.

The oligopolical structure of Payment Networks

The word oligopoly is derived from the Greek words oligos meaning few and
polein meaning to sell. Thus, an oligopolical structure of payment networks is a
network of payments systems where the participating networks are small in size but
occurring in large numbers. Consequently, no one player will have a domineering
effect on the market. However, it is the players themselves who dominate
collectively. Such a structure is created due to the significant barriers of entry into
the particular industry. Finally, the participants will be seen to be offering a
homogenous or a differentiated service.

Advantages of the oligopolical structure

The oligopolical structure will have some advantages accruing to both the consumer
of the service as well as to the supplier of the service. These advantages are
discussed briefly below:

1. Large profits
An oligopoly does not have as much competition as is found in a perfect
competition market. Consequently, profits made by participants in an
oligopolical structure will tend to be higher. This is made more apparent
because demand for the services of payment networks is getting higher and
higher.
2. Better quality service
Because an oligopoly is made up of a number of small participants, they will
tend to compete in swaying customers to want to get their products.
Consequently, they differentiate their products from what their competitors
are charging. This culminates in the provision of a better quality service to
the customer.
3. Security
An oligopolical structure forces the participants to provide a safe payments
system. A safe payments system benefits all the players in the economy and,
this ultimately makes the payment system more efficient.
4. Choice
An oligopoly has a relatively greater number of payment networks. This is
good because it affords the user the benefit of choosing the preferred
network. Choice is one of the essential tenets of the capitalist society that we
enjoy.
5. Service information dissemination
The dissemination of information is enhanced when the participants compete
and try to woo as many clients as possible to them.

Disadvantages of the oligopolical structure

The oligopolical structure will also have some disadvantages accruing to either the
consumer of the service and/or to the supplier of the service. These disadvantages
are discussed briefly below:

1. Complacence
The participants will suffer from complacency over time. Complacency is
brought about by the realization that their services will have takers
regardless of the amount of effort taken to woo customers. This emanates
from the realization that there are only a few players on the market.
Complacence is not good as it depletes the inertia to become innovative and
creative in product development.
2. Limited choice
Although the oligopolical structure affords some choice, it does not give a
large and satisfactory amount of choice to the network user. On the contrary,
in a perfectly competitive market there are many suppliers and consumers
who have a wider choice. Thus the existence of a limited choice has been
cited by many authors as the major weakness found in an oligopolical
market.
3. Niche market difficulty
It has been cited by many authors that a new entrant in an oligopolical
market would need to work harder to find a niche market for themselves
because the older players may have entrenched themselves in the market
already. This makes it difficult for new players to gain a foothold in the
market. In the payments network it is indeed a formidable task to try and
compete with players like Master Card and Visa Card.
4. Price taker
A new entrant into the payments network would need to be a price taker as
opposed to being a price maker. This means that the new entrant will need to
survive on profits generated when the fixed market price is adopted. The
reason is that in an oligopoly prices are set by the payment networks
collectively. The price thus becomes a fixed price that participants would
either have to accept or reject at their peril.
5. Duplication
In situations where an oligopoly exists we tend to have duplication of both
services and infrastructure. Each network participant will do its own
advertising and sales promotion and this category of costs can be quite
massive. Further, the infrastructure that is required in order to operate will
need to be replicated by each payment network in order to make the services
available to the user.

Proposed changes

1. Blockchain
The Blockchain based system may need to be adopted in order to alleviate
some of the shortcomings brought about by the shortcomings of the current
 system like steep cost in terms of fees charged. However, since Blockchain is
still in its infancy perhaps we need to make do with the current setup.
2. Innovativation
The current system lacks innovativeness and the challenge is to ensure that
new products and services need to be continually developed in the payments
network system. The financial sector just like any other sector in the
economy cannot afford to be complacent in the wake of trying to make a
better world for mankind and the future generations.

Reference

https://www.federalreserve.gov/faqs/cat_21427.htm

https://www.frbservices.org/files/communications/pdf/research/2013 payments
study summary.pdf

http://thenextgalaxy.com/the-advantages-and-disadvantages-of-ogligopoly/

Question 2

Review the three scenarios for retail payments in Bitcoin described in session
5. Discuss which one you believe will be the most prevalent outcome in retail
payment using cryptocurrency in five years. Support your arguments based
on value propositions to consumers and merchants and learning from other
payment networks.

Introduction

In answering this question the writer will identify the three scenarios for
retail payments in Bitcoin as described in session 5. From these three the
writer will chose one that is believed to be the most prevalent outcome in
using cryptocurrency in five years. Relevant arguments in support of this
notion are laid out.

Three scenarios for retail payments in Bitcoin

The three scenarios for retail payments in Bitcoin are:

Conventional settlements system

Bitcoin payments processing system

 Off-chain network payment processing systems

The most prevalent outcome in five years

The most prevalent outcome in five years is that Bitcoin payments system,
perhaps supported by the off-chain network payment processing systems is
the way of the future.

Arguments to support

1. Bitcoin has relatively lower costs.

2. Lower exposure to volatility.

3. It is relatively more difficult to acquire bitcoins.

4. Bitcoin uses a technical complex method of storing bitcoins.

5. There is no recourse against the merchant once transaction is

effected.

6. Bribing is made difficult.

Conclusion

Reference

https://www.federalreserve.gov/faqs/cat_21427.htm

http://thenextgalaxy.com/the-advantages-and-disadvantages-of-ogligopoly/

https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-
services/deloitte-uk-payments-disrupted-2015.pdf