Connectedness Between Digital Payment Processors and Legacy Banks: An R2 Decomposition Approach to Portfolio Construction

This study examines return connectedness between six digital payment processors and six legacy banks using daily data from 13 January 2021 to 31 July 2026 extracted from Yahoo Finance. The coefficient of determination (R2)-decomposed approach separates connectedness into a contemporaneous component, reflecting same-day co-movement and a lagged component, reflecting cross-day predictability. The total connectedness index is 57.43%, with 99.1% occurring within the same day. Most connectedness remains within the two groups, 52.2% among banks and 28% among payment processors, while only 19.8% occurs between them, indicating two relatively separate risk clusters. More than half of the lagged component runs between the two groups, although that component amounts to only 0.53 index points, so the delayed channel is systematic but small. In the contemporaneous component the payment processors account for a larger share of the variation attributed to others than they receive, while all six banks are net receivers. In the lagged component, this attribution reverses. Because contemporaneous connectedness reflects same-day association, these patterns describe the direction of variance attribution and do not establish that one group reacts first. The minimum connectedness portfolio performs worse than the minimum variance and equal-weighted portfolios, even if the differences are not statistically significant. Constrained variants show why: capping weights removes the concentration but recovers little of the lost return, because the criterion keeps directing capital to the payment processors, which are the least connected assets and also the most volatile. Low connectedness signals weak linkage to the system, not low risk.