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What's in it for us? Network effects and bank payment innovation

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  • Milne, Alistair

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.

Suggested Citation

  • Milne, Alistair, 2005. "What's in it for us? Network effects and bank payment innovation," Bank of Finland Research Discussion Papers 16/2005, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2005_016
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    References listed on IDEAS

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    1. Humphrey, David B & Kim, Moshe & Vale, Bent, 2001. "Realizing the Gains from Electronic Payments: Costs, Pricing, and Payment Choice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 216-234, May.
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    More about this item

    Keywords

    network effects; incentives; payment technology; externalities;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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