Fintechs, Stablecoins, and Competition | Steven J. Davis, Wenxin Du | Hoover Institution

Steven J. Davis (0:11)

We're back at the Jackson Hole Economic Policy Symposium. Joining me now is Wenxin Du.

She's Professor of Finance at Harvard Business School. She has extensive experience with the US Federal Reserve System, and she's an expert on payment system. Welcome Wenxin.

Wenxin Du (0:26)

Thank you, Steve.

Steven J. Davis (0:27)

Thanks for joining me here. The last time we chatted at Linc was at the Asian Monetary Policy Forum.

Wenxin Du (0:33)

That's right.

Steven J. Davis (0:34)

And there, yeah, in Singapore. And there as well, we had a discussion, a closed-door discussion on stage though, about cross-border payments at the Monetary Authority of Singapore.

Wenxin Du (0:46)

Right.

Steven J. Davis (0:47)

So we're back to talk about a similar topic again. And the payment system is like a very broad abstract thing. So I want to make it very concrete.

Let's say I've got $500 and I want to transfer to my relatives in another country that doesn't use the dollar, it's another currency. So as I understand my options, and you can correct me if I'm wrong, as I understand my options, I've got three. I can just walk into my local bank and say, here, I got 500 bucks. I want to send this to somebody in pesos and make it happen. And there's going to be a considerable transactions cost along the way.

Or I can get a fintech app that will let me put some money there and do it for me. Well, we'll talk about, you'll talk about how it does it. Or I can also use a stable coin. So those are in the last two, the stable coins, the fintech apps, they're relatively recent innovations in payments, how we make payments, in this case, across borders. So I guess question one, did I do okay? Did I get at least a C grade in describing the basic options?

Wenxin Du (1:54)

Yeah, you also have the option of getting the cash and take a flight to Mexico. Okay.

Steven J. Davis (1:58)

Well, yeah. Okay. Well, probably not going to do the physical cash route unless I'm engaged in some illicit activity.

Wenxin Du (2:04)

That's right.

Steven J. Davis (2:04)

So let's set that one aside.

And explain to me, I think everybody understands the first one. I just go to my bank teller and they do it for me. But how do the other two work? How does the fintech app work? How does the stable coin work? Right.

Wenxin Du (2:18)

So maybe I'll just spend a couple of minutes to talk about the first option, right? The reason that people don't like it, first, it's slow and it's uncertainly slow in the sense you don't know how long it might take for the transfer to go through. I had my personal experience last summer where I need to actually just wire a few thousand dollar to Europe, to a hotel based in Paris, and somehow it took eight business days.

Steven J. Davis (2:42)

Eight business days?

Wenxin Du (2:43)

Yeah, through one of the large US banks. It turned out I think that French Hotel had what we call a correspondent banking relationship with a German bank, so the payment got trapped somewhere in the middle. I had to actually visit the branch two times in person to ask them where did the payment go. I think this is not an uncommon experience, maybe though it's a little bit on the extreme in terms of delay, but in general, if you go to the first option, even wiring money was one of the most reputable global banks, it's somewhat a frustrating process from a real customer experience.

Steven J. Davis (3:18)

They charged you?

Wenxin Du (3:19)

They also charged me, yeah. And after I went back home, I look at the cost. It's not the explicit cost of wiring fees. Sometimes it's waived for the so-called Platinum Honors clients. It's really the FX rate or the foreign exchange rate that is applied to that transaction. And if you compare the rate that you were charged versus the rate that's been traded in the market, you can conclude more or less that banks are charging us about 300 basis points just on the foreign exchange.

Steven J. Davis (3:46)

So 3% of how much you've seen. And you were getting a good deal because you're a preferred customer.

Wenxin Du (3:51)

I'm not sure.

Steven J. Davis (3:53)

Better deal than some people, maybe.

Wenxin Du (3:54)

Maybe. But yeah, I think getting charged around 200 to 300 basis point is somewhat a normal experience if you do a cross-border transfer with one of the large banks.

Steven J. Davis (4:03)