Digital payments refer to the use of digital currency by customers for digital consumption, transferring digital assets, and investment in digital assets. It is well known that the development of the internet, smartphones, artificial intelligence, and API’s enabled the development of digital payment systems which are widely adopted for commercial use. In Mexico, digital payment systems are a major payment method. Additionally, Mexico has a traditional banking system that is based on legacy systems. Given the overlapping services between digital payment platforms and traditional commercial banks, this paper focuses on examining whether and how commercial banks in Mexico are impacted by digital payments using empirical methods.

Based on prior research, banks can be involved in the development of digital payments, or they can choose to not be involved and thus allow third-party digital payment systems to compete with them. In the first case, digital payments allow traditional banks to be more effective by sharing information and customers but in the second case it will hurt banking profitability by increasing competition and costs. However, prior studies hold mixed view on the impact of digital payments on bank efficiency and profits. Thus, it is important to determine whether the impact does exist for the case of Mexico.

The empirical analysis will use panel data sets for the period covering 2012 to 2021. A systematic GMM model, widely employed by scholars to analyze the determinants of bank profitability, will be used in this study as this will avoid endogeneity and take differences within differences into consideration. Additionally, a panel VAR model will be employed to capture the causality between variables and the effect of each exogenous variable on other variables and to calculate impulse response functions to test the long-term relationship between variables. Data will be obtained from Orbis, a database website that provides information on more than 55,000 banking and financial institutions in different countries all over the world. Data will be collected on items such as fixed assets, equity, loans, ROA, ROE and NIM and so on to estimate the empirical models. The results will be examined and appropriately interpreted.