Paper ID

3396

Paper Type

full

Description

In response to the Fintech trend, an ongoing debate in the banking industry is how to design the new-generation interbank retail payment and settlement system. We propose a two-stage analytical model that takes into account the value–risk tradeoff in the new payment system design, as well as banks’ participation incentives and adoption timing decisions. We find that, as the system base value increases, banks tend to synchronize their investment and adoption decisions. When the system base value is low and banks are heterogeneous, bank association ownership maximizes social welfare. When both the system base value and bank heterogeneity are moderate, government mandate leads to the socially optimal solution. When the system base value is high and banks are relatively homogenous, government ownership is socially optimal. We offer important policy implications regarding the optimal system design and the government regulator’s role in shaping the banking industry in future financial innovation.

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Optimal Design and Ownership Structures of Innovative Retail Payment Systems

In response to the Fintech trend, an ongoing debate in the banking industry is how to design the new-generation interbank retail payment and settlement system. We propose a two-stage analytical model that takes into account the value–risk tradeoff in the new payment system design, as well as banks’ participation incentives and adoption timing decisions. We find that, as the system base value increases, banks tend to synchronize their investment and adoption decisions. When the system base value is low and banks are heterogeneous, bank association ownership maximizes social welfare. When both the system base value and bank heterogeneity are moderate, government mandate leads to the socially optimal solution. When the system base value is high and banks are relatively homogenous, government ownership is socially optimal. We offer important policy implications regarding the optimal system design and the government regulator’s role in shaping the banking industry in future financial innovation.