Fighting Poverty Profitably Full Report

Government coordination and market consolidation influence
consumer prices in payment systems
The cost of operating a payment system alone rarely determines the price consumers
pay to participate in it. The degree of government coordination and market consolidation
can have a large impact. Therefore, they also influence the system’s affordability for
both poor users and small transactions.
Government coordination. Governments play an important role in establishing the
regulatory environment for payments, and sometimes set a philosophy for pricing. The
degree to which the government of a country views payment infrastructure as a public
good or a “utility” may influence its willingness to intervene in the market to shape the
delivery of payment services, to keep pricing low and to facilitate market coordination.
These types of government interventions generally seek the following:
• Serve the broader good
• Capture economies of scale in production and delivery
• Set prices, often based on the cost of providing services.
An example of this type of government intervention is the Netherlands. After WWII, the
government provided citizens free chequing accounts through the government owned
Post Office. This intervention led banks to offer free chequing and focus on cost containment.
Part of this cost focus saw banks forming vehicles to manage payments as
a public good, most recently in cooperation with merchants. Government authorities
oversee such efforts to ensure there is no evidence of anti-trust. One result is that
merchants pay a low price of just $0.01 per $10 debit card transaction. Also, 98% of the
poorest 40% of adults hold a formal bank account.
A different example can be found in the United States. Until recently, the U.S. government
took a more laissez-faire approach to coordinating market players and setting
payment system pricing. Interchange fees on debit and credit card payments, for
example, were established by the main payment service providers and then passed
onto merchants, who in turn often passed them on to consumers through higher prices.
With the advent of the Dodd-Frank financial reforms, the U.S. government capped debit
interchange.
Often, a country’s decision to establish a central payment system creates conditions for
providers to collectively own payment infrastructure. For instance, such countries often
have bank-owned payment providers, including Equens in the Netherlands, Interac in
Canada, and NIBSS in Nigeria. This can lower the cost for banks to provide payments
because they do not need to pay a margin to private owners of payment infrastructure.
If the market is sufficiently competitive, banks will pass this savings along to consumers
in the form of lower prices.
Market consolidation. The structure of competition in the market also has an important
impact on a payment system’s reach to poor consumers. Limited competition can keep
prices for consumers overly high. This kind of behavior is happening with mobile money
payment in Kenya (which is a consolidated market) where the money transfer price
to consumers for sending $1.50 is $0.30, or ten times higher than the same provider
charges in a more competitive market in Tanzania.
FIGHTING POVERTY THROUGH PAYMENTS I SEPTEMBER 2013 www.gatesfoundation.org 21