The Economic Value of Network Externalities in an Electronic Inter-Bank Payment Network : An Empirical Evaluation

Theoretical work ascribes a positive value to the externalities arising from the adoption of network technologies. However, few studies have attempted to quantify the business value of these externalities. As a result, relatively little is known about the economic impact of externalities on firms that adopt network technologies. In this study, we investigate the value of an electronic inter-bank payment network in terms of its effect on the reserve management performance of commercial banks. Performance is measured by the opportunity and penalty costs generated by balances on the reserve account that commercial banks hold at the central bank. We propose that the electronic inter-bank payment network enhances banks’ reserve management performance (i.e., reducing opportunity and penalty costs) by providing more timely information on deposits and withdrawals affecting the banks’ reserve accounts. Technology impact is characterized as an initial stand-alone effect and a network externalities effect as more banks join the network. To evaluate the economic value of the technology impact, we analyze data from the implementation of an electronic inter-bank payment network adopted by all Mexican commercial banks. We find that early adopters of the electronic network, with a low ratio of electronic to overall operations, experience increasing opportunity and penalty costs. However, as additional banks join the network, the ratio of electronic operations increases, and costs decrease. After all banks have adopted the electronic network, we observe a reduction equivalent to 9.9% of each bank’s opportunity and penalty costs. The aggregated savings for all banks equal $5.3 million dollars for the 6 months following the technology adoption. Overall, the electronic inter-bank payment network project provides a significant positive net present value. Our findings provide support for the network externalities hypothesis. They also suggest an initial negative performance impact when there is concurrent use of old and new network technologies.