Network issues and payment systems

Credit & Financial Management Review, First Quarter 1998 by McAndrews, James J

In an anti-trust suit, the U.S. Department of Justice accused Electronic Payment Services (EPS), the operator of the MAC ATM network, of tying the sale of ATM processing (an ancillary product) to the sale of ATM network access. In the 1994 consent decree, EPS agreed to allow other processors to compete for that ancillary service.

Access Once established, a network that has a large base of users must determine which firms will have access to its facilities, that is, whether the network standard will be "open" or "closed." With an open standard, many firms can design and sell products compatible with the standard; a closed system limits the number of firms that can use the standard to sell products. In the late 1970s and the early 1980s, bank customers began to have access to their deposit accounts through ATMs. Most of these systems were proprietary and therefore closed. In the mid 1980s, many banks struck agreements to share access to ATMs, thereby creating shared ATM networks - an open standard. Successful networks can create a type of monopoly called bottlenecks or essential facilities. By restricting access to such facilities, their owners place competing producers of a service at a significant competitive disadvantage. For example, the Telecommunications Act of 1996 directed the FCC to establish the detailed conditions under which competitors to the "baby Bells" could gain access to the local telephone network's lines and switches to provide telephone service. Without mandated access, a local phone network has little incentive to give competing providers access to its facilities (even at a cost). And without access to the local telephone network, the alternative provider would have to build a large network facility to attract a critical mass of users. By denying access to its competitors, the local network enjoys a considerable advantage over entrants into the market. Such bottleneck monopolies have been successfully challenged under the antitrust laws of the United States. Application to Payment Systems Recognition of the network characteristics of payment systems can yield insight into important public policy issues. To be successful, payment systems, which are technologies for the exchange of value among participants, must have wide acceptability. A card-based payment product, whether a debit or credit card, requires that consumers have the cards and that merchants have authorization terminals. These two pieces of equipment are complementary, and more terminals that retailers deploy, the more potential transactions are available to a cardholder. Currency and coin, too, require a network of facilities for reading, counting, and sorting so that bills and coins can be accepted at vending machines.