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Why invest in payment innovations?

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Author Info

  • Sujit Chakravorti
  • Emery Kobor

Abstract

In this paper, we provide a framework to study the creation and adoption of innovations by payment providers and processors. We identify several motivating factors for banks and nonbanks to invest in payment innovations. In addition, we discuss the evolutionary process of payment innovations from inception to commoditization recognizing that innovations differ in the time necessary to evolve from proprietary technology to commodization and some may never evolve completely. Finally, we consider a snapshot of payment innovations at different stages of development. We compare proprietary versus nonproprietary innovations and their profitability. Our main conclusions are the following. Payment innovators are more likely to be successful when they target niche markets. Banks often use innovations to add value to a bundled product offering. Payment networks and processors leverage their connectivity when creating or adopting innovations.

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Bibliographic Info

Article provided by Federal Reserve Bank of Chicago in its journal Emerging Issues.

Volume (Year): (2003)
Issue (Month): Jun ()
Pages:

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Handle: RePEc:fip:fedhei:y:2003:i:jun:n:eps-2003-1b

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Related research

Keywords: Payment systems ; Clearinghouses (Banking);

References

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  1. Cohen, Wesley M & Levinthal, Daniel A, 1989. "Innovation and Learning: The Two Faces of R&D," Economic Journal, Royal Economic Society, vol. 99(397), pages 569-96, September.
  2. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-70.
  3. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
  4. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
  5. Nelson, Richard R, 1981. "Research on Productivity Growth and Productivity Differences: Dead Ends and New Departures," Journal of Economic Literature, American Economic Association, vol. 19(3), pages 1029-64, September.
  6. W. Scott Frame & Lawrence White, 2002. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Working Papers 02-18, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Chakravorti, Sujit, 2004. "Why has stored-value not caught on?," Journal of Financial Transformation, Capco Institute, vol. 12, pages 39-48.
  8. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  9. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  10. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
  11. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  12. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  13. Tim McHugh, 2002. "The growth of person-to-person electronic payments," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Aug.
  14. Dosi, Giovanni, 1988. "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature, American Economic Association, vol. 26(3), pages 1120-71, September.
  15. Tara Rice & Kristin Stanton, 2003. "Estimating the volume of payments-driven revenues," Emerging Issues, Federal Reserve Bank of Chicago.
  16. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1988. "Appropriating the Returns from Industrial R&D," Cowles Foundation Discussion Papers 862, Cowles Foundation for Research in Economics, Yale University.
  17. Sujit Chakravorti & Timothy McHugh, 2002. "Why do we use so many checks?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-59.
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Citations

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Cited by:
  1. Tara Rice, 2003. "The importance of payments-driven revenues to franchise value and in estimating bank performance," Emerging Issues, Federal Reserve Bank of Chicago.
  2. Sujit Chakravorti & Victor Lubasi, 2006. "Payment instrument choice: the case of prepaid cards," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 29-43.
  3. Catharine Lemieux, 2003. "Network vulnerabilities and risks in the retail payment system," Emerging Issues, Federal Reserve Bank of Chicago.
  4. Sujit Chakravorti & Roberto Roson, 2004. "Platform competition in two-sided markets: the case of payment networks," Working Paper Series WP-04-09, Federal Reserve Bank of Chicago.
  5. Tara Rice & Kristin Stanton, 2003. "Estimating the volume of payments-driven revenues," Emerging Issues, Federal Reserve Bank of Chicago.
  6. Marc Bourreau & Marianne Verdier, 2010. "Cooperation for Innovation in Payment Systems: The Case of Mobile Payments," EconomiX Working Papers 2010-5, University of Paris West - Nanterre la Défense, EconomiX.
  7. Paul Kellogg, 2003. "Evolving operational risk management for retail payments," Emerging Issues, Federal Reserve Bank of Chicago.
  8. Cathy Lemieux, 2003. "Retail payments innovations and the banking industry," Emerging Issues, Federal Reserve Bank of Chicago.

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