Banks finance lending with deposits and support the operation of payment system by allowing depositors to freely transfer funds in and out of their deposit accounts. This bundling of financial services creates a liquidity mismatch. Using granular payment data, we characterize a sizeable liquidity risk exposure that banks face due to highly volatile payment flows. Payment risk is a form of funding stability risk that is unique to banks. Our analysis demonstrates the tension between the monetary role and financing role of deposits. We find that payment risk dampens bank lending: An interquartile increase in payment risk is associated with a decline in loan growth that is 10%-20% of its standard deviation. This detrimental effect is amplified by funding stress in broader financial markets and is stronger for undercapitalized banks. Furthermore, payment risk impedes the bank lending channel of monetary policy transmission. Finally, we characterize how banks mitigate payment risk by adjusting deposit rates.

I show that the long-term decrease in the nominal short rate since the 1980s contributed to a decline in banks' supply of business loans, firm investment and new firm creation, and an increase in banks' real estate lending. The driving force behind these relationships was the shift in banks’ funding mix from time deposits (CDs) to savings deposits, which was caused by the decrease in the nominal rate. I show that banks finance business lending with time deposits because of their matching interest-rate sensitivity and liquidity. A lower nominal rate reduces the spread on liquid deposits (e.g., savings deposits), leading households to substitute towards them and away from illiquid time deposits. In response to an outflow of time deposits, banks cut the supply of business loans and increase their price. The decrease in business lending leads to reduced investment at bank-dependent firms and a lower entry rate of firms in industries that are highly reliant on external funding. I document these relationships both in the aggregate, and in the cross-section of banks, firms and geographic areas. For identification, I exploit cross-sectional variation in banks' market power and business credit data. I develop a general equilibrium model which captures these relationships and shows that the transmission mechanism I document is quantitatively important.

Despite a burgeoning literature on Fintech lending that has been occurring from outside the financial industry, less is known about the adoption of Fintech by banks and its implications. We fill this gap by investigating banks’ partnering with Zelle. We document a network effect in banks’ decisions to partner with Zelle as they are positively affected by Zelle penetration in the market that the banks operate. Zelle partnering is followed by higher growth in partnering banks’ deposits and, consequently, small business lending, in the market with greater Zelle penetration. For identification, we rely on (1) estimations of cross-branch variations within a bank to account for bank-level lending opportunities and (2) an exogenous shock to a bank’s Zelle-partnering status due to bank mergers. Overall, our findings are consistent with the interactive nature of banks’ technology adoption and the positive impact of Fintech on banks’ deposit taking and small business lending.