The Impact Of Digitalization On Banking And Financial Stability

Carbo-Valverde discusses how FinTech firms are changing the banking landscape. He observes that while digitalization has been around for decades, its impact and speed of diffusion are unprecedented. FinTech firms are changing competiton in these markets. His conclusions are as follows. First, analyzing these markets will require models that are based on network externalities and multi-sided platforms with their underlying pricing strategies. Second, while digitalization will likely reduce marginal costs and increase productivity, lines between bank and non-bank providers will continue to blur creating privacy, regulatory, and law enforcement challenges. Third, the regulation of financial services need to shift from institution based to activity based to create a more level playing field for all providers and better manage risks.

The Future Of Cryptotokens

In this article, we study how cryptotoken issuance, also referred to as initial coin offerings (ICOs) and security token offerings (STOs), may disrupt funding markets such as venture capital, crowdfunding, and private equity. We discuss the necessary infrastructure to support this new asset class. We analyze the market evolution in terms of volatility, global reach, news events, and types of industries that are issuing or considering to issue tokens. We discuss some specific token offerings to highlight lessons learned. We summarize the regulatory landscape and challenges going forward. This market crashed in terms of market capitalization at the end of 2018. However, this new asset class along with the underlying technology hold great promise to disrupt various types of intermediaries if adequate financial and regulatory infrastructures are developed.

The Diffusion Pattern of Non-Cash Payments: Evidence From China

Exploiting an original dataset of non-cash payments during the period between 1996 and 2005, Qi, Carbo, and Rodriguez analyse the diffusion patterns of non-cash payments in China. Based on both exponential and Gompertz curves, the point of sale (POS) terminal has shown a higher diffusion rate than that of automatic teller machines (ATMs). This result is also robust when a time trend is interacted with rivals' precedence, network effects and market concentration. The diffusion rates of both ATM and POS terminals have accelerated after 2002, when UnionPay was established in China. The diffusion rate of ATMs is found to be mainly driven by rivals' adoption of them. Market concentration boosts the diffusion of POS terminals. In spite of the rising number of POS terminals and merchants, the volume of POS transactions is low. The diffusion rate of POS is, however, negatively affected by interchange fees.

Whither Loose Change?: The Diminishing Demand For Small Denomination Currency

While payment card usage has increased dramatically, the stock of outstanding currency has not declined as rapidly. Amromin and Chakravorti analyze changes in cash demand for 13 advanced economies from 1988 to 2003 by separating cash into three denomination categories to disentangle its store of wealth and payment functions. Defining denominations commonly dispensed by automated teller machines (ATMs) as the “medium” category, we show that demand for small-denomination currency decreases with greater debit card usage and with greater retail market consolidation. In contrast, the demand for high-denomination notes decreases when interest rates rise but is generally unaffected by changes in debit card usage.

Digitization of Retail Payment Systems

Bolt and Chakravorti investigate the research on electronic payment systems. The rapid growth in the use of electronic payment instruments, especially payment cards, is a striking feature of most modern economies. Payment data indicate that strong scale economies exist for electronic payments. Payment costs will decrease through consolidation of payment processing operations as economies of scale are realized. They come to the following conclusions: competition does not necessarily improve the balance of prices for two-sided markets and the ability of merchants to charge different prices is a powerful incentive to convince consumers to use a certain payment instrument. The effect of interventions on consumers, merchants, and banks in Australia, Spain, the European Union, and the United States are discussed. The authors also consider a few areas of payment economics that deserve greater attention.

Managing Cross-Border Settlement Risk: The Case of Mexican ADRS

The Mexican securities clearance and settlement system is ahead of many markets in terms of having one of the shortest settlement periods. However, cross-border transactions—such as those involving American Depositary Receipts—have tended to be associated with a greater number of settlement fails than purely domestic transactions because U.S. and other foreign markets have longer settlement periods. Chakravorti investigates reforms to the Mexican securities clearance and settlement system that are aimed at improving liquidity and efficiency while maintaining safety and reducing both general and cross-border settlement fails. These reforms include penalties for late settlement and the establishment of an electronic lending facility. In addition, a proposed clearinghouse would bilaterally net securities transactions that involve the same type of security.

Mexican Payment System Reforms

Chakravorti investigates payments system reforms begun by the Bank of Mexico in 1994. The goals of these reforms is to reduce the amount of uncollateralized intraday credit extended by the Bank of Mexico (previously unlimited), to promote a market-based allocation of intraday credit for interbank payments, and to move large-value paper-based payments to electronic form. The Bank of Mexico has been successful in achieving all of these goals to some extent. But despite this progress, like other central banks around the world, the Bank of Mexico still faces the possibility that government guarantees may weaken market discipline in the payments system.


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