Bank Card Market Research: A Network Economics Perspective

The main job of this thesis is to study the bankcard market in a framework of network economics. Firstly I give the definition of bankcard; I discuss the classification and function of bankcard, and then I introduce the general condition of bankcard development in the world and China.The thesis analyzes the general network economics characteristics of the bankcard market. The two main functions of the bankcard are withdrawing money and direct consumption, which are implemented on the ATM and POS. The utility of a bankcard to consumer is determined by how many ATMs and POS in the market, which is the typical characteristic of network externalities. According to the material, bankcard is labeled as magnetic bankcard and IC bankcard. Compared with the latter, the former is easy to result in financial fraud due to its unsafe externalities, which will make the bank lose much. The IC card has been applied in so many fields, but it does not replace the magnetic card in the financial field. The main is that the existing ATMs and POS could only recognize the magnetic bankcard, which is an important topic in the network economics: the effect of installed base on the technology. In China, cardholders were charged no year fee before. But now, the big banks have begun to charge year fee on bankcard. The main reason is that banks charge no year fee on bankcard to attract consumer in the initial stages, so that the amount of the cardholders could reach the critical mass so as to attract the merchants to accept the bankcard effectively. And in the latter stages, the banks will have the ability to charge the cardholders for the bankcard. That is the penetrating pricing in the network economics. In the early stages, the bankcard network of the banks are separate each other both in the world and in China. Obviously, the interlinkage of the bankcard networks will be better to the social welfare. The interlinkage of the bankcard networks is achieved through the negotiations of the banks and/or the driving of the government. That is the compatibility choice in the network economics.This thesis studies the two most important submarket, ATM market and POS market. And the former is a single-sided market; the latter is two-sided. When the thesis studies the ATM market, in order to predigest the analysis, this thesis takes the times of withdrawing of the cardholders as exogenous. The thesis analyzes the effects of different ATM pricing systems, i.e. foreign fee, surcharge and mixed fee, on bank profits and social welfare. We assume two banks with symmetric ATM networks firstplay non-cooperative ATM pricing game and then no-for-profit organization (say China Unionpay) chooses interchange fee to maximize the total profits of banking systems. Given an exogenous interchange fee, the result of non-cooperative duopoly game is that an increase of interchange fee will increase foreign fee, decrease surcharge but does not affect mixed fee. Interestingly, after interchange fee adjustment by Unionpay, both foreign fee system and surcharge system lead to the same equilibrium fee. Welfare analysis shows that under whatever fee system, market leads to excessive fee, but the distortion under mixed fee system is the biggest.In order to describe the reality well, the thesis then relaxes the assumption of exogenous withdrawing times and asymmetric bioligopolistic banks. Then the thesis takes the withdrawing times of the cardholders as endogenous, which are the result of the choice of the cardholders. Another reason of this thesis complexing the model is to analyze the effectiveness of the policy of the central bank of China. In order to encourage commercial banks to deploy more ATMs, China's central bank allows them to charge foreign fee. We show that, on the contrary to central bank's aim, foreign fee decreases commercial banks' incentive to deploy more ATMs. We construct a Salop model to analyze three conditions: no-fee, foreign fee and surcharge. Our meaningful conclusions are: The banks whose bankcard market share is smaller than ATM market share will have interchange fee surplus and vice versa; on the banks' pure ATM business, foreign fee is strategy-substitutable and surcharge is strategy-complementary; on the banking competition, foreign fee is strategy-complementary and surcharge is strategy-substitutable; foreign fee decreases banks' perceived revenue, so banks' incentive to deploy more ATMs is discouraged; surcharge increases banks' perceived revenue, so banks are willing to deploy more ATMs.When studying the POS market, the thesis distinguishes the open bankcard organization with the close bankcard organization. And this thesis will answer the question, why the cardholders are charged zero and the merchants are charged much on the payment through bankcard. This thesis studies the bankcard payment system in the two-sided markets, where bankcard organization and merchants have market power. In the benchmark model we show that side fee is increasing with the fixed cost induced to the bankcard organization by the side and the convenience obtained by the side. In the extension model, we adopt standard Hotelling game to describe the competition among merchants. Because of business-stealing effect, the highest feethat merchants are willing to pay is sum of the convenience of itself and of cardholders, which enables bankcard organization could cardholder zero even subsidize them.