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Boot is with the University of Amsterdam and CEPR, Hoffmann is with the European Central Bank; Leaven is with the European Central Bank and CEPR; Ratnovski is with the European Central Bank and IMF. The views expressed are those of the authors and do not necessarily reflect those of the European Central Bank or the Eurosystem. We thank Andreas Beyer, Jean-Edouard Colliard, Julia Faltermeier, Florian Heider, Gerard Hertig, Tommaso Mancini-Griffoli, Simone Manganelli, Alberto Martin, Glenn Schepens, Maurit de Vries Robles–Kroon, as well as seminar participants at the ECB and ESCP-Paris for useful comments. Anna Stelzer provided valuable research assistance.
As will become apparent, communication permits overcoming search and “transportation” frictions.
Over twenty-five years ago, Boyd and Gertler (1994) asked “Are Banks Dead? Or Are the Reports Greatly Exaggerated?” and concluded that the role of banks had in fact not diminished. Banks were neither driven to irrelevance by the disruption caused by the Global Financial Crisis.
While banks often do not have access to non-financial data, they also face regulatory uncertainty as to whether these data are allowed to be used for the provision of financial services.
See “Asset managers double spending in new data in hunt for edge”, Financial Times, May 9, 2018.
Consistent with this argument, Gao and Huang (2020) document an increase of informational efficiency in the U.S. stock market following electronic dissemination of accounting information. More generally, Bai et al. (2016) document an increase in informational efficiency over time and attribute it to technology. However, Farboodi et al. (2020) show that this effect is driven by an increase in firm size, and show that prices have become less informative for smaller firms.
One exception is the literature on financial networks, which focuses on the effects of financial sector network structure on financial stability (see Allen and Babus, 2009, for an overview). In contrast, we discuss how communication frictions affect the connectivity of financial intermediaries with their customers, with implications for competition and business models.
While these entrants started their business as non-bank payments processors, some recently have acquired banking licenses (e.g. Adyen and Paypal).
See “Race to become UK digital banking leader hots up”, Financial Times, October 5, 2019.
A product or service exhibits positive (negative) network externalities if its utility is increasing (decreasing) in the number of people consuming it. These effects can be direct or indirect. For example, social networks such as Facebook exhibit direct effects, since it is easier to find friends if more people sign up. Search engines such as Google display indirect effects: while users do not care about other users per se, increased usage improves the quality of search through more data. Finally, in two-sided markets, there can also be network effects across different sides. For example, consumers and merchants attract each other in online marketplaces.
In Asia, this development has culminated in the rise of so-called Super-Apps (WeChat, AliPay, Gojek, Grab) that offer a large variety of services (messaging, transportation, food delivery, entertainment) seamlessly through a single platform. See “Fintech: the rise of the Asian super app”, Financial Times, December 13, 2019.
A rare exception where financial services have their own utility is wealth management. But even here, wealth managers engage in bundling by offering access to “life style” products and services. See “People Over Products: Why Private Banks Should Focus On Relationships, Not Sales”, Forbes, May 5, 2020.
Prominent examples in this direction include Check24 (Germany) and BankBazaar(India).
See “Apple Debuts Titanium Credit Card With Goldman, Mastercard”, Bloomberg, March 25, 2019, and “Google Makes a Bid for Banking, Where Tech Firms Go to Stumble”, New York Times, November 13, 2019.
For example, trade credit can serve as a monitoring tool for suppliers (Smith, 1987). Similarly, specialized firms can be more efficient than banks at re-deploying repossessed assets (Mian and Smith, 1992; Habib and Johnsen, 1999) or assessing collateral values (Brennan et al., 1998; Stroebl, 2016). Petersen and Rajan (1997) argue that critical suppliers have a superior enforcement capability if they can threaten to disrupt a borrower’s business continuity in response to non-payments. The provision of financing also enables producers to increase product demand via cross-subsidization of lending and sales (Banner, 1958; Barron, Chong, and Staten, 2008).
This also points at transition issues that supervisors and policymakers need to be aware of. These do not just involve understanding new technologies and players (and the associated trial & error), but also anticipating and understanding the problems faced by incumbents when adjusting to the new competitive realities.
The recent failure of Wirecard, a German payment processor, illustrates the difficulty of critically assessing new business models.
Early evidence suggests that prudential regulation can be effective in creating a more even playing field between banks and Bigtech firms. Claessens et al. (2018) show that Bigtech firms play a less prominent role in financial services provision in countries with more stringent prudential regulation. See also Berger and Udell (2006) on the impact of public policy on the financial industry structure.
See e.g. “MetLife Defeats U.S. Government’s Too-Big-to-Fail Labeling”, Bloomberg, March 30, 2016.
To ensure continued viability of legacy banks, supervisors may need to collect different data than in the past, including information on IT investments, customer contact channels, etc.
See Griffoli et al. (2018) for a more extensive discussion of CBDC design choices, and of the relationship between CBDC and monetary policy pass-through.
The fact that platforms are two-sided markets with strong network externalities renders many standard models of antitrust inappropriate, and regulators continue to struggle with this new environment. See Evans and Schmalensee (2015) for the analysis of antitrust issues in two-sided platforms.
“Apple warns of risks from German law to open up mobile payments”, Reuters, 16 October 2019.
Competition between two standards is often referred to as a “standard war”. More efficient standards do not necessarily end up dominating the market. For example, in the 19th century more cost-efficient alternative current has replaced Edison’s direct current. At the same time, a more ergonomic Dvorak keyboard has never been able to replace the entrenched QWERTY standard.
Policy-making is complicated by the fact that the economics of data is a nascent field (see Carrière-Swallow and Haksar, 2019, for a review).
The “India Stack” initiative is a prime example in this direction. Also, authorities need to ensure that those lacking digital literacy (e.g. the elderly or the socio-economically disadvantaged) do not suffer severe limitations on their access to finance as a consequence of technological progress.