Publication Type

Journal Article

Version

publishedVersion

Publication Date

6-2023

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.

Keywords

Fast payments, FinTech, retail payment and settlement, analytical modeling, mechanism design

Discipline

Databases and Information Systems | E-Commerce | Sales and Merchandising

Research Areas

Information Systems and Management

Publication

MIS Quarterly

Volume

47

Issue

2

First Page

669

Last Page

704

ISSN

0276-7783

Identifier

10.25300/MISQ/2022/16776

Publisher

University of Minnesota, Management Information Systems Research Center

Copyright Owner and License

Authors

Additional URL

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

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