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

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