Sometimes it helps if everyone uses the same product or service. In large economies there may be a proliferation of standards, but in controlled smaller economies such as those that prevail in the OIC, commonality may emerge, be encouraged, or enforced. This may drive systems towards monopoly or standardisation. For example, when we buy a DVD player and some DVDs, we encourage one specific industry standard, and thus more DVDs are put on the market. When we throw out an 8-track tape player, we discourage that industry, and if enough people do that, no more 8-track tapes are sold.
As a consequence, lock-in may occur on the ‘wrong’ technology because if, for whatever reason, the wrong technology is chosen, it may be difficult to achieve the coordinated movement of large numbers of users required for the ‘right’ technology to become the standard. One problem is that defining standards can both encourage the spread of technology and limit the development of new technology; so when to impose standards is a difficult practical choice.
Unfortunately, what is rational for an individual may not be rational for the collectively, or vice versa. Once accepted, a standard design can have a profound impact on both the direction of further technical advance and the rate of that advance. When the marketplace decides that a certain product is what it wants, then innovators have to start figuring out how to make that peculiar innovation as effective as possible—and some will be better able than others. This competition will shift from innovative approaches to product design and features to competition based on cost and scale as well as on product performance.
29
Thus, companies and regulators must realise that technological change is not a purely an objective and calculative process. They can only try to envisage a path between what technologies can do at the moment and what they can do in the future. If the path is evaluated using commitment routines, key constituencies will probably commit to the new technology and initiate a bandwagon process that will ensure the successful creation of the trajectory. If the actors are likely to adopt a wait-and-see attitude then the technological trajectory will most likely fail, exactly as predicted by path dependent theories (David, 1985; Rogers, 2003).
3.8 Regulations
Regulating efficient and reliable retail payment services is essential for the smooth functioning of the economy and many financial regulatory regimes in OIC countries are in flux. Academic studies have focused on the two issues of government intervention and regulation in retail payment systems. In addition there is the monetary role of government and the prevention of systematic risk in large value payments (LVPS); both fall outside the scope of this report.
The first issue is whether the government should play a role in stimulating their adoption, through subsidies, standards setting, regulation, etc. Some writers, such as Issing (1999), argue in favour of direct government action, because network effects may lead to excess inertia in the adoption of socially efficient payment systems. Others argue against such a role, for example because governments tend to pick the wrong technology and standard; and by selecting the wrong standard they may even prevent the adoption of the right standard by the private sector (Gowrisankaran, 1999, on the adoption of ACH systems in the United States, and Mantel and McHugh, 2001, on electronic payment networks). Perhaps most outspoken on this topic is Weinberg (1997), who argues that market participants can always reach a sustainable network arrangement, provided that side payments or price discrimination is permitted and there are no barriers that prevent market participants from joining other networks. This model does not adequately address the question of how or whether market participants overcome lock-in to reach such a sustainable arrangement.
The second issue is somewhat the reverse: should the government regulate (i.e. restrain) payment networks once they are established? Calls for such regulation can be heard with respect to debit and credit cards both in OIC countries and in the leading industrial economies. Proponents of such regulation, including Balto (1995 and 2000) and Salop (1990) argue that the increasing returns of payment networks lead to monopolistic power that is being abused by banks. The interchange mechanism is especially being scrutinised by regulators. One seminal paper is by Baxter (1983), who defends the interchange mechanism as being an
30
indispensable enabler of new payment technologies that bring social welfare. As Chakravorti and Shah (2001) conclude in their review of models on interchange, the precise effect of interchange on social welfare is not easy to determine and it is very sensitive to model specifications. Perhaps as a result, to date regulators have not come to any clear point of view: US regulators have wavered (see Chang and Evans, 2000, for a regulatory history of credit cards), the European Commission has sanctioned the interchange for cross border debit card transactions (European Commission, 2000), and the Australian regulator has laid the ground for lowering interchange on credit cards and abolishing it on debit cards (Reserve Bank of Australia, 2000).
The World Bank, the BIS, national and other bodies have addressed the question of who regulates and to what extent. Most recently, HM Treasury of the United Kingdom (2015) identify potential problems in the following areas:
1. Competition: the structure of the industry may It is give powerful incumbent institutions the opportunity to erect barriers to entry, so that challengers and smaller players find it more difficult to access payment systems on fair and transparent terms.
2. Innovation: the network nature of payment systems (i.e. all major players need to be connected for the system as a whole to be effective) means that innovations in the shared space do not give a competitive advantage to banks individually. The banks also have the ability to slow the pace of development of new innovations if, for example, they are not as well-placed to take advantage of them. There is therefore a concern that new innovations might not be developed where they are in the wider social interest, but not in the narrower interests of individual banks.
3. Service-user responsiveness: the network nature of payment systems means that, if a payment system fails to respond to service-user needs, this does not necessarily give a competitive disadvantage to any individual institution. This may lead to retail payment systems not being responsive to service-user needs and wishes.
Since the British experience is both broad and exemplary of advanced practices, these views are likely to frame much of the forthcoming public discussion.