Switching costs and the extent of potential competition in Brazilian banking

Switching costs are a leading cause of customer lock-in in banking, reducing the extent of competition and increasing market power in this industry. This paper tries to estimate these costs using a methodology that does not require customer microdata. The estimates obtained here—using bank accounting information collected on a quarterly basis from 2009 to 2011—indicate substantial switching costs in the deposit market, and such costs tend to be lower for customers of larger banks. Additionally, there is some evidence that much of a bank's market share is due to its continued relationships with customers over time (a lock-in effect). Thus, the extent of potential competition in Brazilian banking could be severely limited by these costs.