A May 2026 working paper from North Dakota State University economists examines how bank consolidation relates to innovation across U.S. states. Oudom Hean, Jaxon Nankivel and Sean Schiefelbein find that the answer depends on how concentrated a state’s banking market already is and on what kind of innovation is being counted.
The paper notes that the number of U.S. banking institutions has fallen by 35% since 2005, citing FDIC data, and names regulatory changes, advances in financial technology, rural-to-urban migration and the pursuit of economies of scale as drivers. The authors measure innovation with U.S. patent grants, as total counts and per 100,000 people, across all states from 1994 to 2020. A companion summary by Nankivel and Hean says concentration is measured two ways: the Herfindahl-Hirschman Index and the combined deposit share of a state’s four largest banks.
The relationship is nonlinear. At low to moderate levels of concentration, more consolidation is associated with more patenting. At higher levels the effect turns negative. The summary offers an explanation: large, well-capitalized banks may be better placed to absorb the risk of lending to innovative ventures, but once a few institutions dominate a market, the smaller and mid-sized lenders most willing to finance risky ventures have largely disappeared, and the largest lenders tend to favor established firms. The effects are stronger in the Northeast and South and weaker in the Midwest and West.
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The authors also sort patents by how disruptive they are and report suggestive evidence that consolidation favors incremental rather than disruptive innovation. In the paper’s words, that implies “greater concentration in the traditional banking sector may slow more radical forms of technological progress.” The summary links this to lending criteria at large banks, which weigh collateral, credit history and stable cash flows and so favor incumbent firms over early-stage innovators.
For fintech buyers and the startups that sell to banks, the mechanism the authors describe runs through credit. In our reading, a founder in a state dominated by a few large banks may find bank financing easier to get for an incremental product than for a disruptive one, and the summary says such firms increasingly turn to venture capital and private equity, which are not available evenly across regions. For CFOs and bank strategists, the summary’s policy section argues that merger review should weigh innovation effects alongside lending competition, and that regulatory requirements should scale with institution size so smaller lenders can keep extending credit to borrowers large banks pass over.
The study works at the state level and ends in 2020. It does not measure the patent filings of individual banks or the effect of any specific merger.
