Wilko Bolt

Payment Network Scale Economies, SEPA, and Cash Replacement

The goal of SEPA (Single Euro Payments Area) is to facilitate the emergence of a competitive, intra-European market by making cross-border payments as easy as domestic transactions. With crossborder inter-operability for electronic payments, card transactions will increasingly replace cash and checks for all types of payments. Using different methods, the authors estimate card and other payment network scale economies for Europe. These indicate substantial cost efficiency gains if processing is consolidated across borders rather than piggybacked onto existing national operations. Cost reductions likely to induce greater replacement of small value cash transactions are also illustrated.

Consumer Choice and Merchant Acceptance of Payment Media

We study the ability of banks and merchants to influence the consumers payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks| income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the banks cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the banks profit-maximizing price structure.

The effect of transaction pricing on the adoption of electronic payments: a cross-country comparison

Pricing should speed up the substitution of low cost electronic payments for expensive paper-based transactions and cash. But by how much? Norway has explicitly priced individual payment transactions and rapidly shifted to electronic payments while the Netherlands has experienced the same shift without direct pricing. Controlling for differences between countries, we estimate the incremental effect of pricing on the shift to electronic payments. If users strongly value the improved convenience or security of electronic payments, pricing-viewed negatively by most consumers-may not be necessary to ensure rapid adoption of electronic payments.

Social Welfare and Cost Recovery in Two-Sided Markets ⁄

Using a simple model of two-sided markets, we show that, in the social optimum, platform pricing leads to an inherent cost recovery problem. This result is driven by the positive externality of participation that users on either side of the market exert on the opposite side. The contribution of this positive externality to social welfare leads the social planner to increase users participation by setting prices at both sides of the market such that the total price is below marginal cost. This causes operational losses for the platform. Our result holds for both interior pricing and skewed pricing in two-sided markets.

Skewed Pricing in Two-Sided Markets: An Io Approach

In two-sided markets, one widely observes skewed pricing strategies, in which the price mark-up is much higher on one side of the market than the other. Using a simple model of two-sided markets, we show that, under constant elasticity of demand, skewed pricing is indeed proflt maximizing. The most elastic side of the market is used to generate maximum demand by providing it with platform services at the lowest possible price. Through the positive network externality, full participation of the high-elasticity, lowprice side of the market increases market participation of the other side. As this side is less price elastic, the platform is able to extract high prices. Our skewed pricing result also carries over when analyzing the socially optimal prices. Interestingly, this leads to below-marginal cost pricing in the social optimum. We motivate the analysis by looking at the Dutch debit card system.

Identifying Booms and Busts in House Prices under Heterogeneous Expectations

We introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices. Using quarterly data we estimate the model parameters for eight different countries, US, UK, NL, JP, CH, ES, SE and BE. We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following chartists beliefs based on their relative performance. For all countries we identify temporary house price bubbles, amplified by trend extrapolation, and crashes reinforced by fundamentalists. The qualitative predictions of such non-linear models are very different from standard linear benchmarks, with important policy implications. The fundamental price becomes unstable, e.g. when the interest rate is set too low or mortgage tax deductions too high, giving rise to multiple non-fundamental equilibria and/or global instability.

Pricing Debit Card Payment Services: An IO Approach

A valve assembly has a housing forming an outlet, having an axis, and secured on a support surface. A support block in the housing has a pair of inlet ports adapted to be connected to pressurized feed lines and an output port communicating with the outlet of the housing. A valve cartridge sitting on the support block includes a casing centered on the housing axis and having a rear end formed with axially rearwardly directed bumps and a stack of disks in the casing including an end disk formed with ports provided with seals projecting axially forward past the casing to the respective support-block ports and at least one valve disk displaceable to vary flow from the inlet ports to the outlet port. A stem projecting axially rearward from the casing is displaceable to move the valve disk. A retaining sleeve formed with a screwthread threadedly engaging the housing is centered on the axis, surrounds the valve cartridge, has a front end bearing directly on the support block, and has a shoulder bearing axially forward on the bumps of the casing and pressing the seals into the support-block ports so that the casing is retained by the sleeve on the support block. A handle is mounted on the stem outside the housing.!

SEPA, Efficiency, and Payment Card Competition

This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the effects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchants pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. Key Words: SEPA, card network competition, optimal pricing, economic welfare

On the Value of Virtual Currencies

This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important. First, the current use of virtual currency to make payments. Second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply). Third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. The model predicts that, as virtual currency becomes more established, the exchange rate will become less sensitive to the impact of shocks to speculators’ beliefs. This undermines the notion that excessive exchange rate volatility will prohibit widespread use of virtual currency.

Pricing in Retail Payment Systems: A Public Policy Perspective on Pricing of Payment Cards

The provision of retail payment services is complex with many participants engaging in a series of interrelated bilateral transactions and subject to large economies of scale and scope along with strong adoption, usage and network externalities. This makes sound public policy difficult. We focus on three types of market interventions for various countries. We argue that intervention into payment markets should concentrate on the removal of entry barriers in payment markets and providing greater incentives to adopt efficient payment instruments without stifling private sector investment in more efficient payment technologies over the long term. While the theoretical literature on the economics of payment cards is growing, the empirical literature is yet too limited to provide much guidance to public authorities. Eventually, the outcomes from different types of market interventions will provide a useful natural experiment to refute or validate the various theories of the economics of payments.