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Cost efficiency in the retail payment networks: first evidence from the Italian credit card system

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  • Guerino Ardizzi

    (Bank of Italy, Payment System Oversight Office)

Abstract

In this paper, a parametric cost frontier for the credit card market is specified (�stochastic frontier approach� - SFA) and robustness checks of the main results are performed. The aim is to provide some clues to: the x-inefficiency problem and determinants in a retail payment circuit; the main technical characteristics of the industry (i.e. scale economies, cost structure, factor substitution); policy implications. The Italian case study indicates that: the credit card industry could benefit from significant increasing returns to scale, but bigger the network (in terms of transactions handled) the more intermediaries tend to veer away from their efficient cost frontier. Moreover, the cost structure borne by firms is strongly dependent on intra-network agreements. Possible solutions to the x-inefficiency problem might come from the �theory of incentives�, which provides pricing (or cost recovery) mechanisms computed on the basis of costs expected under efficiency conditions; however, more studies are needed to investigate the topic within the context of �selfregulated� payment networks.

Suggested Citation

  • Guerino Ardizzi, 2003. "Cost efficiency in the retail payment networks: first evidence from the Italian credit card system," Temi di discussione (Economic working papers) 480, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_480_03
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    More about this item

    Keywords

    credit card industry; interchange fees; technology; efficiency; cost frontier;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G2 - Financial Economics - - Financial Institutions and Services
    • L8 - Industrial Organization - - Industry Studies: Services

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