Review of Industrial Organization (2006) 28:343–358 © Springer 2006
Innovation in the Retail Banking
Industry: the Diffusion of Credit
MARCELLO BOFONDI and FRANCESCA LOTTI
Research Department, Bank of Italy, via Nazionale 91, 00184 Rome, Italy
Abstract. We study technology diffusion in the retail banking industry. Our contribution
to the empirical literature is twofold: Firstly, we explore technology diffusion in the ﬁnan-
cial sector, whose relevance has often been neglected; secondly we focus on credit scoring
adoption, a relevant process innovation still under-explored. Estimating a set of duration
models, we analyze the patterns of diffusion of this technology among Italian banks. We
ﬁnd that credit scoring is ﬁrstly introduced by large banks with broad branch networks,
which can fully exploit scale economies. We present robust evidence that banks with large
market shares operating in more concentrated markets are early adopters, providing a
direct support of the Schumpeterian hypothesis that market power enhances innovation.
Key words: credit scoring, innovation, mortgage loans, retail banks, technology diffusion.
JEL Classiﬁcations: G21, O31, C41.
I. Are Financial Innovations Different?
In a recent survey about ﬁnancial innovation, Frame and White (2004)
point out the “[ ... ] relative dearth of empirical studies that speciﬁcally test
hypotheses or otherwise provide a quantitative analysis of ﬁnancial innova-
tion”. This gap in the literature seems to be more relevant if compared
to the abundance of works concerning other sectors, like manufacturing
(Cohen and Levin, 1989; Cohen, 1995). IO practitioners tend to be more
focused, in a Schumpeterian tradition (Schumpeter, 1950), on the unsolved
problem concerning market structure and innovation in different industries,
often neglecting ﬁnancial system as a unit of analysis.
The relatively scarce attention paid by IO economists to this sector is
remarkable, given that its role as an intermediary between saving, consump-
tion, investment, and production is fundamental for the functioning of
The views expressed here are those of the authors and do not necessarily reﬂect
those of the Bank of Italy.
Author for correspondence: Email: firstname.lastname@example.org