Entry of Non-financial Firms and Competition in the Retail Payments Market

Jooyong Jun ()
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Jooyong Jun: Economic Research Institute, the Bank of Korea

No 2015-19, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We investigate the effects of a non-financial firm's entry on competition in the retail payments market, from the perspective of duopoly between an incumbent and an entrant in conditions of vertical restraints. Considering the cross-platform externalities in payment processing, differentiated preferences for payment platforms, and competitive bottleneck on the consumer side, we derive the following results. When only the entry of a vertically integrated (or end-to-end service) provider is allowed, either all merchants choose to multi-home or no entry occurs, regardless of the regulatory requirement. On the other hand, if the entry of a downstream-only (or front-end service) provider is possible, a partial multi-homing equilibrium result can emerge for some conditions under which the entry of an end-to-end service provider does not occur. In addition, due to the lowered entry cost, the overall welfare is greater when the entry of downstream-only service is possible although the entire increase in welfare goes to the entrant. Without regulation, however, the vertically integrated incumbent does not voluntarily provide the back-end service to the entrant when the merchant's benefit from the payments service is not sufficiently high. It suggests the need for proper regulatory measures to reach a socially desirable outcome from the new entry in the retail payments market.

Keywords: FinTech; Entry; Retail payments; Front-end; Vertical restraints (search for similar items in EconPapers)
JEL-codes: G23 G28 L11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-07-07
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2015-19.pdf Working Paper, 2015 (application/pdf)

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