To Bao or Not to Bao? Payments, Innovation and Money Market Mutual Funds

45 Pages Posted: 30 Sep 2022 Last revised: 3 Mar 2023

See all articles by Anna (Ania) Zalewska

Anna (Ania) Zalewska

University of Leicester School of Business

Yue Zhang

Sun Yat-sen University (SYSU)

Zhe zong

PwC Management Consulting

Date Written: February 1, 2023

Abstract

The creation of Bao products, i.e., Apps that facilitate instant transactions and access to money for money market mutual fund (MMF) investors, and the creation of full-payment Bao products, i.e., Apps that enable bill payments directly from MMF accounts, are a rare example of architectural Fintech innovation designed to improve wellbeing rather than wealth. We study the effects of this innovation using a hand-collected data for 703 Chinese MMF share classes over the period of 2010-2021. We find that consistent with the expectations, opening the MMF market to retail investors resulted in an influx of unsophisticated investors. Yet, in contrast with the literature, we do not find that the influx of unsophisticated investors had negative consequences for the market, i.e., it did not result in higher price volatility and more risk taking by fund managers. We argue that the absence of the negative effects is the consequence of the Bao-specific trading restrictions. We also find that the success of the full-payment Bao products supports the profiting from innovation hypothesis. Our results have strong policy implications. They indicate that potentially unwelcome side-effects of widening financial inclusions are avoidable when the appropriate regulation is in place. .

Keywords: money market mutual funds, financial innovation, financial inclusion, mobile payment technology, Fintech, AliPay, Tencent, financial sophistication

JEL Classification: O16, O30, O39, G23, G29

Suggested Citation

Zalewska, Anna and Zhang, Yue and Zong, Zhe, To Bao or Not to Bao? Payments, Innovation and Money Market Mutual Funds (February 1, 2023). Available at SSRN: https://ssrn.com/abstract=4227111 or http://dx.doi.org/10.2139/ssrn.4227111

Anna Zalewska (Contact Author)

University of Leicester School of Business ( email )

United Kingdom

Yue Zhang

Sun Yat-sen University (SYSU) ( email )

Zhuhai Campus, SYSU
Zhuhai, Guangdong 519082
China

Zhe Zong

PwC Management Consulting

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