Retail Payment Systems
In the OIC Member Countries
24
3.3 Lock-Ins and Network Effects, Innovation and E-money
The ways new technologies are introduced can be seen as a phenomenon of a set of
relationships among industry structures, relationships among players as described in Figure 2,
incentives to innovate, the networks that they are a part of and the functionalities of their
technologies. In the following discussion we focus on the dynamics of payment systems in
structural and functional terms, following numerous sources including that of the World Bank
(2008).
Compared to other IT-based industries such as mobile telecommunications, software systems
and personal computers, the retail payment industry tends to exhibit lower levels of
technological adoption and diffusion (Milne, 2005). Indeed, the technology for increasing the
effectiveness and the efficiency of retail payments is already widely available. Thus, the central
question concerns why rates of technology adoption vary so much internationally. Generally,
the adoption of innovation tends to be faster in smaller countries with relatively concentrated
banking systems (Milne, 2005). However, the structure of the financial services industry
makes a difference, and Schumpeter’s theory of creative destruction implies that innovation is
incompatible with zero-profit competition because the innovating firms would obtain at least
temporary market power. Taking this further, Dasgupta and Stiglitz (1980) argue that some
limited forms of monopolistic power might be required for companies in order to mobilise the
resources to engage in R&D activities.
The concept of network externalities is probably most suitable to explain the incentives to
adopt new technologies of this sort, especially in the case of the retail payment market. First,
switching costs discourage consumers and producers to change to new technological
standards and practices. Participants have already invested much money in current standards
and these are both sunk costs and incur new switching costs. Re-training and re-investment
can be very expensive. The inability to co-ordinate might prevent economically efficient
changes of standards (Farrell and Saloner, 1985). Another potential inefficiency comes from a
dominant group of producers that set inefficient standards in order to raise the costs to new
entrants or the costs of competition. Second, network externalities may arise from using a
system (or platform) that is widely used by others, with a variety of implications for
competition (Katz and Shapiro, 1985). The presence of an installed base is one reason why a
lock-in to inferior standards occurs (Liebowitz and Margolis, 2002).10
10 Widely cited example such as the superiority of QWERTY keyboard over Dvorak layout or VHS video format over
technologically better Betamax.