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The importance of payments-driven revenues to franchise value and in estimating bank performance

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  • Tara Rice
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    Abstract

    This paper examines how the production of payment services impacts the franchise value of banks. It also explores whether analysis are incorrectly measuring the performance of the banking sector and failing to realize the full importance of payments-driven revenues to banks. In initial empirical analysis, we find limited evidence to suggest that higher payments-driven revenues are associated with higher franchise value. We find, also, that estimates of productive efficiency change dramatically for a small number of banks heavily involved in payments services. We find evidence to suggest that traditional efficiency estimates that exclude nontraditional bank activities inaccurately measure the relative performance of some types of BHCs. We infer from these results that estimation of efficiency must take into account the different mix of traditional and nontraditional activities in which banks engage.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Chicago in its journal Emerging Issues.

    Volume (Year): (2003)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:fip:fedhei:y:2003:n:eps-2003-1d

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    Keywords: Payment systems ; Bank management ; Bank holding companies;

    References

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    1. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Sujit Chakravorti & Emery Kobor, 2003. "Why invest in payment innovations?," Emerging Issues, Federal Reserve Bank of Chicago, issue Jun.
    3. Edward J. Green & Richard M. Todd, 2001. "Thoughts on the Fed's role in the payments system," Annual Report, Federal Reserve Bank of Minneapolis, issue Apr, pages 6-27.
    4. Tara Rice & Kristin Stanton, 2003. "Estimating the volume of payments-driven revenues," Emerging Issues, Federal Reserve Bank of Chicago.
    5. Allen Berger & Diana Hancock & Jeffrey Marquardt, 1996. "A framework for analyzing efficiency, risks, costs and innovations in the payments system," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 696-732.
    6. Paul W. Bauer & Gary D. Ferrier, 1996. "Scale economies, cost efficiencies, and technological change in Federal Reserve payments processing," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 1004-1044.
    7. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 16-33.
    8. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
    9. Loretta J. Mester, 1987. "Efficient production of financial services: scale and scope economies," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-25.
    10. Rebecca S. Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
    11. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-70.
    12. Terri Bradford & Matt Davies & Stuart E. Weiner, 2002. "Nonbanks in the payments system," Payments System Research Working Paper PSR WP 02-02, Federal Reserve Bank of Kansas City.
    13. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
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    Cited by:
    1. Cathy Lemieux, 2003. "Retail payments innovations and the banking industry," Emerging Issues, Federal Reserve Bank of Chicago.
    2. Catharine Lemieux, 2003. "Network vulnerabilities and risks in the retail payment system," Emerging Issues, Federal Reserve Bank of Chicago.

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