The Adoption Process of Payment Cards -An Agent- Based Approach
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Alexandrova-Kabadjova, Biliana; Castellanos, Sara G.; García-Almanza, Alma L. Working Paper The adoption process of payment care - An agent- based approach Working Papers, No. 2012-02 Provided in Cooperation with: Bank of Mexico, Mexico City Suggested Citation: Alexandrova-Kabadjova, Biliana; Castellanos, Sara G.; García-Almanza, Alma L. (2012) : The adoption process of payment care - An agent-based approach, Working Papers, No. 2012-02, Banco de México, Ciudad de México This Version is available at: http://hdl.handle.net/10419/83739 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Banco de M´exico Documentos de Investigaci´on Banco de M´exico Working Papers N◦ 2012-02 The Adoption Process of Payment Cards -An Agent- Based Approach Biliana Alexandrova-Kabadjova Sara G. Castellanos Banco de M´exico BBVA Research Mexico Alma L. Garc´ıa-Almanza Banco de M´exico May 2012 La serie de Documentos de Investigaci´ondel Banco de M´exicodivulga resultados preliminares de trabajos de investigaci´onecon´omicarealizados en el Banco de M´exicocon la finalidad de propiciar el intercambio y debate de ideas. El contenido de los Documentos de Investigaci´on,as´ıcomo las conclusiones que de ellos se derivan, son responsabilidad exclusiva de los autores y no reflejan necesariamente las del Banco de M´exico. The Working Papers series of Banco de M´exicodisseminates preliminary results of economic research conducted at Banco de M´exicoin order to promote the exchange and debate of ideas. The views and conclusions presented in the Working Papers are exclusively of the authors and do not necessarily reflect those of Banco de M´exico. Documento de Investigaci´on Working Paper 2012-02 2012-02 The Adoption Process of Payment Cards -An Agent- Based Approach* y z Biliana Alexandrova-Kabadjova Sara G. Castellanos Banco de M´exico BBVA Research Mexico x Alma L. Garc´ıa-Almanza Banco de M´exico Abstract: We investigate the payment card's adoption rate under consumers' and mer- chants' awareness of network externalities, given two levels of Interchange Fees in a multi- agent card market. For the purpose of our research, in multiple instances of the model (scenarios) the investigated effects are analyzed over the complete process of adoption, until the market's saturation point is achieved. For each scenario, a comparison is made between two different levels of Interchange Fees and different degrees of consumers' and merchants' awareness. We model explicitly the interactions between consumers and merchants at the point of sale. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers can charge fixed and transactional fees to mer- chants. Keywords: Two-sided markets, financial services, network formation. JEL Classification: D7, D85, G28, L13. Resumen: Investigamos la tasa de adopci´onde las tarjetas de pago considerando el conocimiento (la consciencia) de consumidores y comercios respecto las externalidades de red, usando dos niveles de Cuota de Intercambio en un mercado de tarjetas multi-agente. Para el prop´ositode nuestra investigaci´on,en m´ultiplesinstancias (escenarios) del modelo los efectos investigados son analizados sobre el proceso completo de adopci´on,hasta que el mercado alcanza su punto de saturaci´on.Se realiza una comparaci´on,para cada escenario, entre los dos niveles de Cuota de Intercambio y diferentes grados de conocimiento (conscien- cia) de consumidores y comercios. Hemos modelado expl´ıcitamente las interacciones entre consumidores y comercios en el punto de venta. En el modelo, los emisores de tarjeta pueden cobrar cuotas fijas y entregar beneficios netos por el uso de las tarjetas, mientras que los adquirientes pueden cobrar cuotas fijas y por transacci´ona los comercios. Palabras Clave: Mercados de dos lados, servicios financieros, formaci´onde redes. *The authors want to express their gratitude to Ricardo Medina, Francisco Sol´ıs,Edward Tsang and Andreas Krause for the multiple insights on this and other payment systems matters. They also thank Harry Leinonen, Paivi Heikkinen and the anonymous referees. The views expressed in this paper are those of the authors and do not involve the responsibility of the Banco de Mexico nor the BBVA Group. This paper ap- pears in \Simulation in Computational Finance and Economics: Tools and Emerging Applications," edited by Biliana Alexandrova-Kabadjova, Seraf´ınMartinez-Jaramillo, Alma Lilia Garcia-Almanza and Edward Tsang. Copyright 2012, IGI Global, http://www.igi- global.com/book/simulation-computational-finance- economics/64901. Posted by permission of the Publisher. y Direcci´onGeneral de Estrategia, Riesgos y Sistemas de Pagos. Email: [email protected]. z BBVA Research Mexico. Email: [email protected]. x Direcci´onGeneral de Tecnolog´ıasde la Informaci´on.Email: [email protected]. 1. Introduction During the last decade interest on studying the retail side of the payment systems has grown. The driving factor behind this study is that electronic payment methods are of ever increasing importance for making payments. Among these instruments, payment cards - more commonly referred to as credit and debit cards - are replacing cash and check payments at a rapid rate and are competing strongly with new payment methods. In terms of relative importance, for instance in Canada and the USA payment cards are the most commonly used instruments, accounting for 68% and 58%, respectively, of all registered transactions made in 2010 (Bank for International Settlements, 2011). According to the European Central Bank (2010) in the European Union their market share is reported to be 38%, which is the highest of all payment methods available, well ahead of direct credits, direct debits and checks. Electronic payments have also been expanding in emerging and developing countries. For example, in Mexico, the average growth rate of transactions with non cash payment instruments (payment cards, direct debits, checks and electronic funds transfers) between 2002 and 2010 was 14%. That of transactions with payment cards was 26%; they totaled almost 1 billion operations in 2010 with a value of nearly 600 billions of pesos (Figure 1(a)). In turn, electronic funds transfers (direct credit) and direct debits have grown at positive rates also, while checks have decreased. As a result of these dynamics, during that period bank card payments as a share of non cash retail payments increased from 22% to 46% (Figure 1(b)) and card payments per inhabitant per year more than duplicated from 4 to 91 (Figure 1(c)), still well below of what is observed at either Canada, the United States or Europe. 1 For further details about credit card usage among different population segments in Mexico see the appendix. 1 Bank card operations at the point of Distribution of non cash retail sale terminals 1,200,000,000 1,000,000 payments Number of operations 100% 900,000 1,000,000,000 Value (millions of MXP) 800,000 80% 700,000 800,000,000 60% 600,000 600,000,000 500,000 40% 400,000 400,000,000 300,000 20% 200,000 200,000,000 100,000 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 0 Bank cards at POS Electronic funds transfers Jul-05 Jul-05 Direct debits Checks Jun-05 Jun-05 Jun-05 Jun-05 Jun-05 Jun-05 Jun-05 Source: Central Bank of Mexico Note: Estimations exclude electronic funds transfers (a) of 100,000 pesos or more Source: Central Bank of Mexico (b) Bank card transactions at POS per inhabitant per year 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - 2005 2006 2007 2008 2009 2010 Source: Central Bank of Mexico and National Population Council. (c) Figure 1: The growth of electronic payments Given the prominent growth in the usage of payments cards, the line of research dedicated to study the competitive nature of the payment card market has attracted considerable attention from policy makers (e.g. Vickers, 2005, Reserve Bank of Australia, 2008, Bolt & Chakravorti, 2008, and Weiner, 2008). We have recently witnessed several regulatory initiatives such as the code of conduct for the credit and debit card industry in Canada. The aim of the code is to ensure that merchants are fully aware of the costs associated with accepting credit and debit card payments, including the interchange fee (IF). Furthermore, in order to encourage consumers to choose the lowest-cost payment option, merchants are provided with increased pricing flexibility and are able to freely choose which payment options they will accept. Another prominent example is the USA financial reform, which among others regulatory provisions, is aimed to set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. In addition, the bill also includes a reduction on the fees charged on debit card transactions, including the IF that card issuers can charge to card acquirers whenever their cardholders use their cards at the merchant’s point of sales terminal set by a different acquirer.