Network Effects and Payment Innovations: Microfoundations and Macroeconomic Implications of Mobile Money and Cashlessness in Botswana

This thesis develops the microfoundations of mobile money adoption and its implications for cashless payments and monetary policy in Botswana. Over the past two decades, mobile money, which is low-cost monetary innovation, has significantly extended payment services beyond conventional banking systems, particularly in Africa. However, in Botswana, due to the dominance of bank deposit card payments, there has been a slow uptake of mobile money. This warrants the study of the role of network effects in a new payment media as this underscores the power of incumbency of the dominant payments option. Chapter 2 utilises the game-theoretic framework of Myerson (1998) based on the Binomial probability theory, where potential adopters have to form expectations of how many others will adopt mobile money to quantify network effects as a strategic complementarity in the adoption of new technology. We quantify network effects variable using data from the Global Findex Survey for Botswana, and integrated it into a Logit model alongside demographic variables. Results show that though the expected network effects of mobile money significantly increase its adoption, network effects favouring incumbent cash and bank deposits money are mitigating factors. This leads to slow mobile money adoption despite low switching costs. Chapter 3 extends the theoretical model to examine how pairwise switching to a new payment technology affects the intensive margins across payments media. Findings show that adopting cashless digital payments, such as bank cards and mobile money, allows us to track the falling share of cash transactions. Chapter 4 develops a macroeconomic model linking microfoundations of technology driven changes in payment habits toward digital money via the above intensive margins to monetary base, interest rates and inflation. Results show that cashlessness contributes to a lower inflation rate. This provides valuable insights for policymakers navigating the transition to digital economies with cashless payments.