New Payment Rails: Implications for Banking

Making payments in an efficient manner is critical to a well-functioning economic system. While the direct effect of reducing the cost of payments is an increase in user welfare, changes in the payment system can have broader economic effects. This is because payment systems are characterized by a multisided network externality, as the willingness of consumers to participate in a payment method depends on the number of merchants on the system and operators of a payment system can glean information from the payment flows. We highlight the role that banks have played in the payment system and show how payment innovation can lead to bank disintermediation both in payment services and in the credit market. We highlight some recent innovations in payments—some of these rely on the banking system and others try to bypass it. There are many interesting open questions for researchers to explore in this field.