Catching the Fast Payments Trend: Optimal Designs and Leadership Strategies of Retail Payment and Settlement Systems

In stock
SKU
47.2.07

Publication History

Received: March 20, 2020
Revised: June 30, 2021; February 13, 2022
Accepted: May 10, 2022
Published Online as Articles in Advance: May 22, 2023
Published in Issue: June 1, 2023

https://doi.org/10.25300/MISQ/2022/16776

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Abstract
Recent financial technologies have enabled fast payments and are reshaping retail payment and settlement systems globally. We developed an analytical model to study the optimal design of a new retail payment system in terms of settlement speed and system capability under both bank and fintech firm heterogeneous participation incentives. We found that three types of payment systems emerge as equilibrium outcomes: batch retail (BR), expedited retail (ER), and real-time retail (RR) payment systems. Although the base value of the payment service positively affects both settlement speed and system capability, the expected liquidity cost negatively impacts settlement speed, and total transaction volume and technological effectiveness positively impact system capability. We identified three leadership strategies to maximize social welfare: the government mandate (GM) strategy, the fintech-inclusive (FI) strategy, and the fintech-exclusive and bank-exclusive (FE+BE) strategy. When the base value of the payment service is either low or high, the GM strategy leads to a socially optimal unified system. When the base value of the payment service is in the intermediate range, and if fintech firms have a significant technological advantage over banks, then both GM and FI strategies result in a socially optimal unified system; otherwise, the FE+BE strategy results in a socially optimal fragmented system. Further, we proposed a Shapley-value-based cost-sharing rule under the GM strategy to fairly allocate social welfare among the system participants. Our findings offer important policy insights into the optimal system designs, leadership strategies, and the government regulator’s role in shaping future innovations in the payments industry.
Additional Details
Author Zhiling Guo and Dan Ma
Year 2023
Volume 47
Issue 2
Keywords Fast payments, fintech, retail payment and settlement, analytical modeling, mechanism design
Page Numbers 669-704
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