Costs of Typical Firm

Characteristics

Current situation

Future trend

Main fixed costs

The main fixed costs in POS-lending market that many big players have are employees’ wages, cost of money, software and hardware expenses, investments in equipment and facilities, rent, advertising, contracts with paying terminal owners. Usually, banks which have long history and experience in banking operations enter POS-loans market. So, fixed costs are not a great hurdle for a bank to enter the market.

One of the key issues that will turn up to be an intangible asset is shaping strong relationships with retail chains.

In the nearest future there will be an option to cut fixed costs by eliminating employees’ wages. This will happen because banks’ representatives will be replaced by store sellers that will be paid be retail chain.

Main variable costs

As far as banks are not manufactures they do not have any output. This means that the variable costs equal to zero.

Economy of scale (scope)

Concerning economy of scale, banks in POS-lending market cannot achieve this because they have to be presented in all of the retail chains in order to sell as more loans as possible. This is one of the most important conditions retailers impose on banks. As for the software costs, bank pays for a program once, but it can utilize it in every point of sale. Thus, there are some traces of economy of scale in the market analyzed.

Regarding economy of scope, banks in POS-lending market do not provide differentiated service. So, no economy of scope can be observed.

Due to the specifics of the market practically nothing will change.

Are there minimum efficient scale (MES)?

What is the efficient growth mode?

As far as POS-lending market simply lacks economy of scale under which efficient scale occurs, we cannot observe MES.

Sensitivity of costs to capacity utilization

Due to the fact that fixed costs will remain the same with the decrease/increase in capacity, costs are not sensitive to capacity utilization.

Due to the specifics of the market practically nothing will change. Bank is not a plant and will never turn out to be one.

Behavior of marginal cost

In POS-lending market we should interpret marginal costs in terms of cost changes of money if we provide a customer with one additional loan. In case a bank gets the money from a depositor and provides with this money a POS-loan, the cost of money is initially a fixed percent. This percent will always remain the same notwithstanding the fact whether a bank provides one loan more.

We can infer that marginal cost line is straight.

Initially nothing will change in the future except the rate under which a bank gets money.

Exit barriers

The costs associated with exit barriers are low because the only costs are costs associated with contracts with payment terminals. As POS-loans providers are subunits of a big bank, the exit losses are insignificant.

Moreover, if a bank needs urgent exit from market, it can sell its loan portfolio to another bank without significant losses.

As far as we can observe an increase competition in the market, retailer may impose stricter requirements for banks. For example, banks will be obliged to have long-term contracts with retailers. This will simultaneously increase exist costs.