Cost Efficiency in the Retail
Payment Networks: First Evidence
from the Italian Credit Card System

Nel presente lavoro viene condotta un'analisi di efficienza di costo per il circuito carte di credito, nell'ambito del cd. stochastic frontier approach, prevedendo controlli di robustezza sui risultati ottenuti. L'indagine intende offrire spunti di riflessione circa: eventuale presenza di x-inefficienza e possibili cause; caratteristiche tecnologiche dell'industria; implicazioni di policy. Per l'Italia, emerge che l'industria delle carte è in grado di beneficiare di rilevanti economie di scala, ma al crescere del network (in termini di transazioni gestite) gli intermediari tendono ad allontanarsi dalla frontiera efficiente di costo. Inoltre, la struttura dei costi aziendali risulta fortemente condizionata dagli accordi di "rete".

In this paper, a parametric cost frontier for the credit card market is specified ("stochastic frontier approach" - SFA) and robustness checks of the main results are performed. The aim is to provide some clues to: the x-inefficiency problem; the main technical characteristics of the industry; policy implications. The Italian case study indicates that: the credit card industry could benefit from significant increasing returns to scale, but the bigger the network (in terms of transactions handled) the more intermediaries tend to veer away from their efficient cost frontier. Moreover, the cost structure borne by firms is strongly dependent on intra-network agreements. [JEL Code: L11, G2, L8]

*guerino.ardizzi@bancaditalia.it
I am particularly grateful to David B. Humphrey for his helpful suggestions and comments on a preliminary version of the paper. I would also like to thank Paolo Angelini, Mark Armstrong, David Bal- to, Gerardo Coppola, Riccardo De Bonis, Jean-Charles Rochet, Stefano Siviero, Jean Tirole, Luigi Ventura and two anonymous referee for their useful comments. I have also benefited from comments by participants at the Conference on The Economics of Payment Networks, IDEI Université de Toulouse I, June 10th and 11th 2002 and from suggestions on a previous version of the paper made by par­ ticipants at the seminar presentation held at the Research Department of the Bank of Italy on January 10th 2001. All the remaining errors are mine. The views here- in are personal and do not involve the responsibility of the Bank of Italy.