Significant debate has occurred over the last several decades regarding whether there is adequate competition and innovation in the non-recurring consumer payments segment of the banking industry. For instance, the Department of Justice and some retailers have sued Visa and MasterCard for limiting competition and innovation. There has also been a host of high profile product "failures" in the consumer e-payment market place (e.g., e-cash and smart card products). Meanwhile, some researchers have suggested that consumers are irrational and unresponsive to marketplace incentives (for instance, see Ausubel (1991)). Despite anecdotal reports which imply to some that "there's something wrong" in this market, we find evidence that there is increasing competition, strong innovation, and customers who respond to market stimuli in the non-recurring consumer payments market. The paper discusses three areas: (1) demand and supply-side factors influencing change, (2) a framework for evaluating and predicting innovation and substitution in this market, and (3) the implications of changing technology, governance, business practice, and the formation of "multi-purpose networks" in electronic payment networks on competition policy. First, this paper provides strong support for Hirschman (1982)'s "bundle of attributes (consumer rationality)" theory. It also provides strong evidence that there are important supply-side phenomena such as differences amongst community and national banks and the importance of market-size which influence market incentives. Second, the paper proposes the beginning of a model of substitution and innovation, which helps not only to explain but also predict where innovations might or might not occur. It also helps to explain which types of firms might have an advantage in pioneering these innovations, and why. The article goes on to apply this model, discussing changes in consumers' propensity to use credit cards, debit cards, electronic benefits transfer cards, e-cash, stored value, and smart cards. Third, drawing on well known academic literature, this paper argues that efforts by the public sector to influence the practices of incumbents might actually adversely impact innovation by reducing the expected pay-outs that are currently motivating significant investment in innovation by non-traditional providers. In this vein, the paper analyzes several consumer e-payment infrastructures currently in place - some owned by banks, some owned by independent third parties and provided to banks, and some owned by non-banks - which provide a platform for innovation by both financial institutions and non-traditional providers. The presence and viability of these alternative payment platforms are making these markets increasingly competitive and contestable, at least at the margins. We assert that, at a minimum, the ongoing formation of what we call "product-independent payment networks" currently underway, as documented by this study, may require anti-trust authorities to reconsider how they define the relevant market for evaluating competition policy objectives
