Following my first piece on the design of card networks and its competitive implications, I wanted to dive deeper into this theme. This opportunity came when I got to apply the concepts I learned from Paul Milgrom's Market Design class (ECON 136) to a specific regulatory change in the Brazilian payments space.
In Brazil, Buy-Now-Pay-Later has long been a familiar and widely-used option — it was a popular practice long before it became popularized in the rest of the world by fintechs. Because of that, merchants receive their card payments in instalments, and pay their card processors a cash advance fee if they wish to get settled for their transactions earlier.
My classmate Diego and I were able to show through a difference-in-difference regression the effect of an important market reform by the Brazilian Central Bank in 2018. In 2018, merchants were allowed to securitize their card receivables and effectively decouple those from their main card processor. With a securitized receivable, they could effectively shop for the best cash advance rates across the street from their main card processor.
Our regression results show a 25bps drop in the cost of cash advance after the enacted change.
Full PDF here.