Leo Van Hove

Electronic money and the network externalities theory: lessons for real life

The aim of this paper is to show that the network externalities theory provides a useful framework to analyse the introduction and further development of the new electronic payment instruments currently being launched. To that end the paper presents a pragmatic (and selective) reading of the network externalities literatures i.e., it screens the literature in search of both theoretical insights and empirical results which can be transposed to the case of electronic payment instruments. In so doing, the paper concentrates on the so-called electronic money products and, especially, on electronic purses. Specifically the paper shows that the network externalities literature provides a number of useful insights concerning consumer reactions to the introduction of electronic purses (and the ways in which card issuers can anticipate these reactions) and concerning the strategies card issuers may follow in a competitive market with incompatible electronic purses. All this is substantiated by multiple references to real-life situations. The first section of the paper defines the concept of network externalities. The third section demonstrates that payment cards in general are indeed network goods. It also points out which kind(s) of network effects apply to the electronic purses currently available. The paper then goes on to answer five questions in depth. Firstly, what can we learn from the network externalities literature as far as the ‘chicken-and-egg’ problem is concerned? – the problem being: merchants will not invest in terminals without a sufficient number of potential users, while the general public will not use electronic purses unless there is sufficient acceptance. Secondly, is there room for more than one incompatible electronic purse, or is the electronic purse market prone to ‘tipping’ and ‘lock-in’? Thirdly, can an electronic purse issuer gain a (decisive) first-mover advantage by entering the market before others do? Fourthly, under which conditions will card issuers be inclined to make their electronic purses compatible? And finally, what is the optimum pricing strategy for an electronic purse issuer?

Cost-based Pricing of Payment Instruments: the State of the Debate

Earlier I have argued in favour of explicit cost-based pricing of payment instruments. This article analyses new cost estimates for the Netherlands, and provides an overview of positions recently taken by important actors such as central banks and the European Commission. The new cost estimates strengthen the case for e-money. The central bank reports indicate that many are now convinced that a transparent pricing structure can increase efficiency. The Commission, on the other hand, seems unlikely to allow commercial banks to make a coordinated move towards cost-based pricing in order to break the deadlock in which they find themselves today.

The New York City Smart Card Trial in Perspective: A Research Note

The adoption of smart cards continues to be more interesting to those who market them than to the target population. A high-profile test of Mondex and Visa Cash stored-value cards ended in 1998 after a 15-month run on Manhattans Upper West Side. The results were disappointing. This paper describes the organization of the trial, analyzes the results, and offers possible explanations for the low consumer and merchant acceptance. These explanations are integrated with prior analyses into a coherent theoretical framework combining insights from the literature on network externalities and innovation diffusion.The adoption of smart cards continues to be more interesting to those who market them than to the target population. A high-profile test of Mondex and Visa Cash stored-value cards ended in 1998 after a 15-month run on Manhattans Upper West Side. The results were disappointing. This paper describes the organization of the trial, analyzes the results, and offers possible explanations for the low consumer and merchant acceptance. These explanations are integrated with prior analyses into a coherent theoretical framework combining insights from the literature on network externalities and innovation diffusion.

On the optimal spacing of currency denominations

Abstract Existing theoretical evidence on optimal currency spacing is fragmentary and, to some extent, contradictory. This note brings together the pieces and tries to solve the puzzle. It shows that if the spacing of denominations is uniform, then the average number of notes and coins exchanged in a transaction can be minimized by spacing denominations apart by a factor of two, even when allowing for overpayment and the return of change.

Mobile Payment Models and Their Implications for NextGen MSPs

Purpose - This paper aims to provide a first overview of important implications of payment models for next-generation mobile service platforms (NextGen MSPs). Methodology and approach - Our starting point is an existing set of mobile payment models. We modify and expand on these models, in order to be able to highlight implications for NextGen MSPs. Findings - We identify two different types of payment models for mobile environments: carrier centric models and payment service provider (PSP)-centric models. Instantiations of both categories are already being applied, although not necessarily always in the mobile environment. Both types come with a number of advantages as well as disadvantages. This article argues that combining different models or introducing intermediaries yields solutions that satisfy the requirements of NextGen MSPs for offering a compelling value proposition to their users. Originality and value of paper - This article is the first to analyze the suitability of existing mobile payment models in the specific context of NextGen MSPs. It also proposes alternative models that provide a better fit with the potential business models for such platforms.

On the War on Cash and its Spoils

This article brings together a number of recent studies for Belgium and the Netherlands in order to show that the War On Cash is a cause worth fighting for. It builds on two central bank studies to show that the social cost of cash is substantial, and that society would benefit from a switch to debit cards and electronic purses. As for the most effective way of bringing about such a switch, evidence is presented according to which the introduction of cost-based pricing of payment instruments would have a bigger impact than simply raising the number of EFTPOS terminals.

To Bundle or Not to Bundle? How Western European Newspapers Package Their Online Content

This article tries to reveal why some newspaper Web sites rely on subscriptions, whereas others (also) offer pay-per-view. To that end, this study applies logit analysis to a unique dataset on 82 national newspapers from 8 countries. It was found that quality newspapers are more likely to offer site subscriptions and pay-per-view, whereas newspapers with a higher offline market share prefer Portable Document Format (PDF) subscriptions. On the country level, a higher relative importance of advertising revenues is negatively related with the former 2 access options, and positively with the latter. Indications of mimicking or herd behavior were also found. Finally, the newspapers studied apparently see site and PDF subscriptions as substitutes, and site subscriptions and pay-per-view as complements.

What Future for Electronic Purses

As Ewald Judt and Robert Komatz point out elsewhere in this book, the Austrian Quick electronic purse is in the 10th year of its existence. The same is true for the other E-Purse that is studied in more detail in this volume – the German GeldKarte; see the article by Volker Koppe. Both Quick and GeldKarte were part of a wave of E-Purses that were launched by European banking associations in the mid-1990s2. As the first decade of electronic money draws to a close in Europe, there is, however, not much reason to celebrate. The Belgian Proton E-Purse is generally seen as the most successful European scheme, but in a 2004 interview Banksys CEO Dirk Syx nevertheless called it a “commercial disappointment” as transaction volume remains significantly below target3. Worse still, in the meantime several European E-Purses have been discontinued because they have failed to catch on. The most recent victims are all Scandinavian. The Swedish banks closed down their CASH scheme in the fall of 2004. In Denmark, the pioneering Danmont card – which was launched as early as March 1993 – will disappear at the end of this year. In Finland, beginning in 2006 no new Avant cards will be issued and the system will be closed down in 20094. The operators of yet other E-Purse schemes have adjusted their ambitions. Telekurs in Switzerland, for example, has repositioned its Cash card as a niche product – for vending machines and closed environments – and the card is no longer heavily marketed (Telekurs 2004). Similarly, at the 2005 Payments Conference organised

Metcalfe's Law and Network Quality: An Extension of Zhang Et Al.

Zhang et al. exploited data on Facebook and Tencent to validate Metcalfe’s law, which states that the aggregate value of a communications network is proportional to the square of the number of users. This note points out that the value of a social network may be driven not only by its size, but also by increases in the variety and quality of the services offered. I therefore extend Zhang et al.’s approach by explicitly controlling for changes in network quality over time. For the case of Tencent, I also filter out revenues and costs that are unrelated to Tencent’s core (social network) services. I find that these two extensions only strengthen Zhang et al.’s conclusions: Metcalfe’s law now outperforms the other laws even more clearly.

The role of risk in e-retailers' adoption of payment methods: evidence for transition economies

We use logit analysis to exploit a self-collected dataset on the payment and delivery options offered by the vast majority of B2C websites in five Central Asian transition economies. Specifically, we conduct a supply-side test of (elements of) the Transaction Context Model, which highlights the role of perceived risk. Our results confirm that e-retailers in sectors with higher average transaction values are more likely to adopt ‘pay in advance’ instruments—such as debit cards—that have a lower payment risk for the seller. We also find that merchants who offer higher-risk delivery options are more prone to also adopt higher-risk payment instruments (such as credit cards). Our control variables also yield interesting results. In particular, in line with the network externalities theory, we find evidence that the offline penetration of a payment instrument positively affects online merchant adoption.