Digital finance thrives in high-trust regions while inequality widens in low-trust areas

The authors warn that while trust encourages deep use of digital financial services, it does little to expand coverage to underserved populations. As a result, digital finance can unintentionally reinforce existing inequalities rather than reducing them.

A new empirical analysis reveals that the strength of social trust plays a far more decisive role in shaping the evolution of digital finance than previously understood, affecting everything from user participation and technological adoption to regional financial inclusion and institutional performance. The research draws attention to the complex interplay between formal and informal institutional forces at a time when China continues to lead global digital finance transformation, offering fresh insight into how cultural and behavioural foundations influence financial innovation.

The findings come from the study “The Impact of Social Trust on the Development of Digital Finance,” published in the International Journal of Financial Studies examines how trust interacts with household income, internet penetration, institutional environments, and regional dynamics to shape digital financial development.

Trust emerges as a foundational force in digital finance expansion

Social trust consistently and significantly accelerates the development of digital finance, even when controlling for economic conditions, government intervention, technology investment, industrial structure, public welfare expenditure, and local attention to digitalisation. The findings indicate that trust is not simply a complementary factor but a structural condition that supports the growth of digital financial ecosystems.

Digital finance, as described in the study, evolves through several dimensions: breadth, depth, and digitisation. Breadth refers to access and penetration of digital financial accounts; depth captures the frequency and complexity of financial activities; and digitisation reflects the integration of advanced technologies within financial operations. The authors highlight that social trust has a positive and substantial impact on depth and digitisation, influencing how consumers engage with more sophisticated digital tools and how institutions deploy advanced infrastructure. However, trust shows no statistically significant effect on breadth, revealing a critical tension in how digital finance expands across different social and economic segments.

The study notes that trust operates by reducing perceptions of risk, encouraging consumers to adopt unfamiliar technologies, and improving the functioning of online environments. As digital financial services grow more complex, information asymmetries increase and contract incompleteness becomes more pronounced. Trust, therefore, reduces hesitation, accelerates platform usage, and lowers frictions associated with algorithmic decision-making, automated lending, and digital credit evaluation. By helping users navigate uncertainty, trust drives deeper engagement with financial services that require more than basic transactional confidence.

At the same time, digital financial innovation also generates new frictions. Users face concerns related to data security, cyber risk, and the impersonality of digital interactions. Social trust mitigates these concerns by enabling informal mechanisms that reinforce behavioural norms and expectations, thereby compensating for regulatory gaps that often emerge during periods of rapid financial innovation. This underlines the importance of trust in early-stage digital markets where formal legal structures and enforcement mechanisms are still developing.

The researchers also extend the analysis by establishing the conceptual relationship between informal institutions, such as trust, and formal institutions, such as market rules, judicial protections, and regulatory oversight. Their findings show that trust does not replace formal systems; instead, the two interact synergistically. Stronger institutional environments amplify the positive effects of trust on digital finance, while weaker institutions limit trust’s ability to strengthen financial development. This is particularly evident in how trust interacts with marketisation, legal infrastructure, and intermediary organisations across regions.

Income and internet development identified as key mechanisms behind trust’s influence

To understand how trust translates into measurable financial development, the study investigates two primary mechanisms: household income growth and internet development. Both mechanisms strengthen the link between social trust and digital finance and serve as pathways through which trust exerts broader economic influence.

In the first mechanism, the study finds that higher levels of trust contribute to rising income levels by encouraging economic cooperation, facilitating entrepreneurship, and reducing barriers to social mobility. As income levels rise, so does demand for efficient, technology-driven financial services. Households with higher incomes are more likely to use digital credit, mobile banking tools, and investment platforms, which then feeds into the expansion and sophistication of digital finance. This mechanism strengthens the argument that trust not only contributes to financial behaviour on the individual level but also supports the macroeconomic conditions necessary for digital financial innovation.

The second mechanism focuses on internet development. Trust fosters openness, information sharing, and comfort with online environments. This reduces the cost of digital interactions and encourages widespread participation in internet-based activities. As internet ecosystems grow more robust, they provide fertile ground for digital finance to flourish. Trust-driven online engagement supports both technological adoption and market expansion by enhancing the authenticity and reliability of digital interactions.

This mechanism underscores the idea that digital finance does not evolve in isolation; it depends on a mature digital infrastructure supported by public confidence. The authors show that social trust strengthens the digital environment, which in turn forms the backbone of digital financial transformation.

The study’s comprehensive modelling illustrates that trust directly enhances digital finance while simultaneously exerting indirect effects through income and internet penetration. Together, these mechanisms reveal a multi-layered framework in which cultural, behavioural, and technological factors converge to shape financial development.

Regional disparities reveal uneven impacts and structural limitations

China’s provinces exhibit significant differences in economic development, institutional quality, digital literacy, and cultural norms. These disparities create distinct landscapes in which trust interacts with digital finance.

The research categorises the regions into eastern, central, and western provinces and evaluates how trust influences digital finance in each. The results reveal stark contrasts:

• Eastern provinces, which possess more developed market environments, stronger institutions, and broader digital infrastructure, benefit most from trust’s positive effects. In these regions, trust amplifies digital finance development and aligns with strong institutional frameworks to create sustained momentum.

• Central provinces show statistically insignificant results, suggesting that institutional maturity and digital ecosystem readiness play a moderating role in how trust shapes financial development.

• Western provinces exhibit a negative moderating effect, indicating that structural barriers weaken the impact of trust. Limited access to digital services, lagging infrastructure, and lower institutional quality diminish trust’s ability to encourage digital finance adoption.

The study also performs quantile regression to determine how trust influences digital finance at different stages of development. Results show that the role of trust grows stronger at higher levels of digital finance advancement. This suggests that as digital finance ecosystems mature and technology becomes more embedded in daily economic life, informal institutional factors become increasingly vital.

These findings raise important concerns for policymakers. In less developed regions, financial inclusion may stall if institutional reforms and digital infrastructure fail to keep pace with user needs. The combination of low trust, weak institutions, and underdeveloped digital ecosystems risks widening the digital divide and exacerbating income inequality.

The authors warn that while trust encourages deep use of digital financial services, it does little to expand coverage to underserved populations. As a result, digital finance can unintentionally reinforce existing inequalities rather than reducing them.

Policy implications point to the need for integrated institutional reform

The study provides several policy recommendations based on its empirical findings. Policymakers are urged to prioritise the construction of trust systems alongside improvements to formal institutional environments. Digital finance regulation should incorporate behavioural norms, ethical expectations, and public perceptions to strengthen consumer confidence.

The authors suggest that differentiated policy approaches are needed for different digital financial products. Basic payment services may require promotion to support financial inclusion, while digital lending and wealth management demand stronger compliance structures to protect vulnerable users.

Regional strategies must also be adjusted. Eastern provinces can continue leveraging strong institutional systems, whereas central and western provinces require targeted interventions that strengthen trust and institutional capacity simultaneously.

Furthermore, promoting digital literacy and closing regional technology gaps are essential to preventing widening inequality. Strengthening trust, institutions, and digital capability together will help support balanced, sustainable digital financial development across China.