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The effect of pricing on demand and revenue in Federal Reserve ACH payment processing

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  • Joanna Stavins
  • Paul W. Bauer
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    Abstract

    Because the automated clearinghouse (ACH) has been found to have lower social costs than paper checks, the Federal Reserve has been promoting more widespread use of ACH by lowering ACH processing fees. In this paper we have obtained the first numerical estimates of ACH demand elasticities, a measure of the responsiveness of ACH demand to price changes. In order to determine how robust the estimates are, various methods were employed to estimate the demand elasticities. ; Our results show that the volume of ACH items processed by the Federal Reserve does respond to changes in per-item fees. We find that demand for ACH credit is elastic, while demand for ACH debit is inelastic. The difference most likely arises from high customer resistance to automatic payment deduction and from low market penetration of that service among companies. Demand for origination was found to be somewhat more elastic than demand for receipt. We then examined how volume growth initiated by a price cut affected unit costs. Given the relatively large scale economies found for ACH, volume growth leads to lower unit costs. However, to outweigh revenue lost as a result of a price decline, ACH volume would have to increase by an amount greater than our estimates indicate is likely. Consequently, a decline in per-item ACH fees would likely lead to lower net revenues.

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    File URL: http://www.clevelandfed.org/research/FSRG/fsrg0197.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Cleveland in its series Financial Services working paper with number 97-01.

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    Date of creation: 1997
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    Handle: RePEc:fip:fedcfs:97-01

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    Related research

    Keywords: Clearinghouses (Banking);

    References

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    1. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
    2. Bauer, Paul W & Ferrier, Gary D, 1996. "Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1004-39, November.
    3. Scott E. Knudson & Jack K. Walton II & Florence M. Young, 1994. "Business-to-business payments and the role of financial electronic data interchange," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 269-278.
    4. Paul W. Bauer & Diana Hancock, 1995. "Scale economies and technological change in Federal Reserve ACH payment processing," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 14-29.
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