Retail fast payment systems as a catalyst for digital finance

Summary

Focus

The rise of digital technologies is challenging the dominance of traditional financial institutions, such as banks. Payments have been the most deeply impacted, and a number of initiatives aim to further increase their speed and convenience. Retail fast payment systems (FPS) offer one prominent example. The impact of FPS extends beyond offering faster and more convenient payment options for individuals and businesses. FPS have spurred the rising use of finance apps, which in turn provide individuals and small businesses alternative ways to borrow, to invest and to buy insurance. We assess the pace of adoption of digital finance apps and how FPS have influenced adoption, both across countries and over time.

Contribution

We fill a gap in the research literature around the impact of digitalisation of financial services. Specifically, we shed light on how FPS influence the diffusion of digital finance apps. Thus, we provide valuable insights into a rapidly changing financial technology landscape for both industry and central banks. We identify various mechanisms through which FPS drive finance app adoption, eg stimulating competition and innovation in payments, fostering digital finance adoption via learning effects and expanding access to financial services, particularly in emerging market and developing economies. Our findings are of significant interest to the designers of FPS, as a primary objective of FPS is to promote greater digitalisation of financial services.

Findings

We confirm that network effects are a strong driver of digital finance adoption. Moreover, the launch of a retail FPS stimulates adoption of digital finance apps, with the most pronounced impact in lower-income economies. This effect is particularly evident for apps by technological disrupters, such as fintechs or big techs, relative to those of incumbent financial institutions. Finally, we identify some characteristics of FPS that further amplify digital finance adoption such as the active role of the central bank, open membership and real-time settlement.

Abstract

Retail fast payment systems (FPS) like Brazil's Pix, India's UPI and Switzerland's TWINT have stimulated the diffusion of digital finance apps. With a rich dataset on app downloads and use for 86,163 apps in 95 countries over 2012–22, we find that adoption of finance apps is higher following launch of an FPS, particularly in lower-income economies. FPS are more closely associated with the diffusion of payment apps than with non-payment apps. They are also linked to entry by technological disrupters (fintechs and big techs), more than by apps of incumbent financial institutions. Notably, digital finance app adoption shows a stronger association with FPS that feature active engagement by the central bank, real-time settlement capabilities and open membership to banks and non-banks.

JEL classification: G21, G23, O32

Keywords: fast payment system, digital finance, fintech, big tech, digital adoption