Research Discussion Papers, Bank of Finland
No 28/1998:
Developing the Interbank Payment System. Efficiency of Public versus Private Investments
Karlo Kauko ()
Abstract: In this paper a game theoretic duopoly model is developed
to analyse the development of an interbank payment system. There are two
competing banks in the model, and payment services offered to the public
are among their main products. The customer of the larger bank uses mainly
intrabank payment services; these services are assumed to be of high
quality. This creates a so-called network externality, meaning that many
customers prefer to use the large bank for quality reasons. The development
of interbank payment systems reduces the significance of this factor and
hence benefits the small bank. A big bank has a sufficient incentive to
develop the system only if a fee is charged for using payment systems. The
role for public investment depends critically on the pricing of payment
services. If banks offer payment services free of charge, their incentives
to develop the system are H5ly biased, and it would be efficient for the
central bank to have an active role in developing the system. If instead
payment services are directly priced, eventual distortions are much less
serious, and the role of the central bank need not be as prominent.
Keywords: banks; payments systems; network externality; duopoly; (follow links to similar papers)
JEL-Codes: G18; G21; L13; (follow links to similar papers)
73 pages, December 14, 1998
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