05 | February | 2024 | Mostly Economics

Archive for February 5th, 2024

Is Schumpeter Right? Fintech and Economic Growth

February 5, 2024

The rise of fintech is revolutionizing the financial landscape, with products and companies advancing innovative technologies to improve and automate financial services. In this paper, I use a novel dataset and implement a dynamic modelling to investigate the relationship between fintech and economic growth in a panel of 198 countries over the period 2012–2020. This cross-country approach—utilizing direct measures of fintech and dealing with potential endogeneity—provides interesting empirical insights.

First, the impact magnitude and statistical significance of fintech on real GDP per capita growth depend on the type of instrument (digital lending vs. digital capital raising). While digital lending has a statistically significant positive effect on economic growth, digital capital raising has a large but insignificant effect.

Second, the overall impact of fintech including all instruments is positive and statistically significant because of the overwhelming share of digital lending in total.

Finally, while the positive relationship between fintech and growth is stronger in magnitude in advanced economies, the statistical significance of this effect is higher in developing countries.

Taken as a whole, these results confirm Schumpeter’s prediction that financial innovation can promote growth, but not every type of fintech becomes an accelerator.

Hmm.

Ross Levine and Robert King in a 1993 paper had used Schumpeterian lenses to see whether finance helps in economic development:

We present cross-country evidence consistent with Schumpeter’s view that the financial system can promote economic growth, using data on 80 countries over the 1960-1989 period. Various measures of the level of financial development are strongly associated with real per capita GDP growth, the rate of physical capital accumulation, and improvements in the efficiency with which economies employ physical capital. Further, the predetermined component of financial development is robustly correlated with future rates of economic growth, physical capital accumulation, and economic efficiency improvements.

For measuring financial development, credit was one of the major indicators.

Both the papers with a thirty years gap, show that just like Banks’ credit, Fintechs’ digital credit plays a role in development and growth.

Posted in Academic research & research papers, Central Banks / Monetary Policy, Economics - macro, micro etc, Financial Markets/ Finance, Growth and development | Leave a Comment »

Given Paytm’s problems were known in advance, why was it allowed to offer National Common Mobility Cards for Metro/bus travel?

February 5, 2024

RBI’s action against Paytm Payments Bank has rocked and shocked Indian fintech space. Paytm has pretty much led the fintech and payments space ever since the space shaped up. Most folks have been introduced to digital payments using the paytm app. Paytm became like Xerox. Just like photocopies were often called xerox, similarly digital payments were often called Paytm.

Post its success in digital payments, Paytm was awarded the licence to run a payment bank. A payment bank is like a narrow bank which can take deposits but not give any loans.

In March 2022, RBI had asked the Paytm Payments Bank to stop onboarding of new customers.

However, RBI was not satisfied with Paytm progress and decided to take the ultimate step of closing down the Payments Bank altogether:

The Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action.

3. Accordingly, in exercise of its powers under section 35A of Banking Regulation Act, 1949 and all other powers enabling it in that behalf, the Reserve Bank of India, has today directed PPBL as below:

1. No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.
2. Withdrawal or utilisation of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc. are to be permitted without any restrictions, upto their available balance.
3. No other banking services, other than those referred in (ii) above, like fund transfers (irrespective of name and nature of services like AEPS, IMPS, etc.), BBPOU and UPI facility should be provided by the bank after February 29, 2024.
4. The Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd. are to be terminated at the earliest, in any case not later than February 29, 2024.
5. Settlement of all pipeline transactions and nodal accounts (in respect of all transactions initiated on or before February 29, 2024) shall be completed by March 15, 2024 and no further transactions shall be permitted thereafter.

The RBI statement is really sparse and does not cite the reasons/factors that led to the decision.

The decision has created confusion and chaos not just for Paytm users but users of other fintech/payment service providers. Paytm was leader of the pack and if this is the state of the leader, what about followers?

I also don’t understand given Paytm problems have been known for a while, why was it allowed to offer National Mobility Cards?

For instance, Ahmedabad Metro which started in October 2022, offered two cards for travelling on the metro trains. One issued by Gujarat Metro and other by Paytm. This is six months after the RBI gave the first notice to Paytm in March 2022. The major advantage of Paytm card was that one could add to the wallet seamlessly by using the app. Also if the card was lost, one could recover it. The card could also be used for shopping and purchases. While Gujarat Metro card might not be in a posiiton to offer shopping benfits, it is not clear why it did not have the other two features.

A seperate scanner was built for Paytm card users within the main entry/exit machine installed on the stations. One saw several sales executives egging you to buy Paytm product over Gujarat Metro card.

Suddenly, customers realise that Paytm cards will not work post Feb 29, 2024. Atleast that is what I understand from this RBI notice:

No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.
Withdrawal or utilisation of balances by its customers from their accounts including savings bank accounts, current accounts, prepaid instruments, FASTags, National Common Mobility Cards, etc. are to be permitted without any restrictions, upto their available balance.

The government and RBI could have worked together and helped the customers from getting into this card trap and chaos.

The sales executives who sold the cards till the notification have also been caught off guard and not sure how to answer the questions raised by irate customers.

Posted in Indian Economy/Financial Markets | 1 Comment »

Does Pension Automatic Enrollment Increase Debt? Evidence from a Large-Scale Natural Experiment

February 5, 2024

A team of 10 economists (John Beshears, Matthew Blakstad, James J. Choi, Christopher Firth, John Gathergood, David Laibson, Richard Notley, Jesal D. Sheth, Will Sandbrook & Neil Stewart) in this NBER paper discuss whether ato enrollment into pensions increase debt:

Does automatic enrollment into retirement saving increase household debt? We study the randomized roll-out of automatic enrollment pensions to ~160,000 employers in the United Kingdom with 2-29 employees. We find that the additional savings generated through automatic enrollment are partially offset by increases in unsecured debt. Over the first 41 months after enrollment, each additional month increases the average automatically enrolled employee’s pension savings by £32-£38, unsecured debt (such as personal loans and bank overdrafts) by £7, the likelihood of having a mortgage by 0.05 percentage points, and mortgage balances by £118. Automatic enrollment causes loan defaults to fall and credit scores to rise modestly.