Pricing Electronic Payments Services : An Io Approach

In the Netherlands the enormous uptake in the usage of debit cards has been the main driver for the rapid developments in non-cash, point-of-sale, payments. However, several practices in the Dutch electronic payments services industry with regard to pricing and infrastructure have attracted controversy and antitrust scrutiny. In this paper we will present a theoretic framework to analyse pricing structures in debit card schemes. Cardholders value debit cards only to the extent that these are accepted by retailers, while retailers in turn benefit from a widespread usage of cards. This points to a fundamentaldimension of the market for debit cards, namely, that it is two-sided. In setting prices banks need to be careful to get both the consumers' side and retailers' side on board. We show that the consumers' side of the market can be used to generate an increase in demand for debit card payments, for which the retailers effectively pay. This theoretic results nicely corresponds to the current practice in the Netherlands that consumers pay no transaction fee for using their debit cards. Only the retailers pay such a fee. The question arises how this result compares to socially optimal prices, and how system competition between network switches affects this result