This article examines how competition between banks and a digital PSP impacts the lending rate and the consumers’ use of payment instruments. The digital PSP offers a digital wallet and payment services, but does not offer credit. In contrast, banks invest their deposits in lending activities, which implies that they may incur some costs of adjusting their liquidity needs when consumers make payments. I show that the adoption of the digital wallet for payments may sometimes increase the volume of payments by bank deposit transfers and the lending rate. This results from banks’ trade-off between lowering their costs of liquidity when consumers pay from their digital wallet and reducing the revenues they receive from bank transfer fees.

This paper studies the incentives of a merchant to bypass a payment platform by issuing private cards. In our model, a payment platform allocates the total cost of a card transaction between a monopolistic issuer and a monopolistic acquirer by choosing an “interchange fee”. We determine how the level of the interchange fee impacts a merchant’s decision to issue private cards, if there are strategic interactions between merchants. We prove that the payment platform can only deter entry by lowering the level of the interchange fee. If the payment platform chooses to accommodate entry, we find that the total user surplus increases, but that entry is beneficial to social welfare only if the entry cost is sufficiently low.

We study competition between two payment instruments: bank deposits and digital platform tokens. Using a Hotelling model that integrates the theory of two-sided markets and payment economics, we assess how this competition is affected by a public payment infrastructure that makes private payment instruments interoperable. We show that interoperability, whether implemented as a fast payment system (FPS) or a central bank digital currency (CBDC), may eliminate payment access exclusion and increase trade volumes and social welfare, but at the cost of some disintermediation. When new payment service providers (PSPs) enter and compete for consumers, they soften competition for merchants: incumbent intermediaries then charge merchants higher fees and earn higher profits. This contrasts with entry of PSPs on the merchant side, which disciplines incumbent fees instead.