Quantifying Equilibrium Network Externalities in the ACH Banking Industry

Abstract

We seek to estimate the causes and magnitudes of network externalities for the automated clearinghouse (ACH) electronic payments system, using a panel data set on individual bank usage of ACH. We construct an equilibrium model of consumer and bank adoption of ACH in the presence of a network. The model identifies network externalities from correlations of changes in usage levels for banks within a network, from changes in usage following changes in market concentration or sizes of competitors and from adoption decisions of banks outside the network with small branches in the network, and can separately identify consumer and bank network effects. We structurally estimate the parameters of the model by matching equilibrium behavior to the data, using simulated maximum likelihood and a data set of localized networks, and use a bootstrap to recover confidence intervals. The parameters are estimated with high precision and fit various moments of the data reasonably well. We find that most of the impediment to ACH adoption is due to large consumer fixed costs of adoption. The deadweight loss from the network externality is moderate: the optimal number of ACH transactions is about 16% higher than the equilibrium level.