Gauging the Impact of Payment System Innovations on Financial Intermediation: Novel Empirical Evidence from Indonesia. (December 2019)

• Record Type: Journal Article
• Authors: Lubis, Alexander; Alexiou, Constantinos; Nellis, Joseph G.
• Is Part Of: Journal of emerging market finance. Volume 18:Number 3(2019:Sep./Dec.)
• Page Start: 290
• Page End: 338
• Publication Date: 2019-12
• Subjects: Payment systems -- financial intermediation -- excess reserves -- currency demand -- monetary policy; Banks and banking -- Developing countries -- Periodicals; Financial institutions -- Developing countries -- Periodicals; Securities -- Developing countries -- Periodicals; 332.09172405
• DOI: 10.1177/0972652719846312
• Languages: English
• ISSNs: 0972-6527

Abstract

In this article, the relationship between innovations in the payment systems and financial intermediation is explored. By focusing on excess reserves and currency demand we provide evidence on the extant transmission mechanism. In this direction, a generalised method of moments (GMM) and vector error correction model (VECM) techniques are applied to a data set collated for Indonesia. We find that financial intermediation is affected by currency demand while we observe a limited role of excess reserves affecting financial intermediation. Credit card payments are found to have a statistically significant effect on currency demand, whereas debit card payments only influence financial intermediation in the long run. In addition, the real-time gross settlement (RTGS) exerts an upward pressure on excess reserves. The findings are of great importance as they provide support to policies that favour payment migration to an electronic platform, particularly that of card-based payment systems. JEL Classification: E42, E58, N25, G21