Nonbanks in the Payments System: Vertical Integration Issues

Abstract

We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.

Keywords: payments system, credit cards, debit cards, non-banks, vertical integration, market power, monopoly

JEL Classification: L13, L42, L50, L80