Bank Competition and Household Privacy in a Digital Payment Monopoly

IMF Working Papers, June 9, 2023

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Bank Competition and Household Privacy in a Digital Payment Monopoly

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Bibliographic details

• Authors: Itai Agur, Anil Ari, Giovanni Dell'Ariccia
• Published: June 9, 2023
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9798400244865.001

Summary

• Lenders can exploit households' payment data to infer their creditworthiness.
• Households that value privacy face a tradeoff between protecting privacy and obtaining favorable credit conditions.
• The study analyzes how introducing an informationally more intrusive digital payment vehicle affects households' cash use, credit access, and welfare.
• A tech monopolist controls the intrusiveness of the new payment method and strategically manipulates information asymmetries among households and oligopolistic banks.
• The tech monopolist extracts data contracts that are more lucrative than lending on its own.
• The laissez-faire equilibrium results in a digital payment vehicle that is more intrusive than socially optimal, providing a rationale for regulation.

Model and Mechanism

• Actors:
  • Households who value privacy and choose between cash and the digital payment vehicle.
  • A tech monopolist who issues the digital payment vehicle and controls its informational intrusiveness.
  • Oligopolistic banks who compete in lending and can use payment data to infer creditworthiness.
• Key mechanism:
  • The monopolist sets intrusiveness and extracts value by designing data contracts that exploit information asymmetries between households and banks.
  • Payment data allow lenders to infer household creditworthiness, altering credit access and terms.
• Outcome:
  • Data contracts with banks can be more lucrative for the monopolist than direct lending.
  • Market equilibrium under laissez-faire delivers excessive intrusiveness relative to the social optimum.

Findings and Key Statistics

• Pages: 55
• Authors: Itai Agur, Anil Ari, Giovanni Dell'Ariccia
• Publication date: June 9, 2023
• Series: Working Paper No. 2023/121
• Issue: 121
• Volume: 2023
• DOI: https://doi.org/10.5089/9798400244865.001
• Stock No: WPIEA2023121
• ISBN: 9798400244865
• ISSN: 1018-5941
• Subject areas: Consumer credit; Credit; Data collection; Digital financial services; Economic and financial statistics; Financial institutions; Loans; Money; Technology
• Keywords: bank competition; Big Tech; Consumer credit; Credit; Data collection; data contract; Data regulation; DC issuer; Digital financial services; Financial intermediation; Loans; monopolist digital currency issuer; payment vehicle; Privacy; tech monopolist

Policy Implications and Recommendations

• The laissez-faire outcome—where the digital payment vehicle is more intrusive than socially optimal—provides a rationale for regulatory intervention.
• Potential policy focus areas implied by the findings:
  • Regulating the informational intrusiveness of digital payment vehicles issued by tech monopolists.
  • Addressing data-contract arrangements between payment-platform monopolists and banks to limit exploitative extraction of household data value.
  • Balancing household privacy protections against the credit-enhancing benefits of payment-derived information.

IMF Working Paper: "Bank Competition and Household Privacy in a Digital Payment Monopoly" (Working Paper No. 2023/121), June 9, 2023.

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