Retail Payment Systems
In the OIC Member Countries
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