By Fumiko Hayashi and Zhu Wang
First version: December 2008
This version: July 2009
RWP 08-14
Research Division
Federal Reserve Bank of Kansas City

This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew rapidly until the mid 1980s and then declined sharply. We construct a theoretical model to explain the industry shakeout, which shows that a major product innovation — introducing the point of sale debit function in the mid-1980s — played an important role in driving the network consolidation. The theoretical predictions are tested and confirmed using a novel dataset on network entry, exit, size, location, ownership and product choices. Unlike previous studies, we found little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout.