Transparent price competition or two-sided subsidisation in card payments? Is there a need for a more efficient business model for the card industry?

This paper describes the alternative business models for payment instruments and how transparent price competition could increase the efficiency of the payment industry and customers’ payment habits. It takes a critical view of the two-sided market approach and the tourist test methodology, which are based on (cross) subsidies and hence the continuance of biased volumes of payment instruments. The paper argues that unbundling service packages, increased price/cost transparency for all instruments, including cash, and requiring open networks and network governance would increase payment-industry efficiency and development speed considerably, as a result of increased competition. Increased openness and transparency in payments would result in the same type of efficiency improvement as has occurred when other network industries have opened up to increased competition. This seems also to be the road that several competition authorities have taken in a step-wise fashion. In concrete terms, this would mean increased use of debit cards, with cash use limited mainly to small ‘coin-size’ payments, and consumer card credits based on interest rate competition.