2017 Series • No. 17–4
Current Policy Perspectives
Faster Payments: Market Structure and Policy Considerations 
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. Although a few private‐sector firms are currently implementing new faster payments platforms, it is still uncertain how the market for faster payments will evolve in the long run.
As they did for legacy payment markets, economic forces such as economies of scale and scope, network effects, switching costs, and product differentiation will help shape the market for faster payments. Emerging technologies, however, could alter these forces and lead to new organizational arrangements or market structures. Various other factors, including industry and public‐sector efforts, will also influence the structure of the faster payments market.
In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant‐operator environment, a multi‐operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. In particular, outcomes in the faster payments market will depend on the degree and allocation of market power among participants, which in turn may depend on factors such as available substitutes or ease of market entry.
Key Findings
- In the dominant‐operator environment, provision of faster payments by a large operator that serves the vast majority of the market may result in productive efficiencies due to scale and scope economies. However, the dominant operator may lack competitive discipline on prices and service quality. Difficulties with market fragmentation would not arise in this environment, but high fees may reduce adoption, posing challenges to ubiquity. Additionally, a dominant operator may be well positioned in certain ways to promote safety but may concentrate operational or other risks. Moreover, a lack of competitive pressure leads to mixed effects on innovation.
- In the multi‐operator environment, multiple operators coexist, but none has the vast majority of the market share. Competition among operators in this environment may help mitigate market power concerns associated with the dominant‐operator environment. Although competition may enhance efficiency and ubiquity goals, multiple operators replicate fixed infrastructure costs and may lead to a fragmented market, inhibiting these goals. While redundancy across multiple operators can enhance resiliency, coordinating safety measures across operators could be costly or difficult.
- In the decentralized environment, a traditional operator that integrates many aspects of payment production – such as clearing, settlement, and establishing rules – does not exist because of technological change or other developments. Functions traditionally performed by an operator may be unbundled (different entities provide different functions), distributed (no single entity has control over a given function), or both. While a number of organizational arrangements are possible in this environment, a distinguishing feature is that market outcomes are driven by end‐user service providers. Although technological change may reduce the fixed costs of infrastructure in this environment, coordination among many providers may be costly, resulting in an ambiguous effect on overall costs. Easy market entry in this environment may intensify competition, which could result in lower fees and higher service quality. A decentralized environment without a central coordination body could face challenges. In the absence of such an entity, failure to coordinate on safety and security issues can increase vulnerability to cyberattacks, while the failure to coordinate on common rules or standards can exacerbate fragmentation.
- Tools are available to promote positive outcomes in each market structure. Coordination on interoperability may help advance ubiquity and safety objectives but may also raise other issues, such as access pricing or settlement risk. Open, inclusive, and transparent governance arrangements can help payment stakeholders effectively make decisions on a variety of initiatives that can promote positive outcomes. In addition to private coordination arrangements, public authorities can play several important roles in protecting the public interest, such as regulator, supervisor, and catalyst for change.
Implications
Each of the three market structures examined has both advantages and disadvantages in meeting public policy goals. Moreover, their implications depend on more‐detailed institutional features and other factors. Given the nascent state of the faster payments market and the tendency for path dependence in the payments industry, careful consideration of market structure implications is particularly relevant at this juncture.
Abstract
The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.