Payment System Externalities

Abstract

We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities—a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.

Bank Competition and Household Privacy in a Digital Payment Monopoly

“…16 These setups aligns with empirical findings that additional dimensions of agent heterogeneity (in addition to hidden quality) avoid a full "unraveling" equilibrium where all agents opt to disclose private information Jin and Vasserman, 2021;Soleymanian et al, 2021). 17 On asymmetric information and data externalities, see also Acemoglu et al (2022), , Choi et al (2019), Cicala et al (2021), , Jones and Tonetti (2020) and Parlour et al (2022a). 18 In Huang (2021) banks also compete with FinTech lenders, which rely on data from linked ecommerce platforms while banks rely on physical collateral, leading to different borrower type specializations for FinTechs and banks.…”

An econometric understanding of Fintech and operating performance

“…While Fintech concept is popular in media and press articles [3], it remains a novel concept in academic research. Recently, from investment angle, Liu et al (2022) examine common risk factors that explain expected returns on Cryptocurrency market, whereas Parlour et al (2022) investigate the disruption in the payment System. In comparing conventional and largest Islamic banks, Sidaoui et al (2022) find business model of Islamic banks to be credit-oriented and Fintech focused in delivering better customer service and is driving Islamic finance growth.…”

Money and Banking with Reserves and CBDC

“…Our microfoundation for the role of reserves emphasizes fire sales (Shleifer and Vishny (1992), Stein (2012)) and frictional interbank markets (Bianchi and Bigio (2022)). In Kiyotaki and Moore (2019), a liquid security, like reserves, relaxes resalability constraints, and in Parlour, Rajan, and Walden (2022), a transfer of bank deposits generates a costly "liquidity externality. "…”