Modern Banking - Banks, Money and The future of Payments

what are modern payments?

based on fiat money and intermediated by banks

How do payments affect bank balance sheets?

When a depositor sends money to another bank, the sender's bank loses deposits on its liability side and transfers an equal amount of reserves to the receiver's bank, shrinking its asset side. This process generates information and liquidity spillovers for banks.

What are the information spillovers from processing payments?

payments convey private, continuous, timely, hard information that cannot easily be manipulated. This is very valuable compared to individuals’ or firms’ annual financial statements

What are cashless payments?

= any type of monetary transaction that is completed without the exchange of physical cash, including payments made via credit/debit card, cheque, or mobile phone.

-              They provide information on the customers

-              This information can be used for bank monitoring and default prediction capabilities

-              cashless payments improve banks’ screening capability, but that the effect on borrowers’ financial outcomes and financial inclusion are theoretically ambiguous

What are the potential benefits of digitalization of payments?

• reduce direct transaction costs → account opening fees and minimum balance requirements

• reduce indirect transaction costs → less theft, travel time to the bank etc.

• more lending

• financial inclusion

• decrease poverty and increase welfare

How do FinTechs and BigTechs affect banks in terms of payment services?

FinTechs and BigTechs offering payment services can impact banks by reducing their access to payment data used for credit assessment

Can the means of payments affect aggregate economic growth?

Yes, cashless payments

• reduce transaction costs

• information asymmetry

• increase economic activity

• increase consumption/productivity

• reduce tax evasion

What are fast payment systems?

are payments systems in which the transmission of funds occurs in real or near-real time (on a 24/7 basis)

What liquidity risk is associated with fast payment settlements?

as depositors' payment outflows can drain reserves while loans cannot be easily sold to replenish them. Banks could loose all their reserves

How can fast payment systems affect bank competition?

By challenging the exclusive role of large banks as payment service providers

How can fast payment systems affect financial inclusion?

For resource-constrained individuals, a delay of funds can lead to a cascade of adverse financial consequences. Fast payments can reduce such liquidity issues, and thereby mitigate individuals’ risk of being subject to overdrafts and fees.

How can fast payment systems affect economic activity (businesess)?

for (small) business, faster payments could reduce uncertainty about payment delays and optimize cash flows. This could allow firms to preserve more capital for business needs and, hence, increase investment efficiency.

what are the objectives of the regulations?

-              Reduce cash transaction costs and electronic payment costs

-              Increase bank competition

-              Increase financial inclusion

-              Reduce the shadow economy and tax evasion

What potential drawbacks exist for cashless payment systems?

-              Monetary policy transmission → In a cashless system, it may become harder for central banks to influence the economy using interest rates, which is how they usually manage inflation and growth.

-              Financial exclusion → people with no phones, old people not understanding technology etc.

-              Silent bank runs → will be difficult to observe because people will not line up in front of the banks

-              Operational and fraud risk →phishing problems, hackers etc.

 

What are the possible drawbacks of fast payment systems?

-              Liquidity and settlement risk → failure to transfer money

-              Operational and fraud risk → system failure, people start to freak out because instead of 1s it takes longer

-              Fast bank runs → transferring money from one bank to another can be done in seconds + social media can amplify bank runs

What regulatory considerations are important for Central Bank Digital Currency (CBDC)?

-              Financial inclusion

-              Privacy

-              Monetary policy