that explain the use of technology are the same ones that explain the differences between those owners who are happy with the pace of technology implementation and those who view it as an obstacle. Bank size could affect this push-pull tension, especially considering that larger banks have made the bigger investments. Yet while large banks might be expected to actively encourage the use of technology, small banks still have the ability to purchase the features they need to offer their customers. Is bank size related to how firms view the implementation of technology? Do recent mergers resulting in larger banks affect small firm perceptions about the use of technology in the delivery of banking services? A recently completed survey of small firm use of technology in banking provides an opportunity to address the questions raised above. The survey includes information about the extent to which owners use the internet for their banking business, their view of technology as an enabler of the conduct of their banking business, and an assessment of how their primary bank has implemented technology in the delivery of banking services. In addition to the typical firm characteristics captured in a survey, it also includes owner ratings of a set of characteristics important to the conduct of their financial business (e.g., knows my business, market and industry, speed of decisions, range of services offered, 2

5 location convenience, a rating of the bank s performance on this same set of characteristics, and measures of geographic proximity of the business to the bank. With these data we develop a number of hypotheses that address three issues. First, what are the characteristics of owners and their businesses that use technology in banking? Second, do the characteristics that explain the use of technology also explain their view of whether technology implementation is being forced upon them or their view of technology as an enabler of their banking business? And finally, has technology implementation been disruptive enough to cause owners to shop for a new bank or engage in the costly process of changing banks? A better understanding of how technology in banking is used and viewed by small firms is important to bankers and policy makers interested in maintaining small firm access to capital markets. The results presented in this paper can help bankers better understand the profile of small firms that have problems with the implementation of technology as well as those that are amenable to its use. For policy makers and regulators, the paper provides information on how technology is perceived by the most information opaque firms that rely on relationship banking and the association of this perception with bank size and changes in market structure such as mergers. In considering both mergers and new bank charters, the interaction between bank size, the incidence of mergers, and its effect the incidence of changing banks for small information-opaque firms is valuable information. Sample and Data The data for this study were collected for the NFIB Research Foundation by the executive interviewing group of The Gallup Organization. The interviews for the survey 3

6 were conducted between February 2 and March 8, 2006 from a nationally-representative sample of small employers, defined as a business employing at least one individual in addition to the owner(s), but no more than 249. After compiling the results, the interviews yielded a sample of 752 observations. Table 1 lists descriptive statistics for the sample, including information about owner characteristics (age and education level), years in business, location of business, number of employees, sales growth, and industry. The raw number of observations is presented in the table, but the weighted sample is used for the frequency distribution. The Use of Technology in Banking by Small Firms The definition of technology use in banking by small firms is not straightforward. Given the proliferation of web sites as portals for access to banking services, the frequency of small firms reporting their use of the internet for any part of their banking business is an acceptable measure of technology use. With this measure, 51 percent reported using technology in banking (Table 2). This frequency is almost a five-fold increase from the response to a similar question asked in the 2001 Credit, Banks and Small Business Survey. 1 Firms use the internet most frequently to check balances (89 percent), followed by transfer money among accounts (70 percent), make payroll deposits (31 percent) and apply for credit (16 percent). Another perspective on technology use is obtained from the question, How important is a customer-friendly web site to the conduct of your banking business? Fifty-two (52) percent of the firms rated this attribute very important or important on 1 Eleven (11) percent responded yes to the question, Does your firm do any of its banking over the Internet? See for details on this survey. The Credit, Banks survey uses a somewhat different sampling frame than the current survey. The former is composed of NFIB members only, a somewhat larger and more rural group than is the population. However, there is no reason to believe that Credit Banks results vary from a more representative sample. 4

7 a five point scale with 35 percent rating it very important. While this question is correlated with the use of the internet for banking (rho=.21, p=.000), the correlation coefficient is not high, suggesting that both questions are not measuring the same dimension of technology use in banking. Firm and owner characteristics, including location, size of their bank, and distance from their bank, should be related to the use of technology. Larger firms with more resources or younger, better educated owners who are more facile with technology ought to more frequently use technology in banking. Location should also affect the use of technology if owners located further from their bank find it more efficient to use technology for accessing bank services instead of personal visits. Finally, owners at larger banks with more resources to develop electronic banking alternatives should be more likely to use technology for their banking business. Table 2 presents a breakdown of the responses to the technology questions by selected firm characteristics that enable a preliminary evaluation of these conjectures. Younger firms and firms with younger owners are more likely to report using the internet for some of their banking business. For example, 63 percent of the owners under age 35 and 63 percent of firms in business under 6 years report using the internet for banking services compared to 30 percent for owners over the age of 65 and 36 percent of firms in business over 30 years. Although the frequency of using the internet is higher for firms with more rapid growth, size of the firm shows no noticeable association with the use of the internet for banking. Home-based businesses, which typically would be small operations, are more likely to use technology for their banking. A similar pattern is 5

8 observed for owners that report a bank s web site is important or very important to the conduct of their banking business. Education plays a role in the use of the internet for banking. Owners with an undergraduate (54 percent) or graduate degree (57 percent) more frequently use technology compared to those with high school diplomas or their equivalent (38 percent). Again, a similar pattern is observed for the importance of a customer-friendly web-site. Location plays a role in the use of electronic banking, but not as expected. Firms located in rural areas (where the gains from technology might be greater in terms of lower transportation costs to the bank) are less likely to use technology (38 percent) compared to firms in highly urban areas (58 percent). While firms that are further away from their banks (in time) might be expected to rely more on electronic banking, the data show no association. This outcome could be due to lack of access to high speed telecommunications in many rural areas. 2 The only exception is for owners that communicate with their bank by telephone only, where 86 percent report using the internet for banking. A similar pattern is observed for the importance of a web site for banking services, but the differences between rural and highly urban locations is not as great. Finally bank size varies with the use of technology as expected. 3 Owners doing business at the largest banks (over $10 billion in assets) more frequently report the use of technology, whether it is banking via the internet or the importance of a customerfriendly web site for conducting banking business. What is interesting in Table 2 is that 2 See Telecommunications, NFIB National Small Business Poll, Volume 4, Issue 8 (4/7/2005) at 3 Care needs to be taken when relating bank size to internet use because the choice of bank may be driven by the desire to use the internet. The tables only show association, not causation. 6

9 the use of technology does not decrease monotonically with bank size. The proportion of owners at the smallest banks exceeds those at $100 million - $1 billion banks and is about the same as those doing business at banks between $1 billion and $10 billion. A more formal test of the role of firm characteristics in explaining technology usage is presented in Table 3, where logistic regression is used to estimate the log odds of an owner reporting that they use the internet for some of their banking business (1= yes, they bank via internet; 0 otherwise). The dependent variables include firm size (log of the number of employees), log of firm age, log of owner age, three owner education categories (college degree omitted), real sales growth, a categorical variable for whether or not the business is home-based, log of time to the owner s principal bank, and four location categories (rural omitted). A set of industry categorical variables is included (retail omitted) as control variables but not presented in the Table 3 results. Bank size is excluded as a predictor because of the problem of controlling for small firms that choose their bank based on their desire to use technology. The log odds decrease with firm age and a high school education only, but increase with firm size or if a home-based business. Owners that do not physically visit their bank are more likely to use the internet for banking services. Otherwise, location has no effect on the incidence of using the internet for banking. Also reported in Table 3 are the ordered probit regression results for the determinants of whether a customer-friendly web site is very important to conducting their banking business (1= web site rated very important; 0 otherwise). 4. The importance of a customer-friendly web site to the conduct of banking business decreases with firm 4 OLS would be appropriate if all of the differences between the rating categories (1 to 5) were equal. Because these differences are only a ranking, ordered probit is a better estimation technique (Greene, 2000) 7

10 age and increases if the owner has a college degree or has a home-based businesses or does all of their banking electronically (no visits to the bank). It is not related to the size of the firm, age of the firm, or location. Technology as an Enabler of Small Firm Banking Business Although technology in banking might work to the detriment of information opaque firms that rely on soft information for lending decisions, it could also enable small firms to be more efficient in their financial transactions. The survey asks a question that can help address this issue: Over the last three years at your primary financial institution or bank, have you found technology increasingly helpful, increasingly getting in the way, or having no effect in conducting your banking business? Fifty-three (53) percent reported helpful, 11 percent getting in the way, and 35 percent no effect. A distribution of these responses by firm and owner characteristics is shown in Table 2. As was the case with the use of technology, firm and owner characteristics show some distinct patterns with their view of technology as an enabler. Younger owners (under age 35) and younger firms (under 10 years in business) more frequently report technology as helpful, as do owners with undergraduate or advanced degrees. Older firms (over 10 years in business) tend to more frequently report technology getting in the way or having no effect. As was the case with use of technology, there is NO strong association between technology as an enabler and firm size. Home-based businesses more frequently report technology as helpful and less frequently as having no effect. Faster growing firms (above 20 percent real growth in the 8

11 past two years) more frequently report technology as helpful, but slower growing firms find it getting in the way of conducting their banking business. Location, like the use of the internet, is not related to technology as an enabler as might be expected. Owners in urban areas more frequently report technology as helpful, while those in non-urban areas are more likely to report it getting in the way. Although no strong association exists between distance and technology as an enabler, owners further away from their primary bank less frequently report technology getting in the way. In the introduction an argument was made that small banks are at no special disadvantage in the use of technology to assist the delivery of their banking services. Supporting this contention, bank size is not related to the frequency of reporting technology as an enabler with one exception. Owners at banks under $100 million more frequently report technology as getting in the way (19 percent) and less frequently report it as helpful (46 percent). Multinomial logit is used to provide a multivariate analysis of the effect of firm and owner characteristics on technology as an enabler. This technique is appropriate when an unordered response, such as the question related to technology as an enabler, has more than two outcomes. The omitted category is no effect so that the coefficients listed in Table 4 should be interpreted as the increase (a positive coefficient) or the reduction (a negative coefficient) in the log odds between the included categories ( helpful or getting in the way ) and no effect. The multivariate results generally support the conclusions drawn from Table 2. Older firms are less likely to report technology helpful compared to those reporting no 9

12 effect, as are owners with less than college degrees. Larger businesses and home-based businesses are more likely to report technology helpful. Only two characteristics are related to reports of technology getting in the way : businesses that are growing more rapidly are less likely to report this category as are owners with less than a college education. Neither location nor distance from the bank has no significant association with technology as helpful. Interestingly, firms that do not visit their bank report that technology gets in the way. Finally, bank size has no effect on owners view of technology as an enabler. Even though owners at small banks ($100 million - $1 billion in assets) are less likely to report technology getting in the way, the bank size coefficients as a group are not significant for this category. However, owners reporting a recent bank merger are more likely to report technology getting in the way. Implementation of Technology Owners reporting that technology is getting in the way may have this perception because banks are forcing technology use upon them. The survey asks owners Is your principal financial institution forcing you to use more technology in your banking relationship than you would like? This question attempts to capture the push (bank initiated) versus pull (customer demanded) dynamics of technology implementation. Only 16 percent reported yes, which suggests that banks are letting there customers move into technology at a comfortable pace. A fairly strong correlation exists between those finding technology as an enabler and those reporting that the bank forces them to use it more than they want. Only 31 percent of those reporting being forced to use more 10

13 technology than they would like also reported that technology was helpful, compared to 54 percent overall. Likewise, only 37 percent reporting being forced to use technology reported that technology was getting in the way compared to 11 percent overall. Table 2 also includes the responses to the forced technology use question broken down by firm and owner characteristics. Interestingly, the responses to this question appear to be less strongly correlated to firm and owner characteristics than the other questions about technology. Although younger owners appear to more frequently report being forced to use technology, so do the oldest owners and those owners with less than a college degree. The smallest firms and those with lower real sales growth are more likely to report being pushed to use technology, as are agricultural firms. Owners in highly urban and fringe urban (but not urban) more frequently report being pushed, as do owners at the smallest banks. Table 5 presents a multivariate analysis of the association between firm and owner characteristics and banks forcing technology use. The logistic regression results show that neither owner nor firm age affects the response to the question about forced technology use (1=yes; 0 otherwise). Larger firms and those experiencing slow sales growth are less likely to report being forced into technology use. As identified in Table 2, owners at small banks (between $100 million and $1 billion in assets) and large banks (between $1 and $10 billion in assets) were less likely to report being forced into technology. This small bank advantage is consistent with the generally favorable views owners have of small banks quality of service. Once again, though, firms that have reported a recent merger are more likely to report being forced to use more technology than they desire. 11

14 Technology and Relationship Banking In the introduction the issue was raised as to whether the use of technology in banking was antithetical to relationship banking for small, information opaque firms. One way to identify those owners that value relationship banking is through ratings of selected characteristics they rate as important to the conduct of their banking business. The survey includes a set of 12 characteristics (including a customer-friendly web site used above) of which five are identified as instruments or correlates of relationship banking: knows you and your business, provides helpful advice, know local market, and social contact with loan officer (Scott, 2004). These variables have been combined into a Relationship Index as well. If technology is an obstruction to relationship banking from the viewpoint of small firms, then the correlation of importance ratings on these characteristics should be negatively associated with technology use. The correlation coefficients presented in Table 6 provides no evidence that the use of technology or view of technology in the conduct of the firm s financial business is negatively associated with the importance of relationship banking. For example, ratings of all of the relationship banking characteristics are positively correlated with the importance of a customer-friendly web site. Although use of the internet is negatively correlated with knows local market and social contact an outcome consistent with technology use at odds with relationship banking there is no association with knows my business or provides helpful advice. Owner views of technology as an enabler or banks pushing them to use technology shows little correlation with owners that value relationship banking. 12

15 The correlation coefficients, of course, are an incomplete way to investigate how technology usage is related to the importance of relationship banking because it does not control for firm age, a factor that is likely to be (negatively) related to the importance of relationship banking. Though not shown, the inclusion of either the Relationship Index or its components in the multivariate estimates shown in Tables 3, 4, and 5 confirmed the correlation coefficient results. Thus, while those owners that place more value on relationship banking are less likely to use the internet, there is no association with a view that technology gets in the way or that they are forced to use more technology than they want. These results suggest that banks are letting owners adopt technology at a pace that they are comfortable with given their preferences in a banking relationship. Another way to look at whether the implementation of technology has disrupted small firm banking relationships is to examine the association with shopping for a new bank and the incidence of changing banks. Table 7 presents logistic regression results for two dependent variables: Shopped for a New Bank takes a value of 1 if the owner reports shopping for a new bank in the past three years and Changed Banks takes a value of 1 if the owner reports changing banks at any time within the recent past and 0 otherwise. Approximately 20 percent of the owners reported shopping for a new bank, while almost 10 percent of the owners reported making such a change. As shown in Table 7, column 1, owners who feel they are being forced to use technology are more likely to report shopping for a new bank. However, their views on technology as an enabler have no effect on the incidence of shopping (Table 7, column 2). While concerns about banks forcing technology on them leads to more shopping, owners concerns are not severe enough to lead them to change banks (Table 7, column 13

16 3). Furthermore, owners that view technology as getting in the way are less likely to change banks, as are those that find technology helpful in conducting their banking business (Table 7, column 4). These findings further support the idea small firms, in general, have been able to adopt technology at their own pace. So What? What are the implications of this research for bankers, regulators and policy makers? First, they should have little concern about the pace of technology implementation for small firms or its effect on the value of relationship banking. Small business owners have a mostly favorable view of technology implementation, viewing it as enabling rather than confining, especially for the youngest, most information-opaque firms. The haves and have nots are not related to firm size, but owner age and education. Over time, as the owner population ages and becomes increasingly educated, the population should be at even greater ease with computer technology. For now, the only cost to those uncomfortable with the pace of technology change appears to be shopping for a new bank. Second, the advantages of technology in the conduct of owner s banking business are not just limited to those using large banks. Not only do small banks have just as much access to technology for their customers, but in their tradition of relationship banking they are less likely to be viewed as forcing customers into technology use. And finally, regulators need to carefully monitor the effect of mergers on technology use and implementation. Owners at banks that merged are less likely to view technology as an enabler and more likely to report technology use forced on them. 14

17 Conclusion The proliferation of technology in banking and the consolidation of the banking system have the potential to disrupt small business banking relationships. For small information opaque firms that rely on personal relationships, technology that is forced upon them possibly through a bank merger involving a larger acquiring bank could affect credit availability. This paper makes use of recent survey data of small firm owners that asks several questions about their use of technology in banking, their view of how banks are implementing technology in the delivery of banking services, and their assessment of the extent to which technology is an enabler of the conduct of their banking business. Small firms have been relatively slow to adopt electronic banking, with no more than half using it for anything. Yet the use of electronic banking has increased almost five-fold since And over half of the owners report that a customer-friendly web site is important to the conduct of their banking business. The importance of technology is less related to the size of the business, but more to the age of the owner and business. While technology use might be expected to be concentrated in more rural areas where the cost efficiencies may be the greatest, the opposite conclusion is found, possibly because of the lack of access to high-speed telecommunications. Not all small business owners are totally happy with that development as many continue to prefer a personal banking relationship. Still, banks are not systematically forcing technology on small firms as only 16 percent report that they are forced to use more technology than they are comfortable with. Owners appear free to accept the types of technology they feel comfortable with and reject the types they are not. The only 15

18 exception appears to be in the case of mergers, where owners are more likely to report technology getting in the way or being forced into using more technology than they want. Whether these problems are directly related to technology, have an effect on credit availability, or reflect a broader concern with the merger transition remains for future research. 16

19 References Akhavein, J., Frame, W.S., and White, L.J., The Diffusion of Financial Innovations: An Examination of the Adoption of Small Business Credit Scoring by Large Banking Organizations. Journal of Business, 78, Berger, A.N., Frame, S., Miller, N., Credit Scoring and the Availability, Price and Risk of Small Business Credit. Journal of Money, Credit, and Banking 37, Berger, A. N., and Udell, G.F., Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure. Economic Journal 112, F32-F53. DeYoung, R., Hunter, W.C., Udell, G.F., The Past, Present, and Possible Future for Community Banks? Journal of Financial Services Research 25, Greene, W., Econometric Analysis (4th ed., Prentice-Hall, New York, New York). Petersen, M.A. and R. G. Rajan, Does Distance Still Matter? The Information Revolution In Small Business Lending. Journal of Finance 57, Scott, J.A., Small Business and the Value of Community Financial Institutions. Journal of Financial Services Research, 25,

20 Table 1 Sample Description The distribution of the responses to the National Federation of Independent Business' Credit, Banks and Small Business Poll conducted by the Gallup Organization. The raw number of observations is shown with the frequency distributions adjusted for the oversampling of large businesses. No. of Observations Weighted % of Total Owner age Under Don't know/no answer 22 3 Owner education High school/ged Some college Undergraduate Graduate/professional Don't know/no answer 5 1 Business age < 6 years Don't know/no answer 9 1 Employment One Home-based business Yes No Don't know/no answer 6 1 Real sales growth >30% % % /- 10% Fell by 10% Don't know/no answer 33 5 Industry Agriculture 19 3 Manufacturing/mining 64 8 Construction Wholesale 41 7 Retail Transportation 35 4 FIRE Professional/science/techical 86 9 Education/Health care 60 6 Art/Entertainment 95 3 Other services Don't know/no answer Total

21 Table 2 Use of Technology in Conducting Banking Business (% responding "yes" to each category) Use of Technology in Banking Bank via Internet Web site important Technology as an Enabler Getting in the way Implementation Made to use more than desired Helpful No Effect Owner age Under Owner education High school/ged Some college Undergraduate Graduate/professional Business age < 6 years Employment One Home-based business Real sales growth >30% % % /- 10% Fell by 10% Location Rural Small cities/towns Fringe urban Urban Highly urban Time to bank under 5 minutes minutes minutes Over 10 minutes Use telephone only Bank size Over $10 billion $1-$10 billion $100 million - $1billion Under $100 million Non-bank Total

22 Table 3 Multivariate Analysis of the Determinants of Technology Usage Logistic regression results are presented for Bank via Internet (1= owner responds yes; 0 otherwise). Ordered probit is use for Web Site Important (5 = owner rates very important to 1= owner rates not important). Robust standard errors are reported that allow for clustering on firm size. Bank via Internet Web Site Important Coef. Std. Err. Coef. Std. Err. Log of firm age *** *** Log of owner age Log of firm size *** High school diploma ** ** Some college * Graduate/professional degree *** Real sales growth Home-based business *** * Industry: Agriculture Industry: Manufacturing Industry: Construction Industry: Wholesale Industry: Transportation Industry: Professiona;/science/tech *** *** Industry: FIRE * * Industry: Education/Health care Industry: Art/Entertainment * Industry: Other services ** *** Log time to bank Time to bank: no visits ** ** Location: metro Location: urban Location: fringe urban Location: small city Constant *** No of Obs Psuedo r-squared *** significant at.01 level; ** significant at.05 level; * signficant at.10 level 20

23 Table 4 Multivariate Analysis of Technology as an Enabler Multinomial logit is used to estimate the effect of firm and owner characteristics on the how technology is viewed as an enabler. The dependent variable has three 1/0 categories: Technology Is Helpful, Technology Gets in the Way, and Technology Has No Effect. Technology Has No Effect is the omitted category and the cofficients on the independent variables should be evaluated versus this category. Robust standard errors are reported that allow clustering on firm size. Technology Helpful Technology Gets in Way Coef. Std. Err. Coef. Std. Err. Log of firm age *** Log of owner age Log of firm size *** High school diploma *** ** Some college ** ** Graduate/professional degree Real sales growth * Home-based business *** Industry: Agriculture Industry: Manufacturing Industry: Construction * *** Industry: Wholesale ** Industry: Transportation Industry: Professional/science/tech ** Industry: FIRE *** Industry: Education/Health care Industry: Art/Entertainment Industry: Other services *** Log time to bank Does not visit bank *** Recent merger of primary bank *** Very large bank Large bank Small bank * Location: metro Location: urban Location: fringe urban Location: small city Constant No of Obs. 723 Psuedo r-squared *** significant at.01 level; ** significant at.05 level; * signficant at.10 level 21

24 Table 5 Multivariate Analysis of Small Firm View of Technology Implementation Logistic regression is used to estimate the log odds that banks are forcing technology on small firms. The dependent variable =1 if owners report banks making them use more technology than the want and 0 otherwise. Robust standard errors are reported that allow for clustering on firm age. Coef. Std. Err. Log of firm age Log of owner age Log of firm size ** High school diploma Some college Graduate/professional degree Real sales growth ** Home-based business Industry: Agriculture Industry: Manufacturing Industry: Construction Industry: Wholesale Industry: Transportation Industry: Professional/science/tech Industry: FIRE Industry: Education/Health care Industry: Art/Entertainment Industry: Other services * Log time to bank Does not visit bank Recent merger of primary bank *** Very large bank Large bank * Small bank ** Location: metro Location: urban * Location: fringe urban Location: small city Constant No of Obs. 729 Psuedo r-squared *** significant at.01 level; ** significant at.05 level; * signficant at.10 level 22

25 Table 6 Technology Use and Relationship Banking: Correlation Coefficients Knows my business Knows my business Provides advice Knows local market Social contact Relationship Index Use internet Customer friendly web site Technology is helpful Technology is in the way Technology has no effect Bank is forcing technology use Provides advice * Knows local market Social contact Relationship Index Use internet Customer friendly web site Technology is helpful Technology is in the way Technology has no effect Bank is forcing technology * significance levels are presented below the pairwise correlation coefficients 23

26 Table 7 Multivariate Analysis of the Effect of Technology on Search for New Banking Relationship Logistic is used to estimate the effect of the technology implementation variables on the incidence of shopping for a new bank and the incidence of changing banks. Shopped for a New Bank takes a vlue of 1 if the owner reports shopping for a new bank within the past three years and 0 otherwise. Changed Banks takes a value of 1 if the owner reports changing primary banks within the past three years and 0 otherwise. Robust standard errors are reported that allow for clustering on employment. (1) (2) (3) (4) Shopped for New Shopped for New Bank Bank Changed Banks Changed Banks Coef. Std. Err. Coef. Std. Err. Coef. Std. Err. Coef. Std. Err. Forced to use technology *** *** Technology is helpful ** Technology is getting in the way *** Log of firm age ** ** Log of owner age ** ** Log of firm size ** ** *** *** High school diploma * Some college Graduate/professional degree Real sales growth ** ** Home-based business * Industry: Agriculture *** *** Industry: Manufacturing Industry: Construction Industry: Wholesale * * Industry: Transportation Industry: Professional/science/tech ** ** Industry: FIRE Industry: Education/Health care *** *** Industry: Art/Entertainment ** ** Industry: Other services Log time to bank Does not visit bank * * Recent merger of primary bank ** ** * ** Very large bank Large bank * * Small bank Location: metro Location: urban ** ** * * Location: fringe urban Location: small city *** Constant *** *** *** No of Obs Psuedo r-squared *** significant at.01 level; ** significant at.05 level; * signficant at.10 level 24