Payment instruments and network effects: why Americans still write checks

Next week, Gottfried Leibbrand will defend his dissertation Payment instruments and network effects: Adoption, harmonization and succession of network technologies accross countries in Maastricht. His dissertation fits nicely in the research tradition of the Maastricht Economic Research Institute on Innovation and Technology. And the summary for layment, Why Americans still write checks, fits similarly in the McKinsey tradition to provide well written executive summaries.



The dissertation contains two models to further explore and explain network effects in payments and the stepwise innovation and adoption of technology. So after reading the dissertation one understands why:

- payment systems are national (as a result of the underlying transaction patterns),

- one single technology standard may not be the only equilibrium outcome on a national or European level,

- choices for technological innovation and adoption build upon previous choices and existing infrastructures,

- stepwise innovation is the way forward rather than paradigm shifts and payment systems that are built from scratch.



The theory is applied to a number of cases and thus allows testing and discussion on the basis of empirical data. And although some theoretic deliberations on network effects do actually reach this more detailed level, the adapted models of Leibbrandt provide more insight into the subject matter and are more close to reality in the payments industry.



In sum, the dissertation makes particularly good reading for public policy makers in the payment industry as they might want to reconsider the popular one-single-standard idea (and some more issues...). Other than that, we can rest assured that the content of the work and its paradoxical copyright notice (in which copying, pasting, disseminating of the work is encouraged) will contribute to its visibility to both practicioners and academics.

The Myth of Systemic Risk

Ian Grigg points to these remarks made at the St. Louis Banking Conference by Professor George Kaufman:

I also come from the perspective that "systemic risk" in banking is not a threat and has not been a great danger in world history. It is a scare term, much like the use of the word "fire" in a crowded theater. Systemic risk is used shamelessly by regulators to justify their own actions, and by novelists and movie script writers to provide plots for horror stories. This is my bottom line, and if I had two hours I could go on and give you all the evidence.

Dutch flavour of EU directives....

For reasons unknown to me, Dutch government still wants to add a Dutch sauce to EU-regulation when implementing these. Yesterday, two lawyers identified this same behaviour of government in the Financieel Dagblad (Onno Brouwer, Kees Schillemans). They noticed that the implementation regime of Regulation 1/2003 de facto withdraws previous exemptions as issued by the competition authority. In the retail payment sector this would mean that the exemption rulings for interchange fee acceptgiro and atm-usage may be immediately up for legal testing.



Apart from their observation, the Regulation 1/2003 holds promises for more competion in local markets. Market players may now take one another to court if they observe collusion/kartels. Interesting enough, this change has not received a lot of attention in the media.

Laws or self-regulation?

This SEO research report is about the cost and benefits of regulation. It concludes:

1-the cost of regulation are lower for self-regulation when compared to using laws and legal rules,

2-at the moment, the possibilities of self-regulation have not been explored/used to their fullest potential. Common choices for self-fegulation now often lead to a certification structure (with a transfer of compliance costs to the private sector),

3-in practice, there is still hardly a systematic discussion of the possible regulatory options: laws/rules vs self-regulation.

Undesirable research...?

While browsing I found an interesting speech (oratie: Dutch download) that discusses the tensions that may arise when research for policy-makers does not provide the results that are desirable from a policy perspective. To resolve some of the problems that may arise, the author (Carl Koopmans) suggests that all research that has been commissioned by government, will be published actively on the web.



He provides (and illustrates) five arguments:

1-improved public discussions, deliberations and decision making due to the availablity of all information,

2-improved research, due to the scrutiny of the results by peer-researchers and the reputation effects of the publication,

3-citizens pay taxes for this research so they deserve to see the results of what has been paid for with their money,

4-improved confidence in government and elimination of the element of secrecy that now exists if government refuse to publish reports,

5-keeping it secret is impossible; one slip of the tongue/pen by the involved researchers/researched will lead to further questions about the nature of the research, its contents etc. And to the questions why the results are kept secret, which is the content of the reports etc..

Cost / income ratio flawed...?

As this weblog evolves into a literature/article linkdump, I hereby present some interesting material. First of all a report by Peter Welch of BankEcon (download summary) that discusses if the cost/income ratio is really useful for determination of a bank performance.

Pre-paid funds of mobile operators are e-money (when used to pay others) !

In July 2000 (!), when I was still working as a senior policy analyst at the Dutch central bank, I wrote an article on the relevance of e-money rules for mobile operators, concluding:

The adapted infrastructures and billing engines from mobile phone network operators may fall under the future local legal implementation of the EMI-directive and (for the billing part of it) under local law with respect to payment instrument. It appears to be useful, therefore, for mobile phone operators and regulators to further consider and discuss the potential legal consequences of the current technical developments.



Regulators may benefit from this discussion and be better able to decide on the best local implementation of the EMI-directive. The mobile phone network operators may benefit by better understanding the supervisory consequences of some of the technical choices to be made.



Today, May 10, 2004 (more than 2 years after the obliged implementation date for the emi-directive), the European Commission releases a consultation paper on the treatment of mobile operators under the E-money Directive. Their conclusion is similar to mine:

According to Member States experts and the Commission services, pre-paid mobile phone cards are likely to be a form of electronic money when they are used to buy and pay third party products or services.



Assuming that it will take some 2-4 years to sort this stuff out, we will eventually have a level playing field for e-money players in 2008.



Better late than never ... (?)

What is play and what is reality in money and payments?

Ron Onrust sent me this link to an article that describes how stuff in multi-player on-line games may get a real-world value. And how that real-world value might be traded by using Paypal as a payment mechanism. But it also shows a potential weakness in Paypal: multiple accounts for single individuals, allowing the beefing up of positive feedback for accounts......