Retail Payment Systems
In the OIC Member Countries
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3.2 Actors and Industry Characteristics
Driven by globalisation, deregulation, as well as technological change and other forces, the
retail payment industry has experienced dramatic changes in structure and competition. The
banking sector in the OIC member states has also shown a strong growth potential in
comparison with developed economies (COMCEC, 2015). However, on average the financial
sector in OIC member countries remains operationally inefficient (SESRIC, 2013).
The provision of retail payment services is a highly intricate matter. Many participants are
involved in a series of interrelated bilateral transactions and subject to large economies of
scale and scope along with strong adoption, usage and network externalities (Bolt &
Chakravorti, 2012). This not only makes optimal payment pricing difficult, it also makes sound
public policy challenging.
Figure 2. Payment flows and fees
Source: Adopted from Bolt and Chakravorti (2012)
In principle, retail payment systems follow similar market structure (see Figure 2). Most
transactions happen in three- or four-party networks: consumers and their banks (issuers) as
well as merchants and their banks (acquirers). Both issuers and acquirers are a part of a
payment network that sets the rules and procedures for clearing and settlement among its
members. By setting rules, they also create constraints that foster allegiances, provide comfort
for participants and exclude players that do not have access. This effectively creates lock-in
that stabilises the systems but also restricts some forms of later innovation.
CONSUMER MERCHANT
MERCHANT’S BANK CONSUMER’S BANK
Fixed goods price or instrument-
contingent pricing
Interchange fee
Potential rewards
Merchant fees (fixed, proportional, or both)
Consumer fees (annual,
finance, other)