nep-pay New Economics Papers
on Payment Systems and Financial Technology
Issue of 2023‒02‒20
twenty-two papers chosen by

  1. The Technology of Decentralized Finance (DeFi) By Raphael Auer; Bernhard Haslhofer; Stefan Kitzler; Pietro Saggese; Friedhelm Victor
  2. Digital Money and Central Banks Balance Sheet By Adrian Armas; Mr. Manmohan Singh
  3. Antitrust, Regulation, and User Union in the Era of Digital Platforms and Big Data By Lin William Cong; Simon Mayer
  4. Managing Seller Conduct in Online Marketplaces and Platform Most-Favored Nation Clauses By Schlütter, Frank
  5. Mobile internet and the rise of political tribalism in Europe By Manacorda, Marco; Tabellini, Guido; Tesei, Andrea
  6. Superstar Exclusivity in Two-Sided Markets By Elias Carroni
  7. Bitcoin Does Not Hedge Inflation By Mykola Pinchuk
  8. A Multi-Currency Exchange and Contracting Platform By Robert M. Townsend; Mr. Tommaso Mancini Griffoli; Mr. Tobias Adrian; Federico Grinberg; Nicolas Zhang
  9. Who Pays For Your Rewards? Redistribution in the Credit Card Market By Sumit Agarwal; Andrea F. Presbitero; André F. Silva; Carlo Wix
  10. The Bank of Amsterdam and the limits of fiat money By Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
  11. Currency Competition with Firms By Maxi Guennewig
  12. Expectile hidden Markov regression models for analyzing cryptocurrency returns By Beatrice Foroni; Luca Merlo; Lea Petrella
  13. Experimental Indicators of Digital Industries in Select Countries: Definitions, Methods, and Results By James Tebrake; Martha Tovar; Brent Moulton
  14. Enforcing Fintech Competition: Some Reflections on Institutional Design By Jens-Uwe Franck
  15. The Future of Business: Digital and Sustainable By Evans, Isabelle
  16. Have Credit Card Services Become Important to Monetary Aggregation? An Application of Sign Restricted Bayesian VAR By William Barnett; Hyun Park
  17. Market Definition and Three 19a Designations under German Antitrust Law: Alphabet, Meta, and Amazon By Jens-Uwe Franck; Martin Peitz
  18. Eliminating Disparate Treatment in Modeling Default of Credit Card Clients By Tom, Daniel M. Ph.D.
  19. How Do Transaction Costs Influence Remittances By Mr. Kangni R Kpodar; Patrick A. Imam
  20. Would Banks, King of Capital, Ever Be Dethroned? By Hoang, Giang
  21. A Theory of Payments-Chain Crises By Saki Bigio
  22. Self-Preferencing at Amazon: Evidence from Search Rankings By Chiara Farronato; Andrey Fradkin; Alexander MacKay

  1. By: Raphael Auer; Bernhard Haslhofer; Stefan Kitzler; Pietro Saggese; Friedhelm Victor
    Abstract: Decentralized Finance (DeFi) is a new financial paradigm that leverages distributed ledger technologies to offer services such as lending, investing, or exchanging cryptoassets without relying on a traditional centralized intermediary. A range of DeFi protocols implements these services as a suite of smart contracts, ie software programs that encode the logic of conventional financial operations. Instead of transacting with a counterparty, DeFi users thus interact with software programs that pool the resources of other DeFi users to maintain control over their funds. This paper provides a deep dive into the overall architecture, the technical primitives, and the financial functionalities of DeFi protocols. We analyse and explain the individual components and how they interact through the lens of a DeFi stack reference (DSR) model featuring three layers: settlement, applications and interfaces. We discuss the technical aspects of each layer of the DSR model. Then, we describe the financial services for the most relevant DeFi categories, ie decentralized exchanges, lending protocols, derivatives protocols and aggregators. The latter exploit the property that smart contracts can be "composed", ie utilize the functionalities of other protocols to provide novel financial services. We discuss how composability allows complex financial products to be assembled, which could have applications in the traditional financial industry. We discuss potential sources of systemic risk and conclude by mapping out an agenda for research in this area.
    Keywords: financial engineering, decentralized finance, DeFi, blockchain, ethereum, DLT, cryptocurrencies, stablecoins, cryptoassets
    JEL: E42 E58 F31 G19 G23 L50 O33 G12
    Date: 2023–01
  2. By: Adrian Armas; Mr. Manmohan Singh
    Abstract: Digital money is a logical step in a process of continuous technological advancement in payment systems. In response, central banks are reviewing their conduct of monetary operations in light of the new shape of financial markets and systems. The impact of digital money will depend on the type of money substitution by digital money. The paper straddles several cases where substitution of CiC (currency in circulation), and bank deposits may take place via digital money such as CBDC or other e-money, and how it would impact the central bank balance sheet. Remuneration of CBDC, if aligned to a new objective, could potentially amplify the effect on the interest rate channel of monetary policy.
    Keywords: CBDC; digital money; currency-in-circulation; bank deposits; central bank balance sheet; money base (M0); seigniorage; impact of digital money; dollarization level; central bank of Brazil; unit of account; central bank liability; Fiat currency; central bank FX; Digital currencies; Currencies; Central Bank digital currencies; Treasury bills and bonds; Global; Caribbean
    Date: 2022–10–28
  3. By: Lin William Cong; Simon Mayer
    Abstract: We model platform competition with endogenous data generation, collection, and sharing, thereby providing a unifying framework to evaluate data-related regulation and antitrust policies. Data are jointly produced from users' economic activities and platforms' investments in data infrastructure. Data improves service quality, causing a feedback loop that tends to concentrate market power. Dispersed users do not internalize the impact of their data contribution on (i) service quality for other users, (ii) market concentration, and (iii) platforms’ incentives to invest in data infrastructure, causing inefficient over- or under-collection of data. Data sharing proposals, user privacy protections, platform commitments, and markets for data cannot fully address these inefficiencies. We introduce and analyze user union, which represents and coordinates users, as a potential option for antitrust and consumer protection in the digital era.
    JEL: L10 L41 L50 O30
    Date: 2023–01
  4. By: Schlütter, Frank (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: This article investigates the incentive and ability of a platform to limit the extent of competition between the sellers it hosts. Absent contractual restrictions, a platform has an incentive to ensure competition between the sellers. This incentive can change with the introduction of so-called platform most-favored nation clauses (PMFN) that require the online sellers not to offer better conditions on other distribution channels. Such clauses can align the interests between sellers and platforms to restrict competition. I illustrate that a platform can stabilize seller collusion to its own benefit. These results offer a novel rationale to treat PMFNs with scrutiny.
    Keywords: Platform MFN ; digital economics ; collusion in vertically-related markets ; agency model
    JEL: L13 L40 L50
    Date: 2022–11–29
  5. By: Manacorda, Marco; Tabellini, Guido; Tesei, Andrea
    Abstract: We study the political effects of the diffusion of mobile Internet between 2007 and 2017, using data on electoral outcomes and on mobile Internet signal across the 84, 564 municipalities of 22 European countries. We find that access to mobile Internet increased voters' support for right-wing populist parties and for parties running on extreme socially conservative platforms, primarily in areas with greater economic deprivation. Using survey data, we also show that mobile Internet increased communitarian attitudes, such as nationalism and dislike of strangers and minorities. We conclude that mobile Internet benefitted right-wing populist parties because, in line with findings in social psychology, it fostered offline tribalism.
    Keywords: populism; communitarianism; Europe; mobile internet
    JEL: D72 D91 L86
    Date: 2022–10–14
  6. By: Elias Carroni (University of Bologna Author-Name: Leonardo Madio; University of Padova Author-Name: Shiva Shekhar; Tilburg University)
    Abstract: In most platform environments, the exclusive provision of premium content from leading creators (Superstars) is employed as a strategy to boost user participation and secure a competitive edge vis-Ã -vis rivals. In this article, we study the impact of Superstar exclusive content provi- sion on platform competition and complementors’ homing decisions. Two competing platforms facilitate interactions between consumers and suppliers, of which the latter are identified by the Superstar and a fringe of complementors (e.g., independent developers, amateurs). When platform competition is intense, more consumers become affiliated with the platform favored by Superstar exclusivity. This mechanism is self-reinforcing as it generates an entry cascade of complementors and some complementors singlehome on the favored platform. We find that cross-group externalities are key in shaping market outcomes. First, exclusivity benefits complementors and might make consumers better off when cross-group externalities are large enough. Second, contrary to con- ventional wisdom, vertical integration (platform-Superstar) may make exclusivity less likely than vertical separation under reasonable conditions. Finally, we discuss implications for the strategies of platform owners, managers of Superstars and complementors, and antitrust enforcers.
    Keywords: exclusivity, platforms, two-sided markets, vertical integration, network externalities.
    Date: 2023–01
  7. By: Mykola Pinchuk
    Abstract: This paper examines the response of major cryptocurrencies to macroeconomic news announcements (MNA). While other cryptocurrencies exhibit no reaction to major MNA, Bitcoin responds negatively to inflation surprise. Price of Bitcoin decreases by 24 bps in response to a 1 standard deviation inflationary surprise. This reaction is inconsistent with widely-held beliefs of practitioners that Bitcoin can hedge inflation. I do not find support for the hypothesis that the negative response of Bitcoin to inflation is due to its negative exposure to interest rates. Instead, I find support for the hypothesis that Bitcoin is strongly affected by the shift in consumption-savings decisions, driven by the rise in inflation. Consistent with this view, Bitcoin has negative exposure to a proxy for the consumption-savings ratio.
    Date: 2023–01
  8. By: Robert M. Townsend; Mr. Tommaso Mancini Griffoli; Mr. Tobias Adrian; Federico Grinberg; Nicolas Zhang
    Abstract: Cross-border payments can be slow, expensive, and risky. They are intermediated by counterparties in different jurisdictions which rely on costly trusted relationships to offset the lack of a common settlement asset as well as common rules and governance. In this paper, we present a vision for a multilateral platform that could improve cross-border payments, as well as related foreign exchange transactions, risk sharing, and more generally, financial contracting. The approach is to leverage technological innovations for public policy objectives. A common ledger, smart contracts, and encryption offer significant gains to market efficiency, completeness, and access, as well as to transparency, transaction and compliance costs, and safety. This paper is a first step aiming to stimulate further work in this space.
    Keywords: Cross-border payments; multilateral platforms; digital money; CBDC; programmability; encryption; exchange-market illiquidity; risk sharing; market design; hedging risk; cross-border payment; Smart contracts; Currencies; Currency markets; Financial statements; Global
    Date: 2022–11–04
  9. By: Sumit Agarwal; Andrea F. Presbitero; André F. Silva; Carlo Wix
    Abstract: We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
    Keywords: Household finance; Credit cards; Financial sophistication; Rewards
    JEL: G21 G40 G51 G53
    Date: 2023–01–20
  10. By: Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.
    Keywords: central banks; negative equity; fiat money; trust
    JEL: E42 E58 N13
    Date: 2023–02
  11. By: Maxi Guennewig
    Abstract: This paper analyses the consequences for monetary policy if firms issue money which generates seignorage revenues and information on consumers. I present a benchmark economy with a unique monetary equilibrium in which firms form digital currency areas if information rents are large. The central bank loses its autonomy and is forced to implement deflationary monetary policy. I extend the benchmark to show that the central bank may regain policy autonomy when firms form currency consortia with decision powers and claims on seignorage concentrated in the hands of one firm.
    Keywords: Digital Currencies, Currency Competition, Seignorage Information, Facebook, Monetary Policy
    JEL: E4 E5 G2
    Date: 2022–12
  12. By: Beatrice Foroni; Luca Merlo; Lea Petrella
    Abstract: In this paper we develop a linear expectile hidden Markov model for the analysis of cryptocurrency time series in a risk management framework. The methodology proposed allows to focus on extreme returns and describe their temporal evolution by introducing in the model time-dependent coefficients evolving according to a latent discrete homogeneous Markov chain. As it is often used in the expectile literature, estimation of the model parameters is based on the asymmetric normal distribution. Maximum likelihood estimates are obtained via an Expectation-Maximization algorithm using efficient M-step update formulas for all parameters. We evaluate the introduced method with both artificial data under several experimental settings and real data investigating the relationship between daily Bitcoin returns and major world market indices.
    Date: 2023–01
  13. By: James Tebrake; Martha Tovar; Brent Moulton
    Abstract: The pervasive impact of digitalization on the economy and the lack of an agreed definition makes it challenging to obtain estimates of the digital economy. Nowadays, some countries have estimated the value of the digital economy by identifying digital products or industries as defined in the international classifications. This study presents the estimates of digital industries for five countries that participated in an experimental exercise, applying a simplified standard approach recommended by the international agencies as part of the national accounts framework and using publicly available and limited secondary information. The results show that the structure and evolution of digital industries vary across countries and over time and that the estimates depend significantly on the underlying data sources. The conclusions of this exercise reveal the need to upgrade the data sources to better identify the impact of digitalization and contribute to policy-making on the economic benefits of digitalization.
    Keywords: Enabling industries; digitally ordered; digitally delivered; digital intermediary platforms; e-commerce; supply and use tables; product classification system; ISIC Sector; value of the digital economy; nominal GVA; gross value; Digital economy; Digitalization
    Date: 2022–09–30
  14. By: Jens-Uwe Franck
    Abstract: This paper focuses on institutional design aspects of the enforcement of competition law and other procompetitive regulation in fintech markets. Those interventions may prove necessary because the market entry of technology-enabled innovation may depend on accessing other (competing) market operators’ data and facilities or the enabling of data portability and interoperability of complementing financial services. Basic choices of allocating enforcement powers are identified. Five institutional design topics are discussed: bureaucratic enforcement styles and strategies; efficient use of administrative resources; motivation of staff; treatment of conflicting regulatory objectives; and legitimising elements in competition procedures.
    Keywords: Fintech, Competition Enforcement, Enforcing Regulation, Institutional Design, Enforcement Style, Regulatory Capture
    JEL: K20 K21 K22 K23 K42
    Date: 2022–11
  15. By: Evans, Isabelle
    Abstract: The Future of Business: Digital and Sustainable
    Date: 2023–01–20
  16. By: William Barnett (Department of Economics, University of Kansas, Lawrence, KS 66045, USA and Center for Financial Stability, New York City, NY 10036, USA); Hyun Park (Department of Economics, Tulane University, New Orleans, LA 70123, USA)
    Abstract: The purpose of this paper is to estimate the relationship among a primary set of economic variables, including two types of monetary aggregates: simple sum M2 and credit-card-augmented Divisia inside money services. The importance of that comparison has grown as the use of credit cards in purchase transactions has expanded. The data period includes the Great Recession, which was heavily associated with finance and thereby especially relevant to this study. The basic methodology in this paper is VAR-Sign Restrictions estimation. VAR is a well-known method to analyze inter-dependency among economic variables. By applying VAR-Sign Restrictions, we analyze how economic variables behave, positively or negatively, toward differently defined shocks. Imposing signs on the direction of economic variable responses to shocks is based on economic prior beliefs, using Bayesian estimation. Our results provide deeper insights into the relative merits of the two types of monetary aggregates as indicators.
    Keywords: Credit-Card-Augmented Divisia Monetary Aggregate, VAR, Sign Restrictions, Bayesian Estimation, Mixed-Frequency VAR, aggregation theory
    JEL: E42 E51 E52 E58
    Date: 2023–01
  17. By: Jens-Uwe Franck; Martin Peitz
    Abstract: The Bundeskartellamt has designated Alphabet, Meta, and Amazon as 19a firms. Thus, they are potentially subject to specific competition law interventions under a special procedure. In these three designation decisions, market definition plays an important role. This article points to several noteworthy aspects that concern market definition. In all decisions the authority focuses on one national market, arguing that the respective platform operator is dominant. The authority’s considerations are made at a somewhat aggregate level, abstracting from differences across market segments.
    Keywords: digital platforms, Big Tech, market definition, multi-markets approach, German Competition Act, 19a designations, competition law
    JEL: K21
    Date: 2023–01
  18. By: Tom, Daniel M. Ph.D.
    Abstract: A recent online search for model performance for benchmarking purposes reveals evidence of disparate treatment on a prohibitive basis in ML models appearing in the search result. Using our logistic regression with AI approach, we are able to build a superior credit model without any prohibitive and other demographic characteristics (gender, age, marital status, level of education) from the default of credit card clients dataset in the UCI Machine Learning Repository. We compare our AI flashlight beam search result to exhaustive search approach in the space of all possible models, and the AI search finds the highest separation/highest likelihood models efficiently after evaluating a small number of model candidates.
    Date: 2023–01–17
  19. By: Mr. Kangni R Kpodar; Patrick A. Imam
    Abstract: Using a new quarterly panel database on remittances (71 countries over the period 2011Q1- 2020Q4), this paper investigates the elasticity of remittances to transaction costs in a high frequency and dynamic setting. It adds to the literature by systematically exploring the heterogeneity in the cost-elasticity of remittances along several country characteristics. The findings suggest that cost reductions have a short-term positive impact on remittances, that dissipates beyond one quarter. According to our estimates, reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional US$32bn in remittances, higher that the direct cost savings from lower transaction costs, thus suggesting an absolute elasticity greater than one. Among remittance cost-mitigation factors, higher competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships are associated with a lower elasticity of remittance to transaction costs. Similarly, remittance cost-adaptation factors such as enhanced transparency in remittance costs, improved financial literary and higher ICT development coincide with remittances being less sensitive to transaction costs. Supplementing the panel analysis, the use of micro data from the USA-Mexico corridor confirm that migrants facing higher transaction costs tend to remit less, and that this effect is less pronounced for skilled migrants and those that have access to a bank account.
    Keywords: Remittances; Transaction Costs; Elasticity; Migration; elasticity of remittance; remittance market; remittances flow; remittance cost; cost-mitigation factor; Income; Exchange rates; Correspondent banking; Global
    Date: 2022–11–04
  20. By: Hoang, Giang
    Abstract: With the threats from Fintech firms and regulators, would banks ever be dethroned from the crown? The answer to this question yet remains to be examined.
    Date: 2023–01–08
  21. By: Saki Bigio
    Abstract: This paper introduces an endogenous network of payments chains into a business cycle model. Agents order production in bilateral relations. Some payments are executed immediately. Other payments, chained payments, are delayed until other payments are executed. Because production starts only after orders are paid, chained payments induce production delays. In equilibrium, agents choose the amount of chained payments given interest rates and access to internal funds or credit lines. This choice determines the payments-chain network and aggregate total-factor productivity (TFP). The paper characterizes equilibrium dynamics and their innate inefficiencies. Agents internalize the direct costs of their payment delays, but do not internalize the costs induced onto others. This externality produces novel policy insights and rationalizes permanent reductions in TFP under excessive debt.
    JEL: E32 E42 G01
    Date: 2023–01
  22. By: Chiara Farronato; Andrey Fradkin; Alexander MacKay
    Abstract: We study whether Amazon engages in self-preferencing on its marketplace by favoring its own brands (e.g., Amazon Basics) in search. To address this question, we collect new micro-level consumer search data using a custom browser extension installed by a panel of study participants. Using this methodology, we observe search positions, search behavior, and product characteristics. We find that Amazon branded products are indeed ranked higher than observably similar products in consumer search results. The prominence given to Amazon brands is 30% to 60% of the prominence granted to sponsored products.
    JEL: D12 D83 L13 L15 L81
    Date: 2023–01

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