Effects of Payment Interoperability and Noninteroperability on Platform Competition

Business platforms exploit noninteroperable payment systems to lock in users and gain an unfair competitive advantage. Payment noninteroperability infringes the users’ payment freedom, imposes additional costs, and hinders the healthy development of the platform service supply chain. Therefore, some countries’ governments have recently promoted payment interoperability. We develop a Hotelling model to explore the competitive mechanisms of two platforms under payment interoperability or noninteroperability scenarios. The model incorporates consumer payment adoption level, payment misfit cost, and payment network effect, considering users’ single/multihoming behaviors. We find that the growth of the payment misfit under the noninteroperable scenario increases both platforms’ profits in single-homing mode, whereas it decreases the superior platform's profitability in multihoming mode. The increase of the same-side payment network effect reduces both platforms’ profits under the interoperable scenario but benefits the superior platform in multihoming with noninteroperability. The analysis of extensive model reconfirms that interoperability reduces product prices, increases consumer participation, and eliminates the excess monopoly profits from payment restrictions. Surprisingly, the traditional competitive bottleneck findings are reversed when we consider payment adoption level. The single-homing side is not always subsidized, and the multihoming side is not always at a disadvantage.