Gauging the impact of payment system innovations on financial intermediation: novel empirical evidence from Indonesia

Abstract

In this paper, 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 dataset collated for Indonesia. We find that the financial intermediation is affected by currency demand whilst we observe a limited role of excess reserves in affecting financial intermediation. Credit card payments are found to have a statistically significant effect on currency demand, whereas debit card payments only influence the 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.