# **1. Motivation**

Since the 16<sup>th</sup> century, banking has been at the heart of modern payment systems by allowing changes to a centralized ledger rather than physically exchanging assets (Bank of England 2014, p.263). The introduction of credit cards in the 1950s propelled the use of cashless payments now common across both advanced and developing economies.<sup>2</sup> In the 21<sup>st</sup> century, mobile wallets and digital finance have yielded widely recognized benefits in both economic performance and financial inclusion (Klapper et al 2014, Beck et al 2018). This chronology of innovations could be interpreted as there being stages in the adoption of payment technology, possibly implying that poor countries move from one stage of development to the next as the economy grows. Indeed, the idea that economies follow stages of development is a popular idea in the history of economic thought (see, for example, Rostow 1960). This note tests the hypothesis of the existence of stages of development in payments systems with simple econometric models relying on cross sections of international data. The key dependent variables are proxies of the incidence of use of the three stages of payment systems, based on publicly available survey data collected by the World Bank, namely the Global Findex database.<sup>3</sup> The main finding is that even though historically we can observe stages in the advent of various forms of payments, the data show that many poor countries have higher incidences of digital payments (per adult) than high-income economies, even though large segments of populations in poor countries remain under-served by traditional banking. We discuss the characteristics of different payment systems and estimate a series of Ordinary Least Square (OLS) models to study the relationship between the level of development (proxied by Gross Domestic Product, GDP, per capita) and the incidence of the three types of payments.

Ideally, to study transitions between stages of development (in this case of payment systems), we would rely on panel data. By following countries over time, we would be able to ascertain for sure whether poor economies have in fact leapfrogged from 16<sup>th</sup> century bank-centered payment systems to 21<sup>st</sup> century digital payments. Unfortunately, the available data do not cover enough countries over sufficiently long periods of time to enable this type of research.<sup>4</sup> However, with rich cross-sectional data covering hundreds of countries, we can estimate two key parameters that can be interpreted as suggesting evidence of leapfrogging.

> 2 Digital (or electronic) payments are transfers of value that are executed and/or received using digital (or electronic) devices and channels to transmit the instructions. They include payments that are initiated by mobile phone or computer. Card payments are cashless digital payments but distinct from payments made through the internet.

> 3 Global Findex database: <u>https://globalfindex.worldbank.org/.</u>

> 4 The Findex data on ownership of a mobile money account, for example, cover data in the 21st century, and most countries do not have more than one observation over time. For the 2014 and 2017 waves of the survey, fewer than 70 countries have data for both years.

2