Quantifying Equilibrium Network Externalities in the ACH Banking Industry

We seek to estimate the causes and magnitudes of network externalitiesfor the automated clearinghouse (ACH) electronic payments system, usinga panel data set on individual bank usage of ACH. We construct anequilibrium model of consumer and bank adoption of ACH in the presenceof a network. The model identifies network externalities fromcorrelations of changes in usage levels for banks within a network, fromchanges in usage following changes in market concentration or sizes ofcompetitors and from adoption decisions of banks outside the networkwith small branches in the network, and can separately identify consumerand bank network effects. We structurally estimate the parameters of themodel by matching equilibrium behavior to the data, using simulatedmaximum likelihood and a data set of localized networks, and use abootstrap to recover confidence intervals. The parameters are estimatedwith high precision and fit various moments of the data reasonably well.We find that most of the impediment to ACH adoption is due to largeconsumer fixed costs of adoption. The deadweight loss from the networkexternality is moderate: the optimal number of ACH transactions is about16% higher than the equilibrium level.