Bank competition and household privacy in a digital payment monopoly

Abstract

Lenders can exploit households’ payment data to infer their creditworthiness. When households value privacy, they then face a tradeoff between protecting such privacy and attaining better credit conditions. We study how introducing an informationally more intrusive digital payment vehicle affects households’ cash use, credit access, and welfare. A tech monopolist controls the intrusiveness of the new payment method and manipulates information asymmetries among households and oligopolistic banks to extract data contracts that are more lucrative than lending on its own. The laissez-faire equilibrium entails a digital payment vehicle that is more intrusive than socially optimal, providing a rationale for regulation.