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Credit in a Tiered Payments System

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Author Info
Alexandra Lai
Nikil Chande
Sean O'Connor

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Abstract

Payments systems are typically characterized by some degree of tiering, with upstream firms (clearing agents) providing settlement accounts to downstream institutions that wish to clear and settle payments indirectly in these systems (indirect clearers). Clearing agents provide their indirect clearers with an essential input (clearing and settlement services), while also competing directly with them in the retail market for payment services. The authors construct a model of a clearing agent with an indirect clearer to examine the clearing agent's incentives to lever off its upstream position to gain a competitive advantage in the retail payment services market. The model demonstrates that a clearing agent can attain this competitive advantage by raising the indirect clearer's costs, but that the incentive to raise these costs is mitigated by credit risk to the clearing agent from the provision of uncollateralized overdrafts to its indirect clearer. The results suggest that tiered payments systems, which require clearing agents to provide overdraft facilities to their indirect clearers, may result in a more competitive retail payment services market.

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File URL: http://www.bankofcanada.ca/en/res/wp/2006/wp06-36.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 06-36.

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Length: 49 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:bca:bocawp:06-36

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Related research
Keywords: Financial institutions; Financial services; Market structure and pricing; Payment; clearing; and settlement systems;

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May. [Downloadable!] (restricted)
  2. Alvaro Bustos & Alexander Galetovic, 2003. "Vertical Integration and Sabotage in Regulated Industries," Documentos de Trabajo 164, Centro de Economía Aplicada, Universidad de Chile.
  3. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Blackwell Publishing, vol. 40(1), pages 105-23, March. [Downloadable!] (restricted)
  4. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 845-70.
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  5. Cornelia Holthausen & Jens Tapking, 2004. "Raising rival's costs in the securities settlement industry," Working Paper Series 376, European Central Bank. [Downloadable!]
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  6. Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration and securities trading and settlement," Working Paper Series 387, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada. [Downloadable!]
  2. James Chapman & Jonathan Chiu & Miguel Molico, 2008. "A Model of Tiered Settlement Networks," Working Papers 08-12, Bank of Canada. [Downloadable!]
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