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Entry of Non-financial Firms and Competition in the Retail Payments Market

Author

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  • Jooyong Jun

    (Economic Research Institute, the Bank of Korea)

Abstract

We investigate the effects of a non-financial firm's entry on competition in the retail payments market, from the perspective of duopoly between an incumbent and an entrant in conditions of vertical restraints. Considering the cross-platform externalities in payment processing, differentiated preferences for payment platforms, and competitive bottleneck on the consumer side, we derive the following results. When only the entry of a vertically integrated (or end-to-end service) provider is allowed, either all merchants choose to multi-home or no entry occurs, regardless of the regulatory requirement. On the other hand, if the entry of a downstream-only (or front-end service) provider is possible, a partial multi-homing equilibrium result can emerge for some conditions under which the entry of an end-to-end service provider does not occur. In addition, due to the lowered entry cost, the overall welfare is greater when the entry of downstream-only service is possible although the entire increase in welfare goes to the entrant. Without regulation, however, the vertically integrated incumbent does not voluntarily provide the back-end service to the entrant when the merchant's benefit from the payments service is not sufficiently high. It suggests the need for proper regulatory measures to reach a socially desirable outcome from the new entry in the retail payments market.

Suggested Citation

  • Jooyong Jun, 2015. "Entry of Non-financial Firms and Competition in the Retail Payments Market," Working Papers 2015-19, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1519
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    FinTech; Entry; Retail payments; Front-end; Vertical restraints;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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