Entry of FinTech Firms and Competition in the Retail Payments Market

Abstract

Abstract We investigate the effects of entry of financial technology (FinTech) based firms on competition in the retail payments market. With a model of two‐sided market with vertical restraints, we derive the following results. When only the entry of a vertically integrated (or end‐to‐end service) provider is allowed, either all merchants opt for multi‐homing or no entry occurs, regardless of the regulatory requirement. On the other hand, if the entry of a downstream‐only (or front‐end service) provider is allowed, a partial multi‐homing equilibrium could emerge under certain conditions, in which the entry of an end‐to‐end service provider does not occur. Without regulation, however, the vertically integrated incumbent does not voluntarily provide the back‐end service to the entrant in general. This suggests the need for proper regulatory measures to reach a socially desirable outcome from the new entry in the retail payments market.

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