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Economics of Payment Systems all lecture notes (2021)
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All notes made during the course Economics of Payment Systems.
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Motivation and complexityIf the plumbing is not right, the economic system cannot function!
It is all based on TRUST!
Payment systems are dissatisfiers: People expect them to work, and if they don’t, they get
upset. They won’t notice anything if anything goes right.
Payment economics and some definitions
Monetary = Money
We focus on retail systems in this course!
Main trends and first observations
It takes some time for new payment technologies to rise, since there have to be network
effect. Two sides of the business have to be convinced of the advantages of the new
technology. Consumers need to be convinced to use the new technology and at the same
time merchants have to be convinced to accept the new payment technology.
Main questions and economic framework
Often, a new payment technology is adopted in the following way:
The technology is offered very cheap to one group, which then starts using it a lot. This
makes the others group wanting to use the product, even though it has costs. This group
then pays a higher amount. (PIN → First consumers, very cheap for them. Then merchants
because they could not stay behind, much more expensive for them). Merchant cover the
costs.
The bank of the merchant pays an interchange fee to the consumers bank → via this way
the merchants bank reimburses the consumers bank.
Often, the side which used the new technology cheaply is loss-making. The profit is made
with the merchants who pay higher prices. Consumer get the good deal so they will adopt it
heavily.
The most important question for platforms → How to get both sides to use the product.
Payment chain and pyramid
The four-corner model → Very very important for exam!
All players in the payment market are called payment service providers (PSP).
Spread between loans and deposits is the interest income.
, Assessing market power
HHI
Looks at concentration
Perfect competition is near 0 and perfect monopoly near 10000.
Con is that is doesn’t correct for costs.
Conclusion: Simple, but no cost incorporated.
Lerner index
Theoretically more appealing since it looks at costs also.
The problem: how do we derive marginal costs? We need a function for that (see below)
H-statistic
We need good individual bank data for this.
H-stat estimates a derivative.
What we see is that the different competition measures can give different outcomes.
Apparently, they account for different parts of competition.
Platform types and main characteristics
Most important task for network-companies is get both sides aligned. You always need both
on board!
Cross-network effects and homing
Singlehomers commit to one company and multihomers commit to more companies.
Business model and platform fees
We need to set a certain price which attracts a certain group because they get a certain
reward from it. The other group then is attracted to the platform too.
If one party is not on board, to other one cannot enjoy the platform to its maximum.
We have a platform that signs up both buyers and sellers, so both sides of the market, and
charges fixed fees and transaction fees to both parties.
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