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Retail Payment Systems: What can we Learn from Two-Sided Markets?

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  • Verdier, Marianne

Abstract

Some 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.

Suggested Citation

  • Verdier, Marianne, 2006. "Retail Payment Systems: What can we Learn from Two-Sided Markets?," MPRA Paper 2606, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:2606
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    References listed on IDEAS

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    Cited by:

    1. Bernardo Batiz-Lazo & Gustavo A. Del Angel, 2016. "The Dawn of the Plastic Jungle: The Introduction of the Credit Card in Europe and North America, 1950-1975," Economics Working Papers 16107, Hoover Institution, Stanford University.
    2. VAN HOVE, Leo, 2007. "Central Banks and Payment Instruments: a Serious Case of Schizophrenia," MPRA Paper 5281, University Library of Munich, Germany.
    3. Raúl Morales Resendiz & Milton Vega Bernal (ed.), 2016. "The Role of Payment Systems and Services in Financial Inclusion: Latin American and Caribbean Perspective," Books, Centro de Estudios Monetarios Latinoamericanos, CEMLA, number 2e, Enero-mar.

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    More about this item

    Keywords

    payment systems; two-sided markets; platform competition; payment cards;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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