What's in it for Us? Network Effects and Bank Payment Innovation
32 Pages Posted: 2 Oct 2007
Date Written: 2005
Abstract
The developed world exhibits substantial but poorly understood differences in the efficiency and quality of low-value payment services. This paper compares payments arrangements in the UK, Norway, Sweden, and Finland, and discusses the impact of network effects on incentives to adopt new payments technology. A model is presented, in which private benefits for investment in shared inter-bank payments infrastructure are weak. In contrast, due to 'account externalities', there are strong incentives for investment in intra-bank payment systems. These two features, distinguishing bank payments from other network industries, can help explain some of the observed cross country differences in payments arrangements.
Keywords: network effects, incentives, payment technology, externalities
JEL Classification: G21, L14
Suggested Citation: Suggested Citation