Network Effects in Retail Payments Market: Evidence from Individuals

Abstract

This paper evaluates empirically the effect of network externalities on individual behavior in the Russian retail payments market. Specifically, the effects of direct and indirect network externalities for cardholding and usage probabilities are examined. Using a representative sample of 1500 individuals across Russian regions, this paper finds significant robust evidence of a positive association between the degree of both types of network externalities and individuals’ activity in the Russian retail payments market. Results are economically significant: a standard deviation increase in network effects leads to a 2.5–4 percentage points increase in the probability of cardholding and usage. The findings suggest a need to account for network effects that play an important role in the payment behavior before implementing any payment stimulating programs in Russia aimed at cardholders or users.