Implications of Banking Regulations on Online Payment Failures

Chawla, Aditi and Manjhi, Ganesh and Bhattacharya, Gaurav (2021): Implications of Banking Regulations on Online Payment Failures.

Abstract

This paper explores the `latent economy' of online transaction failure that prevails in the digital payment system. A two-variant model of profit, with a different cost function in each variant, has been proposed to examine the profit of commercial banks. The model considers that when an online transaction fails, banks use the money held in the Unified Payment System to earn revenue in the form of interest income by investing the same. The theoretical exposition of the model has been corroborated by simulation by assuming feasible parametric restrictions and exogenous values. The paper finds that commercial banks make profit by using the held amount at the existing cost. As the proportion of the held money used by the banks increases, their profits increase and the commercial banks incur losses when an `alternative cost' with stricter penalties is imposed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Digital Payments, Transaction Failure, UPI Payment Failure
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation

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