Retail Payment Systems: What can we Learn from Two-Sided Markets?
AbstractSome retail payment systems can be modelled as two-sided markets, where a payment system facilitates money exchanges between consumers on one side and merchants on the other. The system sets rules and standards, to ensure usage and acceptance of its payment instruments by consumers and merchants respectively. Some retail payment systems exhibit indirect network externalities, which is one of the main criteria used to define two-sided markets. As more consumers use the payment platform, more merchants are encouraged to join it. Conversely, the value of holding payment instruments increases with the number of merchants accepting them. The theory of two-sided markets contributes to a better understanding of these retail payment systems, by showing that an asymmetric allocation of costs is needed to maximise the volume of transactions. It also starts to offer results that could explain competition between payment platforms. However, this theory entails some limits to a thorough understanding of retail payment systems. Firstly, we show that some retail payment systems, such as credit transfer or direct debit systems, do not necessarily fulfil all the theoretical criteria used to define twosided markets. Moreover, this theory does not take into account specific features of the payment industry, such as risk management or fraud prevention. This leads us to propose new research directions.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 2606.
Date of creation: Mar 2006
Date of revision:
payment systems; two-sided markets; platform competition; payment cards;
Find related papers by JEL classification:
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-14 (All new papers)
- NEP-CBA-2007-04-14 (Central Banking)
- NEP-COM-2007-04-14 (Industrial Competition)
- NEP-MIC-2007-04-14 (Microeconomics)
- NEP-NET-2007-04-14 (Network Economics)
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