Payment Systems and Network Effects
Total Page：16
File Type：pdf, Size：1020Kb
Payment Systems and Network Effects Adoption, Harmonization and Succession of Network Technologies in a Multi-country World PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit Maastricht, op gezag van de Rector Magnificus, Prof. dr. G.P.M.F. Mols, volgens het besluit van het College van Decanen, in het openbaar te verdedigen op donderdag 3 juni 2004 om 16.00 uur door Johan Gottfried Leibbrandt Promotor: Prof. dr. R.A. Cowan Beoordelingscommissie: Prof. dr. P.A. Mohnen (voorzitter) Prof. dr. P.A. David (Stanford University) Prof. dr. S. Kleimeyer “Alas! How deeply painful is all payment” Lord Byron Contents Preface xi 1 Facts and Questions 1 1.1MainPaymentInstruments.................... 1 1.2Usagepatternsacrosscountries.................. 4 1.2.1 Usageofcash........................ 4 1.2.2 Usageofnon-cashinstruments.............. 5 1.3Evolutionandsuccessionofnon-cashinstruments........ 9 1.3.1 US: Darwin without the extinction of the dinosaurs . 9 1.3.2 Netherlands:fourweddingsandafuneral........ 10 1.3.3 Comparison of payment instrument succession in US and Netherlands......................... 12 1.4EconomicRelevance........................ 13 1.5Questionsforthisthesis...................... 15 2 Theory of payment instruments and networks 17 2.1Paymentinstruments........................ 17 2.1.1 Cashversusalternatives.................. 18 2.1.2 Willcashdisappear?.................... 20 2.1.3 Choicebetweennon-cashinstruments.......... 21 2.1.4 Explaining country differences.............. 25 2.2Networkexternalities........................ 26 2.2.1 Unsponsoredstandards.................. 27 2.2.2 Sponsoredstandards.................... 30 2.2.3 Roleofautarkyandspatiallyseparatedusers...... 33 2.3PaymentInstrumentsasNetworks................ 34 2.3.1 Empiricalevidence..................... 34 2.3.2 Theoretical models of payment instruments as networks 36 2.3.3 Regulatoryimplications.................. 38 2.4Conclusionsfrompaymentandnetworkliterature........ 39 3 Adoption and harmonization of unsponsored standards 41 3.1Basicmodel............................. 42 3.2Theadoptiondecision....................... 44 3.2.1 Concept of critical share and role of industry structure . 44 3.2.2 Effectofupgradinganoldtechnology.......... 48 3.3Autarkyandtheadoptiondecision................ 49 ii 3.3.1 Autarkicbanks....................... 50 3.3.2 Multipleplayersinsemi-autarkiccountries....... 52 3.4Thecompatibilitydecision..................... 54 3.5Summaryandconclusions..................... 58 4 Adoption and harmonization of sponsored standards 61 4.1Thebasicduopolymodel..................... 62 4.1.1 Base case (ε =0, δ =1,b<t)............... 64 4.1.2 Semi-autarkic transaction patterns (δ < 1)........ 69 4.1.3 Strong network externalities: b t ............ 72 4.1.4 Variable transaction demand (ε≥> 0)........... 73 4.2Adoptionofsponsoredstandardsbyanoligopoly........ 77 4.2.1 A model of competition by an asymmetric oligopoly . 77 4.2.2 Possibleequilibria..................... 79 4.2.3 Analysisoffourpolarmarketstructures......... 81 4.3Discussionofresults........................ 86 4.3.1 Comparison of results for sponsored standards with un- sponsoredstandards.................... 86 4.3.2 Welfare effects....................... 87 4.4Discussionofmodelandmainassumptions........... 89 4.4.1 DoesNash-equilibriumapply?............... 89 4.4.2 ComparisontothemodelofShy(2001)......... 91 4.5Conclusions............................. 93 4.6 Chapter appendix: symbols used in chapters 3 and 4 . 96 5 Case 1: adoption of giro-systems 97 5.1Casebackgroundandmethodology................ 97 5.2Howgirowasintroduced...................... 98 5.3Theeconomicsofgiro-systems................... 102 5.4Applyingthemodel........................ 105 5.4.1 Estimating parameters for the unsponsored model . 105 5.4.2 Estimating parameters for the sponsored model . 107 5.4.3 Applyingthemodelforsponsoredstandards....... 109 5.5Discussionofresults........................ 110 6 Case 2: European harmonization of ACH systems 113 6.1Casebackgroundandmethod................... 113 6.2 Creating a Single Euro Payments Area (SEPA): description of events................................ 114 6.2.1 1990s: “Europe” grows increasingly frustrated with cross- bordertransfers....................... 114 iii 6.2.2 2001:legislationonpricingofEuropayments...... 116 6.2.3 2002:theSEPAworkshop................. 117 6.2.4 Otherinitiatives...................... 120 6.3EuropeanACH/girolandscape.................. 120 6.3.1 Incompatiblesystems................... 120 6.3.2 Autarkiccountries..................... 122 6.3.3 Industry structure: locally concentrated, fragmented at Europeanlevel....................... 123 6.4Applyingthemodel........................ 126 6.4.1 Modelforunsponsoredstandards............. 126 6.4.2 Modelforsponsoredstandards.............. 127 6.5Discussionofresults........................ 128 7 Technical change and technology succession: introduction and theory 129 7.1Innovationandtechnicalchange.................. 130 7.2 Technology and country differences................133 7.3Modelsoftechnologysuccession.................. 135 8 A model for succession of payment networks 137 8.1Descriptionofthemodel...................... 138 8.1.1 Basicelements....................... 138 8.1.2 Incremental profit and the role of the installed base . 140 8.1.3 Definitionofequilibriumandregret........... 142 8.2 Analysis of number of equilibrium points and size of regret . 145 8.2.1 Analysisof2by2case................... 145 8.2.2 Extension to larger m and n ............... 147 8.2.3 Effectofcostandbenefit structure on occurrence of mul- tipleequilibria....................... 148 8.3 Impact of initial differencesininstalledbase........... 150 8.3.1 Mechanics of the simulation model and sample run . 152 8.3.2 Convergenceanddivergenceacrosscountries...... 156 8.3.3 Sensitivitytomainparameters.............. 159 8.3.4 Impact of economic factors on country convergence . 161 8.3.5 Effectoflatestarts..................... 163 8.4Incrementalchangeversusparadigmshifts............ 164 8.5Discussionofresults........................ 167 8.5.1 Isthemodelrealistic?................... 167 8.5.2 Dotheoutcomeshavemeaningfulimplications?..... 168 8.6Chapterappendix:listofsymbolsused.............. 170 iv 9 Case 3: Electronic money, Internet and Mobile payments 173 9.1Thefacts:whathappened..................... 173 9.1.1 Descriptionofmaincontenders.............. 173 9.1.2 Takingstockanno2003.................. 177 9.2 Existing literature and theory on electronic money and m-/e- payments.............................. 180 9.3Applyingthemodel........................ 182 9.4ConclusionsofInternetpaymentcase............... 184 10 Conclusions 185 11 Epilogue: “To a man with a hammer .. 189 References 191 A Proof of propositions in chapter 3 203 B Proof of propositions in chapter 4 207 C Proof of propositions in chapter 8 225 D Distribution of technical change sizes 229 Summary in Dutch 231 Curriculum Vitae 235 List of Tables 1.1 Transaction volume and value of main payment instruments . 2 1.2Ben-DavidconvergencetestforBIS-11countries........ 8 1.3Costpernon-cashtransaction................... 14 3.1Summaryofequilibriawithunsponsoredstandards....... 59 4.1 Equilibrium profits for stage 2 of base case duopoly game . 67 4.2 Payoff matrixforstage1ofbasecaseduopolygame...... 68 4.3 Payoff matrix with compatibility ex-post 69 4.4 Payoff matrix with 3 equal sized firms and b =0.8 and c =0.12 80 4.5Comparisonwithresultsforunsponsoredstandards....... 87 4.6 Welfare effectsofvariousequilibriumoutcomes......... 88 4.7Minimaxoutcomesforasymmetricduopoly........... 91 4.8SummaryofShy’s(2001)results................. 92 4.9ResultsofShy’sapproachusingmyparameters......... 92 5.1Giro-systemsinEurope...................... 99 5.2KeydataoncostsandoutputfortheDutchgiro-system.... 104 5.3 Critical share for giro adoption: sensitivity to cost assumptions 106 5.4ShareofbranchesforDutchbanks,1966............. 108 6.1Europeandomesticaccountformats............... 121 6.2Shareofforeigntransactionsbycountry............. 122 6.3Bankconcentrationinmajormarkets,2000........... 124 6.4Numberofpaymentnetworksbycountry............ 126 8.1 Benefit and cost components of ATM and POS technologies . 139 8.2 Average results for 2 countries across 10,000 runs of model . 156 8.3 Different endpoints for 10 countries with initial differences . 159 9.1ElectronicInternetpaymentmethodsinEUandUS...... 178 9.2 Usage of existing infrastructure by new payment schemes . 183 D.1 Results of fittingdistributiontoincreasesincosts........ 229 vi List of Figures 1.1Usageofnon-cashinstrumentsin11BIScountries....... 6 1.2EvolutionofpaymentinstrumentsintheUS........... 11 1.3EvolutionofpaymentinstrumentsintheNetherlands...... 11 3.1 Lock-in as a function of cost/benefit ratio and industry structure 46 3.2Occurrenceoflock-inwithupgrades............... 49 3.3 Critical share with semi-autarky: δ =0.5 ............. 52 4.1 Equilibria for semi-autarkic transaction patterns (δ < 1).... 71 4.2 Equilibria for large network effects (b 1)............ 73 4.3 Equilibria for price sensitive demand (≥ε > 0)........... 75 4.4EquilibriumoutcomesforGorillavsfringe............ 84 4.5Equilibriumoutcomesinafragmentedmarket.......... 85 4.6 Relative loss of social welfare with unsponsored standards . 89 5.1Costofagirotransaction..................... 103 8.1 Probability of multiple equilibria as a function of m and n ... 149 8.2 Average potential regret as a function of m and n ........ 149 8.3 Impact of minimal changes in