To Bao or not to Bao? Payment innovation and money market mutual funds

Using a hand-collected data for 703 share classes offered by 354 money market funds (MMFs) from 116 fund families from January 2010 to March 2021, we investigate how the Chinese Bao innovations (i.e., the creation of Apps that facilitate instant MMF transactions and access to money for investors, and the creation of Apps that enable bill payments directly from MMF accounts) have affected the MMF industry. We find that the introduction of the Bao products that also allow for paying everyday bills without the need to use investors’ bank accounts resulted in a lowering of the financial sophistication of the aggregate investor base but did not lead to higher price volatility or more risk taking by fund managers. This is inconsistent with the previous evidence that improving financial inclusion has inevitable, negative consequences for the market. We argue that the absence of a volatility increase is the consequence of the Bao-specific trading restrictions given that those few Bao products that give investors investment choice are associated with higher volatility. 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.