Bank Competition and Household Privacy in a Digital Payment Monopoly
BankCompetitionandHouseholdPrivacyinaDigitalPaymentMonopoly ItaiAgur,AnilAriandGiovanniDell'AricciaWP/23/121 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 JUN ©2023InternationalMonetaryFundWP/23/121 IMFWorkingPaper ResearchDepartment BankCompetitionandHouseholdPrivacyinaDigitalPaymentMonopolyPreparedbyItaiAgur,AnilAriandGiovanniDell'Ariccia* AuthorizedfordistributionbySoledadMartinezPeriaJune2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Lenderscanexploithouseholds'paymentdatatoinfertheircreditworthiness.Whenhouseholdsvalueprivacy,theythenfaceatradeoffbetweenprotectingsuchprivacyandcreditconditions.Westudyhowtheintroductionofaninformationallymoreintrusivedigitalpaymentvehicleaffectshouseholds'cashuse,creditaccess,andwelfare.Atechmonopolistcontrolstheintrusivenessofthenewpaymentmethodandmanipulatesinformationasymmetriesamonghouseholdsandoligopolisticbankstoextractdatacontractsthataremorelucrativethanlendingonitsown.Thelaissez-faireequilibriumentailsadigitalpaymentvehiclethatismoreintrusivethansociallyoptimal,providingarationaleforregulation. JELClassificationNumbers: D82,E41,G21,G28 Keywords: Privacy;Financialintermediation;BigTech;Dataregulation Author’sE-MailAddress: iagur@imf.org;aari@imf.org;gdellariccia@imf.org IMFWORKINGPAPERSBankCompetitionandHouseholdPrivacyinaDigitalPaymentMonopoly WORKINGPAPERS BankCompetitionandHouseholdPrivacyinaDigitalPaymentMonopoly PreparedbyItaiAgur,AnilAriandGiovanniDell'Ariccia1 1WewouldliketothankMichaelJunhoLee,PeterHoffmann,FlorianHeider,BrandonTanandSnehaAgrawalfordiscussionsandaudiencesatthe2023SwissWinterConferenceonFinancialIntermediation,theLuiss-CEPRFinanceWorkshop,theIMF's5thAnnualMacro-FinancialConference,theBIS,CollegioCarloAlbertoTurin,andaninternalIMFseminarforhelpfulcomments. INTERNATIONALMONETARYFUND3 1Introduction Newpaymenttechnologiesaremakingitincreasinglyeasytocollectandstoreinformationaboutconsumerbehavior.Thesedatacanbeparsedtoinferavarietyofpersonalcharacteristicsthatcorporationscanprofitablyexploitthroughcarefullytargetedoffers.Thesestrategiesrangefromrelativelylighttouch,forinstanceindividuallytargetedinternetads,tomoreheavyhanded,suchaspricediscriminationorcreditratingsbasedonanindividual’sspendingbehavior.Atthesametime,networkexternalitiesarelikelytolimitthenumberofviableelectronicpaymentprovidersandthusendowthemwithsignificantmarketpowerinthecollectionofpersonaldata.1 Theevolutionofpaymenttechnologyandassociateddatacollectionhasfar-reachingimplica-tionsforcreditmarketcompetitionaswellashouseholdprivacy.Ontheonehand,paymentdatacanreduceinformationalasymmetriesandunlockmarketsegmentswhereadverseselectionmayotherwisehindertheprovisionofcredit.Indeed,thereisgrowingevidencethatnewmeansofpayment,includingthosecreatedbyBigTechs,expandcreditaccess.2Ontheotherhand,privacyconsiderationsarounddatadisclosureinpaymentsandlendingareacuteformanyhouseholds,andtodifferingdegreesamongthem.3,4Questionsthenariseastohowmarketswillnavigatethesetradeoffs,whowillbethewinnersandlosersoftheintroductionofnewformsofdatacol-lection,andwhethertheriseofthesenewtechnologiescallsforgovernmentintervention. Inthispaper,weshedlightonthesequestionsbybuildingamodelinwhichadigitalpaymentis-suercompetesagainstananonymousformofpayment,cash,forthebusinessofhouseholds.Thiscenterstheattentiononastarkchoicebetweenoneanonymouspaymentmethodthatprecludesinformationcollectionandanotherwithanadjustableinformationalintrusiveness:theissuerofthedigitalpaymentvehiclecandecidewhatconsumer-spendingdatatocollectandretain.5Inpractice,thiscouldmean,forinstance,thatforeachtransactiontheonlydatacollectedandre-tainedcouldbethevendorandtheamountspent,similartowhathappenswithcreditcards,orinsteadreachthelevelofthespecificitemsbought.Further,thedatacollectorcouldchoosewhat 1PaymentdataisincreasinglymigratingtoBigTechs.E.g.,whenacustomeratashoestorepayswithabankcard,thelocationandtypeofstorearevisibletothebank,whilewhenbuyingshoesonAmazonwithabankcard,only"Amazon.com"appearsonthechargeandAmazonpocketsthepaymentdata.Moreover,manyBigTechsen-couragepaymentdatamigration,includingbeyondtheirplatforms.E.g.,AmazonrewardsconsumersthatsharereceiptsofpurchasesoutsideAmazon;AlibabaandWeChatprovidewidelyusedmeansofpaymentinChina;andMetahasexploreddigitalcurrencyissuance(LibraandDiem). 2See,e.g,AgarwalandAssenova(2022),Allenetal.(2021),Babinaetal.(2022),Becketal.(2022),Bergetal.(2020),Daltonetal.(2023),Frostetal.(2020),Ghoshetal.(2022),Hauetal.(2019),Huangetal.(2020),andOuyang(2022). 3Althoughthevalueofdigitalprivacyingeneralisempiricallydebated(Acquistietal.,2016;Atheyetal.,2017;Bianetal.,2022;Chenetal.,2021
