On the Rise of Payment Firms

Payment firms have experienced an exceptional growth over the past decade, with payment firms’ market capitalization now exceeding the combined market capitalization of all banks in the U.S. We show that stock returns of payment firms are strongly correlated with stock returns of ECommerce firms. Using three million observations at an online retailer, we provide micro-level evidence on the importance of payment firms for E-commerce purchases. When a customer’s preferred payment type is not seamlessly available, approximately a quarter of customers abandon the purchase instead of switching to a different payment type. We document this strong clientele effect both for credit cards, PayPal, as well as Buy-Now-Pay-Later (BNPL) products. Our results suggest that – although E-Commerce firms have access to many payment types – each payment firm has a significant bargaining power vis-à-vis E-Commerce firms.