What if we apply Neutrality rules to Electronic payment systems: Acquiring business?

What if we apply Neutrality rules to Electronic payment systems 2Today, we publish the fourth research and findings elaborated by Solchaga Recio & Associates on how Net Neutrality provisions could change our lives if applied in other industries providing services that touch every consumer and are used daily by everyone.


The first case study focused on airlines industry, the second on the supermarket sector and the third on courier and parcel services. For this fourth paper we are again shifting to a different sector: electronic payment systems, targeting acquiring businesses. Acquiring businesses share a distinctive feature of many Internet based business models: (thus providing a great case study for analysis) their growth is based on network effects; this implies the greater the number of participants is, the greater the benefit to be derived from the system. Which in the case of acquiring businesses means the greater the number of consumers using credit cards, the greater the number of merchants eager to make this form of payment available to them, and similarly, the greater the number of merchants accepting credit or debit cards, the greater the number of consumers willing to get such cards to pay for goods or services purchased.


Applying Net Neutrality principles to the electronic payment systems would restrict implementation on pricing differentiation techniques such as those based number of transactions, expenditure volumes or any other. This would result in an increase of transaction costs. Not only the transaction fees would increase, but also the fees for having the credit or debit cards, and the prices paid by customers to acquire goods or services at merchants’ stores. So point-of-sale terminals would decrease (merchants accepting cards) and so would consumers having the cards and so on, considering the mentioned network effects business is subject to. In a nutshell, the overall economy would suffer from neutrality in the acquiring business due to a decline in payment systems efficiency resulting in a cost increase in the economy as a whole and a decrease in productivity curtailing potential growth.


Summary of the net neutrality rule in the acquiring business




















We invite you to read this fourth research note that illustrates some of the possible consequences on the electronic payment systems if we apply net neutrality rules as proposed for the Telco industry. Once again, the conclusion confirms that regulating a competitive market, this time the electronic payment systems, to prevent potential misbehaviors is disproportionate and may lead to unintended consequences, reducing consumers’ welfare and number of market participants while hampering innovation.


Indeed, why an apparently ludicrous idea for the sectors we have already researched, that is retailers and airplanes, supermarket, courier and parcel and now electronic payment systems is considered as the best solution for keeping the Internet Open?


Spanish version of Solchaga and Recio’s research note is also available here.