What's in it for Us? Network Effects and Bank Payment Innovation
Loughborough School of Business and Economics
Bank of Finland Research Discussion Paper No. 16/2005
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.
Number of Pages in PDF File: 32
Keywords: network effects, incentives, payment technology, externalities
JEL Classification: G21, L14working papers series
Date posted: October 2, 2007
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