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Integrating European retail payment systems: some economics of SEPA

  • Kemppainen, Kari

    ()

    (Bank of Finland Research)

Registered author(s):

    Using a spatial competition model of retail payment networks, this paper discusses the likely economic consequences associated with the formation of the Single Euro Payments Area (SEPA). The model considers an expansion of positive network externalities on the demand side and adjustment cost on the supply side and reveals that the introduction of SEPA may not lead to a fully competitive and integrated retail payment markets. This is especially the case when the markets are segments before the introduction of SEPA. In such a scenario, the post-integrated markets are likely to remain segmented or will be characterised by a kinked equilibrium where no significant price competition takes place. In both outcomes, SEPA leads to increased prices, larger network sizes (ie increased number of customers) and a higher consumer surplus. Additionally, if the SEPA-induced adjustment costs for payment networks are not prohibitively high, SEPA may also lead to an increase in both profits and social welfare.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0822netti.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/2008.

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    Length: 43 pages
    Date of creation: 24 Sep 2008
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2008_022
    Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/

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    1. Mason, Robin, 2000. "Simple competitive Internet pricing," European Economic Review, Elsevier, vol. 44(4-6), pages 1045-1056, May.
    2. Guido K. Schaefer, 2008. "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW.
    3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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    5. Nicholas Economides, 1995. "The Economics of Networks," Working Papers 94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
    6. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
    7. Bolt Wilko & Humphrey David, 2007. "Payment Network Scale Economies, SEPA, and Cash Replacement," Review of Network Economics, De Gruyter, vol. 6(4), pages 1-21, December.
    8. Gandal, N. & Shy, O., 1996. "Standardization Policy and International Trade," Papers 12-96, Tel Aviv - the Sackler Institute of Economic Studies.
    9. de Palma, Andre & Leruth, Luc, 1996. "Variable willingness to pay for network externalities with strategic standardization decisions," European Journal of Political Economy, Elsevier, vol. 12(2), pages 235-251, September.
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    12. Baake, Pio & Boom, Anette, 2001. "Vertical product differentiation, network externalities, and compatibility decisions," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 267-284, January.
    13. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
    14. Heiko Schmiedel, 2007. "The economic impact of the Single Euro Payments Area," Occasional Paper Series 71, European Central Bank.
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    16. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
    17. Nicole Jonker & Anneke Kosse, 2008. "Towards a European payments market: survey results on cross-border payment behaviour of Dutch consumers," DNB Occasional Studies 601, Netherlands Central Bank, Research Department.
    18. Matutes, Carmen & Padilla, A. Jorge, 1994. "Shared ATM networks and banking competition," European Economic Review, Elsevier, vol. 38(5), pages 1113-1138, May.
    19. Economides, Nicholas, 1984. "The principle of minimum differentiation revisited," European Economic Review, Elsevier, vol. 24(3), pages 345-368, April.
    20. Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department.
    21. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 38-56, Spring.
    22. Milne , Alistair, 2005. "Standard setting and competition in securities settlement," Research Discussion Papers 23/2005, Bank of Finland.
    23. James J. McAndrews, 1997. "Network issues and payment systems," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 15-25.
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