nep-pay New Economics Papers
on Payment Systems and Financial Technology
Issue of 2020‒12‒21
twenty papers chosen by
Bernardo Bátiz-Lazo
Northumbria University

  1. Safe Payments By Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
  2. Republic of Korea; Financial Sector Assessment Program-Technical Note-Technological Change, Legal Frameworks, and Implications for Financial Stability By International Monetary Fund
  3. Open Banking: Credit Market Competition When Borrowers Own the Data By Zhiguo He; Jing Huang; Jidong Zhou
  4. Financial Literacy and Attitudes to Cryptocurrencies By Georgios A. Panos; Tatja Karkkainen; Adele Atkinson
  5. Digital Pakistan By Sebastian Saez; Nadeem Rizwan; Erik van der Marel
  6. Plädoyer für den E-Euro - Implikationen für die Gesellschaft By Berentsen, Aleksander
  7. Financial technologies and the effectiveness of monetary policy transmission By Hasan, Iftekhar; Kwak, Boreum; Li, Xiang
  8. What COVID-19 Means for Digital Infrastructure in Emerging Markets By Davide Strusani; Georges V. Houngbonon
  9. Explainable AI for Interpretable Credit Scoring By Lara Marie Demajo; Vince Vella; Alexiei Dingli
  10. Collaborative platforms for innovation in advanced materials By Laura Kreiling; Douglas K. R. Robinson; David Winickoff
  11. The 100% Reserve Reform: Calamity or Opportunity? By Pfister Christian
  12. Context information increases revenue in ad auctions: Evidence from a policy change By S{\i}la Ada; Nadia Abou Nabout; Elea McDonnell Feit
  13. Back to the past: the historical roots of labour-saving automation By Jacopo Staccioli; Maria Enrica Virgillito
  14. Private Equity Returns: Empirical Evidence from the Business Credit Card Securitization Market By Matthias Fleckenstein; Francis A. Longstaff
  15. Technology and the Regulatory Agenda for Community Banking, a speech at Independent Community Bankers of America ThinkTECH Policy Summit (virtual event), December 4, 2020 By Michelle W. Bowman
  16. Competition, Politics, & Social Media By Benson Tsz Kin Leung; Pinar Yildirim
  17. Pandemics, Global Supply Chains, and Local Labor Demand: Evidence from 100 Million Posted Jobs in China By Hanming Fang; Chunmian Ge; Hanwei Huang; Hongbin Li
  18. Enabling reciprocity through blockchain design By Jens Gudmundsson; Jens Leth Hougaard
  19. Essays on competition, regulation and innovation in the banking industry By Capera Romero, Laura
  20. Search and Information Frictions on Global E-Commerce Platforms: Evidence from AliExpress By Jie Bai; Maggie Chen; Jin Liu; Daniel Yi Xu

  1. By: Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
    Abstract: We use a simple model to study whether private payment systems based on bank deposits can provide the optimal level of safety. In the model, bank deposits backed by projects are subject to default risk that can be mitigated by a depositor's ex ante and ex post monitoring. Safe payment instruments issued by a narrow bank can also be used as a back-up payment system when the risky bank fails. Private adoption of safe payment instruments is generally not socially optimal when buyers do not fully internalize the externalities of their adoption decision on sellers, or when the provision of deposit insurance distorts their adoption incentives. Using this framework, we discuss the optimal subsidy policy conditional on the level of deposit insurance.
    Keywords: Central bank research; Digital currencies and fintech; Financial institutions; Payment clearing and settlement systems
    JEL: E42 E50 G21
    Date: 2020–12
  2. By: International Monetary Fund
    Abstract: Technological innovation in Korea holds great potential for the deepening of its financial system, that could lead to an increase of product offerings and lowering of transaction costs. Korea’s financial sector legal framework, particularly the recently announced open banking initiative and anticipated amendments to the legal frameworks for electronic financial transactions and use of personal data, will play a key role in shaping the direction of innovation and competition in the financial sector. The already highly modernized and digitally connected state of the Korean financial sector will amplify the impact of these changes to market structure and competition. Korea’s fintech experience illustrates that even within an already highly technologically advanced, efficient, and inclusive financial sector, significant benefits can still be reaped from innovation in financial services.
    Keywords: Banking;Commercial banks;Fintech;Financial services;Legal support in revenue administration;ISCR,CR,fintech company,payment service,Interface provider,technology company,market structure
    Date: 2020–09–18
  3. By: Zhiguo He; Jing Huang; Jidong Zhou
    Abstract: Open banking facilitates data sharing consented by customers who generate the data, with a regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks' customer data enables better borrower screening or targeting by fintech lenders. Open banking could make the entire financial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data. We highlight the importance of equilibrium credit quality inference from borrowers' endogenous sign-up decisions. When data sharing triggers privacy concerns by facilitating exploitative targeted loans, the equilibrium sign-up population can grow with the degree of privacy concerns.
    JEL: D18 G21 L13 L15 L51
    Date: 2020–11
  4. By: Georgios A. Panos; Tatja Karkkainen; Adele Atkinson
    Abstract: We examine the relationship between financial literacy and attitudes to cryptocurrencies, using microdata from 15 countries. Our financial literacy proxy exerts a large negative effect on the probability of currently owning cryptocurrencies. The financially literate are also more likely to be aware of cryptocurrencies, and more likely to report that they do not intend to own them. We confirm the external validity of our financial literacy proxy and findings using data from a second novel survey of retail investors in 3 Asian countries. More financially literate retail investors are more likely not to have held any cryptocurrencies. We show that the relationship between financial literacy and attitudes to cryptocurrencies is moderated by a different perception of the financial risk involved in cryptocurrencies versus alternative instruments by the more financially literate. Our findings shed light on the demand for cryptocurrencies among the general population and suggest that it is largely driven by unsophisticated users.
    Keywords: Financial Literacy, Cryptocurrencies, Attitudes, Bitcoin, Financial Risk
    JEL: B26 D18 E41 G11 G53
    Date: 2020–11
  5. By: Sebastian Saez; Nadeem Rizwan; Erik van der Marel
    Keywords: Information and Communication Technologies - Digital Divide Information and Communication Technologies - Information Technology International Economics and Trade - Export Competitiveness International Economics and Trade - Trade Policy International Economics and Trade - Trade Technology and Productivity International Economics and Trade - Trade and Services
    Date: 2020–05
  6. By: Berentsen, Aleksander (University of Basel)
    Abstract: Unser Geldsystem ist im Umbruch. Gerade erst hat ein von Facebook gegründetes privates Konsortium den Entwurf einer privaten Weltwährung vorgestellt. Auch China testet zur Zeit eine digitale staatliche Währung, vermutlich mit dem Ziel die Vormachtstellung des amerikanischen Dollars zu brechen. Europa darf diesen Wettbewerb ums digitale Geld der Zukunft nicht verschlafen. Die Europäischen Zentralbank soll den Privatpersonen und den Unternehmen den E-Euro in Form von «EZB-Konten für alle» zur Verfügung stellen. Es sprechen zahlreiche Gründe dafür dem Euro einen digitalen Zwilling zur Seite zu stellen. Der E-Euro kommt dem Bedürfnis der Bevölkerung einer sicheren Geldanlage nach. Zudem erhöht er die Stabilität des Finanzsektors und ermöglicht eine einfache und transparente Geldpolitik. Der E-Euro in Form von «EZB-Konten für alle» ist zudem denkbar einfach zu implementieren, weil er sich problemlos in die bestehenden Zahlungssysteme integrieren lässt. Mit einer raschen Umsetzung des E-Euros würde die EZB die Stellung Europas im Konkurrenzkampf um eine Weltwährung festigen und die europäische Wirtschaft für den globalen Wirtschaftswettbewerb stärken.
    Keywords: CBDC, money, monetary policy, digital currency, cryptocurrencies, blockchain
    JEL: E4 E5 G2 G5 D6
    Date: 2020–12
  7. By: Hasan, Iftekhar; Kwak, Boreum; Li, Xiang
    Abstract: This study investigates whether and how financial technologies (FinTech) influencethe effectiveness of monetary policy transmission. We examine regional-level FinTech adoption and use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with FinTech adoption. The re-sults indicate that FinTech adoption generally enhances monetary policy transmis-sion to real GDP, bank loans, and housing prices, while the evidence of transmission to consumer prices is mixed. A subcategorical analysis shows that the enhanced effectiveness is the most pronounced in the adoption of FinTech payment, compared to that of insurance and credit.
    Keywords: monetary policy,financial technology,interacted panel VAR
    JEL: C32 E52 G21 G23
    Date: 2020
  8. By: Davide Strusani; Georges V. Houngbonon
    Keywords: Finance and Financial Sector Development - Access to Finance Information and Communication Technologies - ICT Economics Private Sector Development - Emerging Makets
    Date: 2020–05
  9. By: Lara Marie Demajo; Vince Vella; Alexiei Dingli
    Abstract: With the ever-growing achievements in Artificial Intelligence (AI) and the recent boosted enthusiasm in Financial Technology (FinTech), applications such as credit scoring have gained substantial academic interest. Credit scoring helps financial experts make better decisions regarding whether or not to accept a loan application, such that loans with a high probability of default are not accepted. Apart from the noisy and highly imbalanced data challenges faced by such credit scoring models, recent regulations such as the `right to explanation' introduced by the General Data Protection Regulation (GDPR) and the Equal Credit Opportunity Act (ECOA) have added the need for model interpretability to ensure that algorithmic decisions are understandable and coherent. An interesting concept that has been recently introduced is eXplainable AI (XAI), which focuses on making black-box models more interpretable. In this work, we present a credit scoring model that is both accurate and interpretable. For classification, state-of-the-art performance on the Home Equity Line of Credit (HELOC) and Lending Club (LC) Datasets is achieved using the Extreme Gradient Boosting (XGBoost) model. The model is then further enhanced with a 360-degree explanation framework, which provides different explanations (i.e. global, local feature-based and local instance-based) that are required by different people in different situations. Evaluation through the use of functionallygrounded, application-grounded and human-grounded analysis show that the explanations provided are simple, consistent as well as satisfy the six predetermined hypotheses testing for correctness, effectiveness, easy understanding, detail sufficiency and trustworthiness.
    Date: 2020–12
  10. By: Laura Kreiling (OECD); Douglas K. R. Robinson (Centre national de la recherche scientifique); David Winickoff (OECD)
    Abstract: Advanced materials hold significant potential to create better products and production processes. Yet realising their promise remains challenging: historically it has taken 15 to 20 years from discovery to deployment of new materials in products. Consequently, governments have been creating shared digital and physical infrastructures – “collaborative platforms” – to pool and manage global data, drive the development of nascent industries, and create hubs of interdisciplinary research, development and training. Based on evidence from 12 case studies, this report characterises governance mechanisms of collaborative platforms for advanced materials such as terms of funding, access, and IP policy and explores how they can create different kinds of value. Technology convergence, the engagement of society and digitalisation are identified as key trends. The study describes conditions under which collaborative platforms can align and power value chains, foster standards, catalyse innovation ecosystems and build education, skills and social capital.
    Date: 2020–12–14
  11. By: Pfister Christian
    Abstract: This paper considers the various 100% Reserve plans that have appeared since the interwar period and have since then been adapted. In all formulations of those schemes, Government liabilities (cash, central bank reserves and short-term Treasuries) back banks’ sight deposits. This organization contrasts with current so-called “fractional reserve banking”, in which, as a result of reserve requirements imposed by the central bank (Drumetz et al., 2015), reserves back only a small fraction of sight deposits. The paper briefly presents the six categories of plans. It then highlights their common features as well as their differences, showing that the differences are more numerous than the common features. The criticisms voiced against the different formulations of 100% Reserves are exposed, adding those of the author and distinguishing between the doubts expressed on the validity of the analysis on one hand, and some undesirable consequences of the reform on the other. In spite of these criticisms, it then shown that the 100% Reserve reform is becoming topical, with recent private sector, central banks and political initiatives that relate to it. Overall, the 100% Reserve reform does not appear as a meaningful opportunity to improve the functioning of banking systems. Furthermore, at least one of its variants could easily turn into a calamity. Fortunately, it is not that variant that is getting more topical.
    Keywords: 100% Reserve, Chicago Plan, deposited currency, full-reserve, limited purpose banking, narrow banking, sovereign money
    JEL: E42 E51 E52 E58
    Date: 2020
  12. By: S{\i}la Ada; Nadia Abou Nabout; Elea McDonnell Feit
    Abstract: Ad exchanges, i.e., platforms where real-time auctions for ad impressions take place, have developed sophisticated technology and data ecosystems to allow advertisers to target users, yet advertisers may not know which sites their ads appear on, i.e., the ad context. In practice, ad exchanges can require publishers to provide accurate ad placement information to ad buyers prior to submitting their bids, allowing them to adjust their bids for ads at specific domains, subdomains or URLs. However, ad exchanges have historically been reluctant to disclose placement information due to fears that buyers will start buying ads only on the most desirable sites leaving inventory on other sites unsold and lowering average revenue. This paper explores the empirical effect of ad placement disclosure using a unique data set describing a change in context information provided by a major private European ad exchange. Analyzing this as a quasi-experiment using diff-in-diff, we find that average revenue per impression rose when more context information was provided. This shows that ad context information is important to ad buyers and that providing more context information will not lead to deconflation. The exception to this are sites which had a low number of buyers prior to the policy change; consistent with theory, these sites with thin markets do not show a rise in prices. Our analysis adds evidence that ad exchanges with reputable publishers, particularly smaller volume, high quality sites, should provide ad buyers with site placement information, which can be done at almost no cost.
    Date: 2020–12
  13. By: Jacopo Staccioli (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore – Institute of Economics, Scuola Superiore Sant’Anna, Pisa); Maria Enrica Virgillito (Institute of Economics, Scuola Superiore Sant’Anna, Pisa – Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore)
    Abstract: This paper, relying on a still relatively unexplored long-term dataset on U.S. patenting activity, provides empirical evidence on the history of labour-saving innovations back to early 19th century. The identification of mechanisation/automation heuristics, retrieved via textual content analysis on current robotic technologies by Montobbio et al. (2020), allows to focus on a limited set of CPC codes where mechanisation and automation technologies are more prevalent. We track their time evolution, clustering, eventual emergence of wavy behaviour, and their comovements with long-term GDP growth. Our results challenge both the general-purpose technology approach and the strict 50-year Kondratiev cycle, while provide evidence of the emergence of erratic constellations of heterogeneous technological artefacts, in line with the development-block approach enabled by autocatalytic systems.
    Keywords: Labour-Saving Technologies, Search Heuristics, Industrial Revolutions, Wavelet analysis
    JEL: O3 C38 J24
    Date: 2020–11
  14. By: Matthias Fleckenstein; Francis A. Longstaff
    Abstract: We present a new approach for estimating private equity returns using secondary market prices for entrepreneurial business credit card securitizations. We show that the market requires a significantly higher premium for entrepreneurial credit risk than for household credit risk. Entrepreneurial risk is systematic in nature and has much in common with risks in corporate bond and real-estate-backed lending markets. The expected return on private equity is on the order of 14 percent and the volatility of private equity returns is comparable to that of the smallest quintile of publicly traded firms.
    JEL: G12 G5
    Date: 2020–11
  15. By: Michelle W. Bowman
    Date: 2020–12–04
  16. By: Benson Tsz Kin Leung; Pinar Yildirim
    Abstract: An increasing number of politicians are relying on cheaper, easier to access technologies such as online social media platforms to communicate with their constituency. These platforms present a cheap and low-barrier channel of communication to politicians, potentially intensifying political competition by allowing many to enter political races. In this study, we demonstrate that lowering costs of communication, which allows many entrants to come into a competitive market, can strengthen an incumbent's position when the newcomers compete by providing more information to the voters. We show an asymmetric bad-news-good-news effect where early negative news hurts the challengers more than the positive news benefit them, such that in aggregate, an incumbent politician's chances of winning is higher with more entrants in the market. Our findings indicate that communication through social media and other platforms can intensify competition, how-ever incumbency advantage may be strengthened rather than weakened as an outcome of higher number of entrants into a political market.
    Date: 2020–12
  17. By: Hanming Fang; Chunmian Ge; Hanwei Huang; Hongbin Li
    Abstract: This paper studies how the COVID-19 pandemic has affected labor demand using over 100 million posted jobs on one of the largest online platforms in China. Our data reveals that, due to the effects of the pandemic both in China and abroad, the number of newly posted jobs within the first 13 weeks after the Wuhan lockdown on January 23, 2020 was about one third lower than that of the same lunar calendar weeks in 2018 and 2019. Using econometric methods, we show that, via the global supply chain, COVID-19 cases abroad and in particular pandemic-control policies by foreign governments reduced new job creations in China by 11.7%. We also find that Chinese firms most exposed to international trade outperformed other firms at the beginning of the pandemic but underperformed during recovery as the Novel Coronavirus spread throughout the world.
    JEL: F16 J2
    Date: 2020–11
  18. By: Jens Gudmundsson (Department of Food and Resource Economics, University of Copenhagen); Jens Leth Hougaard (NYU-Shanghai, China; Department of Food and Resource Economics, University of Copenhagen)
    Abstract: We introduce a reciprocity protocol, an innovative approach to coordinating and sharing rewards in blockchains. Inherently decentralized and easy to implement, it puts emphasis on incentives rather than forcing specific sharing rules from the outset. Analyzing the non-cooperative game the protocol induces, we identify a robust, strict, and Pareto-dominant symmetric equilibrium. In it, even self-centered participants show extensive reciprocity to one another. Thus, despite a setting that is generally unfavorable to reciprocal behavior, the protocol manages to build trust between the users by taking on a role akin to a social contract.
    Keywords: Blockchain, reciprocity, protocol design, Nash equilibrium
    JEL: C62 C72 D02 D63 D91
    Date: 2020–12
  19. By: Capera Romero, Laura (Tilburg University, School of Economics and Management)
    Date: 2020
  20. By: Jie Bai; Maggie Chen; Jin Liu; Daniel Yi Xu
    Abstract: Global e-commerce platforms present new export opportunities for small and medium-sized enterprises in developing countries by significantly lowering the entry barriers of exporting. However, the lack of market selection can lead to a large number of online firms competing for consumers’ attention, resulting in severe congestion in consumers’ search process. When firms’ intrinsic quality is not perfectly observed, these search frictions can further slow down the resolution of the information problem and hinder market allocation towards better firms. In this paper, we investigate how search and information frictions shape firm dynamics and market evolution in global e-commerce. Using detailed data from AliEpxress as well as a rich set of self-collected objective quality measures, we provide stylized facts that are consistent with the presence of search and information frictions. Moreover, using a randomized experiment that offers exogenous demand and information shocks to small prospective exporters, we establish that firms with larger past sales have an advantage in overcoming the search friction and generating future orders. This indicates that initial demand shocks could confound firms’ true quality in determining firm growth and the long-run market structure. We construct and estimate an empirical model of the online market that are consistent with our descriptive and experimental findings and use the model to quantify the extent of demand-side frictions. Counterfactual analyses show that alleviating information frictions and reducing the number of firms can help to improve allocative efficiency and raise consumer welfare.
    JEL: F14 L15 O12
    Date: 2020–11

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