University: University of Sydney
Supervisor: Maxwell Stevenson / Maurice Peat

Research Question: 

• What is the dynamics of a two-sided bill payment market?

Research Motivation:

The bill payments market is rapidly changing. The shift from paper to an electronic oriented method of transacting presents challenges for merchants who face differing costs for processing a transaction that is dependent on the payment instrument chosen by their consumers’.

The key drivers of transaction costs are yet to be defined. Furthermore, the market for payments is largely theoretical and only examines the two-sided nature of the payments market. The focus is on the interchange fee set by the payment platform. A two-sided market is characterised as a platform providing goods and services to two distinct end-users with prices set for each type of end-user. The Bill Payment market is a two-sided market. There has been no satisfactory models developed that describe the dynamics of a two-sided market, let alone the four party bill payment system common in Australia, of which BPAY, Visa and MasterCard are examples of such systems.

This Ph.D seeks to describe the dynamics of the bill payment market through modelling the network effects within the two-sided market. More specifically, this model will describe a four party bill payment system, within a two-sided market, that incorporates the demand of merchants, consumers and their respective banks for joining the platform.

High-level Research Design:

This research be accomplished by modelling the network effects inherit in the two-sided nature of the market between consumers and merchants with proprietary data. The data to be used in this study will be provided by BPAY, and is primarily in the form of transaction data. BPAY has approximately 30% share of the bill payment market and its share continues to grow by approximately 21 million transactions per annum.

A key limitation of previous literature is the unavailability of proprietary data. This is reflected in the lack of empirical studies in the literature.

Network effects refer to the fact that the value of a particular platform to an end user increases as the number of end-users on the other side of a transaction increases. For example, in relation to the payments market, the more merchants offer a particular payment instrument, the higher the value that consumers place on being part of that platform and will be induced to join the platform. With more consumers joining the platform, the higher the value merchants place in offering the payment method. This results in an increase in the merchant demand for joining the platform.

The model will then be calibrated utilising advances in the area of neural network and support vector machine analysis, in order to develop price and demand elasticities of merchants and consumers. Furthermore, simulation analysis will then be undertaken as part of a sensitivity analysis that reflects possible changes in the market for payments, such as changes in the interchange fee guidelines imposed by the Reserve Bank of Australia or to forecast the changes in transaction volume of a platform within the estimated four party bill payment model framework.