Payments and socioeconomic efficiency

The Riksbank and other central banks around the world have been tasked with promoting safe and efficient payments. The Riksbank takes a social perspective in the execution of this task. This means that the Riksbank provides solutions where it is difficult to attain good economic efficiency without central government participation.

As regards payments and the payment system, there is an intrinsic conflict between, on one hand, low costs and, on the other, low risks. This means finding a balance between the two that also fully utilises modern technology. Finding this balance is a matter of achieving economic efficiency. However, the exact point of this balance changes apace with technological developments.

The payment market is heavily concentrated

What characteristics of the market are we talking about, then, that mean that central governments, via central banks, must play a central role on the payment market? This question mainly focuses on the fact that the payment market is often heavily concentrated. This means that it is only possible for a monopoly or a few dominant companies to have functioning operations in the market. Perhaps the foremost example of this is the card market, which is dominated by two international companies – Visa and Mastercard.

Part of the reason for this is that the production of payment services requires major investments in systems with high fixed costs. However, once this has been done, the cost for each payment is very low. There are thus economies of scale here – the more a certain payment service is used, the cheaper it becomes. In addition, what are known as network effects also exert an influence. This means that the benefit from using or accepting a payment service increases as greater numbers of others do so too. For example, nobody wants a mobile payment application that few retailers accept, and neither are retailers interested in accepting mobile payments that very few customers use. The combination of economies of scale and network effects thus means that the payment market is often heavily concentrated.

Central government operates, monitors and regulates

In those areas where the payment market is heavily concentrated, central government usually becomes involved by running part of the operations itself, as well as by monitoring and regulating the part that is run by the market. This is necessary as the concentration that is needed to take advantage of economies of scale and network effects can also lead to deficiencies in efficiency and security. When competition is weak, market participants can exploit their power as monopoly by setting excessive prices for services, at the same time as it becomes difficult for new players to become established on the market. The concentration also creates risks, as any shock to the system will affect large parts of the market so that payments cannot be implemented.

Difficult to see what a payment costs

One problem on the payment market is that we consumers are unable to see how much it costs to make payments in different ways. Payment services often appear to be free for the customer. In such cases, the cost for payment is borne by the trader alone, who, in turn, spreads the cost out by setting higher prices for all goods. This makes it more difficult for the customer to choose the cheapest way to pay. To obtain information on the costs of various payments and thereby create better support for the assessment of how well pricing is functioning, the Riksbank creates what are known as cost studies.

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Updated 31/03/2023