1 / 14

Integrating European Retail Payment Systems: Some Economics of SEPA

Integrating European Retail Payment Systems: Some Economics of SEPA. Kari Kemppainen Bank of Finland ECB-CFS Research Conference, Prague 20 October 2008. Background . Single Euro Payments Area, SEPA Starting point: European retail payment systems have been based on national standards

ursala
Download Presentation

Integrating European Retail Payment Systems: Some Economics of SEPA

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Integrating European Retail Payment Systems: Some Economics of SEPA Kari Kemppainen Bank of Finland ECB-CFS Research Conference, Prague 20 October 2008

  2. Background Single Euro Payments Area, SEPA • Starting point: European retail payment systems have been based on national standards => no interoperability between national systems • Goal: a single domestic market for cashless euro retail payments (credit transfers, direct debits, card payments) => “national borders to be eliminated in European retail payment markets”

  3. Paper in nutshell • Application of a spatial competition model of retail payment networks (debit card markets) • Analysis on economic effects of SEPA formation • A stylized view on SEPA: • Expansion of positive network externalities on the demand side due to common standards • Fixed adjustment costs for SEPA compatibility on the supply side • Finding: Introduction of SEPA may not lead to fully-competitive and integrated retail payment markets if Pre-SEPA markets are segmented.

  4. Related literature • consultant studies, European Commission works; a summary by Schmiedel (2007) • Schaefer (2008) Model of SEPA-effects • Network effects and compatibility: * Katz & Shapiro (1985), Farrel & Saloner (1985) * Mason (2001) Internet pricing, Gandal & Shy (2001) Standardization policy and international trade • Applied Hotelling models: * Rochet (2007): Horizontal mergers of payment systems, various telecom, internet and ATM studies • Two-sided markets literature: Chakravorti & Roson (2006), Guthrie & Wright (2007), Rochet & Tirole (2007)

  5. Research questions Given Pre-SEPA segmented national retail payment markets as a starting point, • what are the effects of SEPA introduction on the prices consumers have to pay? • how will the sizes of payment networks (i.e. number of participating consumers) react? • how do service providers’ profits and consumer surplus change? • what will be the total effect on social welfare?

  6. Model (1) • Considers horizontally-differentiated payment card networks in two countries • Consumers have a unit demand and are uniformly located along a Hotelling line with two card payment networks at {0,1} • Consumers can choose between: (i) cash, (ii) national payment card, (iii) foreign payment card • Networks maximize profits, market sizes solved in equilibrium, perfect foresight assumed

  7. Model (2) 0 x1 x2 1 x1 1-x2

  8. Model (3) Parameters: • V = “base utility” of having a payment card • p = price (annual fee of payment card) • t = transportation cost /differentiation parameter • x = size of payment card network • epsilon = network utility parameter • k = indicator function for compatibility • a = fixed SEPA-adjustment cost for PS providers SEPA-formation: • Pre-SEPA: no compatibility, no adj.cost => k=0, a=0 • Post-SEPA: perfect compatibility, adj.cost => k=1, a>0

  9. Pre-SEPA segmented markets as the starting point • Corresponding to the real-life situation, the condition for Pre-SEPA segmented markets: • Assumption 1: sets limit to the relation between “the base value” of having a payment card (V) and “effective transportation cost”

  10. Post-SEPA potential market outcomes Three possible equilibria (Salop 1979, Ireland 1987, Economides 1984,1988): • Segmented markets • “Kinked” equilibrium markets • Fully-covered markets

  11. Main results (1) “SEPA as such is not enough for full-scale integration” • SEPA does not lead to fully-covered and integrated retail payment markets, if the Pre-SEPA markets are segmented (like they are in real-life). • Instead, possible Post-SEPA markets: i) remain still segmented ii) are characterized by “kinked” equilibrium

  12. Main results (2) • In both cases (i and ii), the introduction of SEPA leads to • increased prices • larger network sizes • higher consumer surplus • Profits and total welfare also increase (provided the SEPA adjustment costs are not prohibitively high) • Threshold values for fixed adjustment costs can also be established

  13. Tentative policy conclusions • Overall economic effects of SEPA can be positive (due to positive network effects) => SEPA project is worth undertaking! • But: the cost-side deserves a lot more attention (c.f. real-life discussions) • If potential economies of scale were incorporated, the positive SEPA effects would be strengthened in the current model => more research on topical SEPA issues is warranted!

  14. Thank You! Kari Kemppainen Bank of Finland Monetary Policy and Research Department Tel. +358 10 831 2249 Email: kari.kemppainen(at)bof.fi

More Related