The Payment System

Abstract

The payment system is a highly strategic infrastructure displaying strong network externalities and scale economies, and can thus be seen as a natural monopoly. Natural monopolies can alternatively be internalized by the public sector, externalized to some private contractor, or fully liberalized. Historically, liberalization has actually been the preferred option in many contexts (e.g. late medieval Venice and nineteenth-century United States), but this solution has constantly proved unstable, to the point of forcing reluctant authorities to eventually embrace nationalization. In other contexts (e.g. nineteenth-century Europe), the natural monopoly was out-contracted to a private monopolist, subject to a number of conditions. Today, state-owned and privately-owned payment systems generally coexist, but only by virtue of government policies expressly aimed at fostering competition.