Cost efficiency in the retail payment networks: first evidence from the Italian credit card system
AbstractIn this paper, a parametric cost frontier for the credit card market is specified (Â“stochastic frontier approachÂ” - SFA) and robustness checks of the main results are performed. The aim is to provide some clues to: the x-inefficiency problem and determinants in a retail payment circuit; the main technical characteristics of the industry (i.e. scale economies, cost structure, factor substitution); policy implications. The Italian case study indicates that: the credit card industry could benefit from significant increasing returns to scale, but bigger the network (in terms of transactions handled) the more intermediaries tend to veer away from their efficient cost frontier. Moreover, the cost structure borne by firms is strongly dependent on intra-network agreements. Possible solutions to the x-inefficiency problem might come from the Â“theory of incentivesÂ”, which provides pricing (or cost recovery) mechanisms computed on the basis of costs expected under efficiency conditions; however, more studies are needed to investigate the topic within the context of Â“selfregulatedÂ” payment networks.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 480.
Date of creation: Jun 2003
Date of revision:
credit card industry; interchange fees; technology; efficiency; cost frontier;
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- G2 - Financial Economics - - Financial Institutions and Services
- L8 - Industrial Organization - - Industry Studies: Services
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