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Efficient Pricing of Large Value Interbank Payment Systems

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  • Holthausen, Cornelia
  • Rochet, Jean-Charles

Abstract

This paper studies the pricing of large-value payment systems and its influence on the way commercial banks route their payments. It is shown that the optimal pricing scheme for a public monopoly system involves quantity discounts in the form of a decreasing marginal fee. This is also true when the public system competes with a private system characterized by a lower marginal cost. However in this case, optimal marginal fees in the public system are lower than its marginal cost, and fixed fees have to be levied. We show that if the Central Bank wants the public system to be used by a significant proportion of the banks, this may be incompatible with full cost recovery. We also study the case of competition between several public systems. The structure of the optimal tariff depends on the willingness of Central Banks to allow by-pass.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0093
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 7 (October)
Pages: 1797-1818

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:7:p:1797-1818

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  3. Freixas, Xavier & Parigi, Bruno, 1998. "Contagion and Efficiency in Gross and Net Interbank Payment Systems," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 3-31, January.
  4. Hancock, Diana & Humphrey, David B. & Wilcox, James A., 1999. "Cost reductions in electronic payments: The roles of consolidation, economies of scale, and technical change," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 391-421, February.
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  8. Charles M. Kahn & William Roberds, 1997. "Payment system settlement and bank incentives," Proceedings 537, Federal Reserve Bank of Chicago.
  9. Furfine, Craig H & Stehm, Jeff, 1998. "Analyzing Alternative Intraday Credit Policies in Real-Time Gross Settlement Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 832-48, November.
  10. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826.
  11. 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.
  12. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
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Cited by:
  1. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
  2. Ben R. Craig & Falko Fecht, 2011. "Substitution between net and gross settlement systems: A concern for financial stability?," Working Paper 1132, Federal Reserve Bank of Cleveland.
  3. Bolt, Wilko & Humphrey, David, 2005. "Public good issues in TARGET: natural monopoly, scale economies, network effects and cost allocation," Working Paper Series 0505, European Central Bank.
  4. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada.
  5. Tore Nilssen, 2011. "Risk externalities in a payments oligopoly," Portuguese Economic Journal, Springer, vol. 10(3), pages 211-234, December.
  6. Wilko Bolt & David B. Humphrey, 2005. "Public Good Aspects of TARGET: Natural Monopoly, Scale Economies, and Cost Allocation," DNB Working Papers 036, Netherlands Central Bank, Research Department.

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