An empirical study of organizational reform of China's bankcard industry and policy recommendations

Abstract

Purpose: The purpose of this paper is to empirically examine the performance of China's bankcard market during 1999-2005 when China's local card association - China UnionPay (CUP) was established in 2002, which integrated many small closed payment systems into an open payment system. Design/methodology/approach: Difference-in-difference (DID) estimator and fixed effects model are employed to assess the potential influences of the establishment of CUP on the performance of China's bankcard businesses. In implementing DID method, it is possible to view the banks (payment entities) that are members of the CUP as the "treatment group" and others outside the CUP as the "reference group", and introduce the "CUP member" dummy variable. Simultaneously, the paper introduces the "incident year" dummy variable labeling 2002 and afterward since the CUP was founded. Therefore, effects of establishing the CUP on the performance of its members can be simply obtained by estimating the coefficient of the interaction term between the "CUP member" dummy variable and "incident year" dummy variable in the estimation equation. The data used in this paper come from the official CUP website and Chinese Financial Statistic Almanac (2000-2006). Findings: The empirical evidence shows that from the micro-perspective of maximizing platform transaction volume, the "closed to open" organizational reform, i.e. introducing the CUP into the market decreased rather than increased the performance of CUP's members. The fundamental reason for this was imperfections in the market's internal management mechanism and multi-party profit distribution mechanism, which led to dislocation and distortion in the positioning and function of the card association-CUP. Originality/value: Different with most other studies that are pure theoretical ones, this study represents one of the few studies that use empirical methods to investigate two-side markets. © Emerald Group Publishing Limited.