03 Payments, Banking, and Investing Flashcards
What are payment systems?
General
Payment systems provide an alternative to cash for settling transaction and transferring funds
–>While cash is settled on the spot, in a payment system a transaction sets in motion a process with multiple steps
There are substantial network effects in any payment system (meaning the more people using the payment systems the better)
- these network effectds are barriers to entry for new players
- thus, many FinTech startups cooperate with established payment networks (e.g. credit card companies)
Why interest in Payment Systems?
- Success of alternative payment systems, especially in emerging markets
* widespread adoption in Africa, has triggered the interest of established financial institutions all over the world (risk to loose market share, and revenue streams) - Value in payments data
* Data on transactions and payments contains a lot of information about the spending behavior of an individual
–>Data protection laws aside, such data allows for targeted marekting or price discrimination
–>Payment data can be a valuable ingredient in big data applications
Payment systems typology
Based on users and transaction sizes
-
Wholesale payment systems
* are used for relativeley few but very large value transfers
* There are only a few participants (mostly commercial and central banks)
* Innovation has happend in waves in the past decades
2. Retail payment systems
* retail transaction are relatively low in value but large in numbers
* Many different user, e.g. Debit/credit cards, PayPal
Distinguish Payment Systems Typology
Based on Netting
Deferred net settlement (DNS)
* accumulate payment over some time period and only settle net amounts
* net payments tend to be much smaller, lowering liquidity requirements
* usually achieved through a central counterparty
Real time gross settlement (RTGS)
* process and transfer payments immediately for every transaction
* no settlement credit risk as payments are settled immediately
* Higher liquidity requirements because transactions are not offset at the same time
–>alos hybrid versions available
Important payment issues
Overview
- Financial Exclusion
- Cross-border payments
Important payment issues
Cross-border payments
International payment are particularly complicated: different currencies, times zones, regulation, risk management
–>as a result international payments can be very slow, opaque and costly, especially for retail transactions
–>Most international retail payments use the correspondent banking model:
The correspondent bank holds funds owned by another bank (the respondent)
–>it uses these funds to provide payment services
–>Some FinTechs facilitate fast cross-border payments: e.g. Wise
Important Payment issues
Financial Exclusion
about 1.7 bn adults do not have payment means other than cash
* studies suggest that access to a bank account can reduce poverty
* cost of sending remittances in many developoing regions is between 6-9%
Remittance payment are important: Flows to low and middle income countries
–>Costs have declined, especially due to digital payments
Front-end payment innovations
Overview: Front
Front-end innovations in payments:
* change how the user interacts with the system, e.g., how to initiate payments
(provide another layer between back-end and the user, in the background still rely on existing payment systems like credit card)
Back-end payments innovation
Back-end
Back-end innovations payment concern the underlying infrastruture to settle transactions or provide a completely new infrastructure
* usually entails a new front-end design
* often these systems are closed-lool, and operate similar to other payment service providers
–>Blockchain and cryptocurrencies also provide an alternative back-end
Banking and importance of the banking sector
Lending basics and
At the core, FI are intermediaries between depositors and borrowers
–>They lend money and provide credit lines to businesses and households
–>The banking secor is crucial for economic growth, poverty reduction, and reduced inequality
Lending inefficiency of current financial system
1.7bn people are substantially underbanked and do not have access to credit markets, especially in the developing world
–>Even if they have access to the financial system, interest rate and fees can reach extreme levels for poor borrowers
–>But also in rich countries, established financial services providers tend to be expensive, especially for households and small businesses, and there seems to be an overall loss in customer trust
Decomposition of Net Margins
–>Net interest rate margins are substantially higher in low-income countries
* There is likely a selection bias in that relativeley poor households and small business do not get any loans in low-icome countries
* Profit-margins are higher in low-income countries, so it is not just driven by risk
FinTech disruptions in lending overview 6 areas
- Sourcing Capital: Tokenized bond (Crypto), Debt platform
- Origination/customer acquisition: Mobile and online applications, Payment gateways
- Credit assessment: alternative data (Facebook, phone), Phone based KYC
- Disbursement: Digital wallets, Virtual currencies, Machine to machine leasing
- Monitoring and servicing: Business monitoring apps, Cloud accounting
- Collection: Pay-as-you-go, automatic deductions
Neo Banks
Short description
sometimes described as banks that do not (yet) have a formal banking licence but partner with established banks to offer banking services
Neo Banks
Business model focus General, type of loans, customers
Challenger and neo banks:
–> have a narrower focus than big commercial banks:
* most cater to households and small to medium size businesses and
* often focus on fixed-term personal loans insted of revolving credit card loans
* most do not have a branch network, but are online-only and usually mobilce centric
–>some specialize in certain loans, e.g. student loasn (like Earnest)
–>Traditionally first emergered in Europe, but can now be find througout the world
—>To compete traditional banks are also starting to launch FinTech like brankds
