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

Marianne Verdier

MPRA Paper from University Library of Munich, Germany

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.

Keywords: payment systems; two-sided markets; platform competition; payment cards (search for similar items in EconPapers)
JEL-codes: D43 L13 O30 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-com, nep-mic and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in International Journal of Digital Economics 61 (2006): pp. 37-59

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/2606/1/MPRA_paper_2606.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:2606

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().