Product Analyses

Digital Transformation Of The Financial Sector: The Impact Of Fintech Firms

Bob Chakravorti presented at Payments Canada 2018 in Toronto on May 9, 2018. He discussed the response of incumbents to entry of FinTech firms. Specifically, he discussed payment, lending, wealth management and cryptocurrency segments. He touched on the role of regulation and discussed the lack of banking services in the U.S. because of regulatory asymmetries.

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.

Payment Instrument Choice: The Case Of Prepaid Cards

In this article, Chakravorti and Lubasi conclude that prepaid applications potentially provide a more cost-effective means to transfer funds when: 1) recipients of funds do not have transactions accounts; 2) disbursers of funds do not have access to the recipient’s transactions accounts; or 3) the disbursers of funds need to restrict where and on what the underlying funds can be spent. As with other payment instruments, all payment system participants need to be on board to spur adoption. General-purpose prepaid cards usually utilize existing payment networks to clear and settle transactions. In addition, in most cases, linking the merchants’ acceptance of generalpurpose prepaid products with other more familiar payment products offered by the same payment network allows issuers of prepaid value to provide greater value to consumers.

Why Has Stored Value Not Caught On?

Why have general-purpose stored-value cards been unsuccessful in penetrating the U.S. market? Three necessary conditions for a payment instrument to be successful are discussed: consumers and merchants need to be convinced of its advantages over existing payment alternatives for at least some types of transactions; payment providers must convince consumers and merchants simultaneously of its benefits to achieve critical mass; and assure them that adequate safety and security measures have been implemented. This article discusses the credit card industry’s success in meeting these necessary conditions and general-purpose stored-value issuers’ failure to meet them to date.

An Electronic Supply Chain: Will Payments Follow?

Businesses, both small and large, are adopting new technologies to automate and reduce the exchange of paper documents in their transaction flows. However, more than 80% of payments between businesses are still made with paper checks. As the exchange of information along the supply chain becomes increasingly electronic, it raises the question: Will payments follow?

Why Do We Still Write So Many Checks?

In this article, Chakravorti and McHugh addressed why consumers, merchants, and financial institutions are reluctant to embrace electronic payments even though electronic payment networks, such as the credit card and automated clearinghouse (ACH) networks, have existed for more than 25 years. While most Internet-based transactions are primarily processed via credit card networks, most noncash off-line payments by both consumers and businesses in the United States are made with checks.


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