Third-party Payment Platform, Competition Strategy And Industry Regulation Research

The third-party payment system was initially invented to link online banking systems with e-business and to provide escrow services to online transactions. As the Annual Monitoring Report of China’s Online Payment Industry for the Year2010-2011released by IResearch.cn reveals, excluding bank card acquiring business and prepaid card, the transaction value of third-party payment exceeded RMB1,000billion. Despite the rapid development of third-party payment industry, the research on platform competition remains scarce. Meanwhile, due to the lagging of industrial and financial regulations as well as the poor coordination of governing policies, various malpractices appear in this industry, all have seriously obstructed the healthy development of the third-party payment industry.Since the third-party payment industry emerged with a short history, relevant research literature is still lacking. Based on the real situation of China’s third-party payment industry and bilateral market theory, research on the bilateral pricing of close platform and pricing of connecting to open platforms is conducted in this easy, moreover, a framework regulating the third-party payment industry is established from the perspective of both financial and industrial regulation. Under this framework, a detailed analysis is implemented on access regulation, pricing regulation and financial regulation. The research results are as follows:1. Third-party payment industry is characteristic of a two-sided market. The increase of sellers is bound to increase customers, and vice versa. From the perspective of industrial chain, the market can be divided into a wholesale market to banks and retail markets to sellers and consumers. Banks lead the wholesale market and both cooperate and compete with payment platforms. Whereas in the retail market, the broadening of sellers (especially those in controlling positions) using third-party payment necessarily leads to the booming of consumers and is a decisive factor on platform market demand.2. Due to the bilaterality of third-party payment platforms, the price of service provided may be lower than its marginal cost or may even be zero or negative. Different from unilateral markets, it is not predatory pricing. Since the improvement of matching technology for third-party payment platforms can reduce the fixed costs, the percentage of successful transactions using such platforms shall be increased as high as possible.3. If there is competition among platforms and the same method of pricing is applied, two-step fee charging is the optimal strategy. With the increase in the degree of differences among platforms, the profitability will increase and total social welfare will decrease. On the contrary, as the network externality of two sides using such payment platforms strengthens, the profitability will decrease and total social welfare will increase.4. As for open platforms (i.e. interconnected platforms), if the numbers of sellers using different platforms parallel, the change in switch fees will only influence the distribution between surcharges and transfer fees, but the total fee will remain the same. Switch fees are non-neutral. The switch fee determined by regulators will not impose an upper limit on surcharge while the access fee determined by regulators will increase the surcharge and transfer fee by the same amount, and thus raise the total fee level.If the numbers of sellers using different third-party payment platforms do not parallel, the surcharge fee on the customers from other platforms to use the larger third-party payment platform will increase with the scale of the platform while the transfer fee on the customers from the larger platform to use other platforms will be lower. This can be easily understood when considering the relationship between platform scale and attraction to customers. Transfer fee charged by every platform will weaken the competitiveness of the larger ones whereas surcharge fees will make them more competitive. The power of pricing for a third-party payment platform is dependent on its number of customers. Switch fees determined by regulators will increase the fees on using large-scale platforms and reduce that on using small-scale platforms. The connection fee will necessarily increase total fees charged by third-party payment platforms no matter how the market structure is.5. It seems inappropriate for the authorities to label the third-party payment industry as non-financial. The third-party payment has an impact on the aggregate amount of currency in circulation in the form of electronic cash and thus influences the efficiency of China’s monetary policy. Moreover, it will also influence the systematic financial risk through payment and settlement as well as anti money laundering. It is related to non-financial institutions like investment funds and insurance companies, and thus the third-party payment industry is an extension to the financial service industry and is characteristic of financial industry. Since the third-party payment industry is also linked to conventional industries, both financial and industrial regulations shall be considered when stipulating regulations on the third-party payment industry. To be more specific, all enterprises on the platforms shall be monitored and regulated using the institution supervision theory and the third-party payment industry be supervised using functional supervision theory.6. Suggestions on industrial regulation:a) Under the principle of thorough competition and stable policy, an access regulation shall be stipulated and the violation cost shall be raised. Besides, efforts by various regulating authorities shall be coordinated with shared information and unified aims. b) The bilateral pricing shall be regulated on close third-party payment markets on the basis of marketization to improve efficiency and social welfare.Various types of market participants shall be nurtured on open third-party payment markets on the basis of marketization to break interest monopoly. A tight at first and loose afterwards principle shall be applied to regulation on access pricing on open third-party payment platforms in an effort to balance regulating cost and social welfare. c) The financial macro prudential regulation and supervision policy shall be implemented through Customer Identification Policy and Compulsory Notification of Suspicious Transactions. The financial micro prudential regulation and supervision policy shall be carried out through improving the technological standards of customer identity and transaction record storage.Many scholars in the field of industrial organization have expanded the bilateral market theory and since the third-party payment industry is burgeoning, under their direction and enlightenment, any tiny but solid improvement on the model will bring innovation onto the industry. The contributions of this essay are listed as below:1. Although there are many articles on third-party payment, it is in most cases confused with network payment on concept and there is no unified idea on its operation pattern. In this essay, the concepts, types, operation patterns, basic competition strategy and performance evaluation of third-party payment are sorted and summarized. Besides, the industrial chain and the relationship between each components are analyzed and the trend of future development is forecasted by drawing upon the international experiences.2. The pricing mode and competition strategy are directly dependent on whether the third-party payment market is bilateral. The bilaterality of the market is tested through logical analysis and the features are also clarified in this essay.3. The profit model given different pricing patterns under both a monopolized and competitive close third-party payment platform is established using Armstrong (2004) Theory. On the basis of this profit model, the competition strategy is suggested for third-party payment platforms like Alipay and Tenpay.4. The access fee and switch fee are analyzed on open third-party payment platforms using Hotelling Model. Such efforts are supposed to provide the regulating authorities with theoretical basis to stipulate regulations on access to super internet banking and platform switch.Both financial and industrial regulation for third-party payment are considered and analyzed in a consolidated framework unprecedentedly, based on which main issues on regulating this industry are proposed. Besides, current problems confronted by China’s third-party payment industry are analyzed by drawing upon international experiences. On the basis of empirical survey and worldwide comparison, some suggestions are proposed on China’s third-party payment industry regulation using the model in this essay.