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Scope and scale economies in Federal Reserve payment processing

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Author Info
Robert M. Adams
Paul W. Bauer
Robin C. Sickles

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Abstract

In the past decade, the U.S. economy has witnessed a tremendous surge in the usage of electronic payment processing services and an increased importance of the firms that provide these services. The payments industry has also undergone changes in cost structure with the introduction of new technology. Unfortunately, data on the private provision of payment processing services are not available. However, the Federal Reserve provides similar services and collects data on its own provision of payments processing, offering an opportunity to gain insights into the cost structure of payments processing. In this paper, we estimate the scope and scale economies and the technical change in the Federal Reserve's provision of payments processing from 1990-2000. We find considerable scale economies and evidence of some scope economies for the provision of automated clearinghouse, fedwire, and book-entry services no matter whether we specify a separable quadratic or a translog cost function. In addition, we find that disembodied technical change also attributed to the overall reduction in costs through the 1990s.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0213.

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Date of creation: 2002
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Handle: RePEc:fip:fedcwp:0213

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Keywords: Federal Reserve banks - Costs Payment systems

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. 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.
  5. David C. Wheelock & Paul W. Wilson, 1997. "New evidence on returns to scale and product mix among U.S. commercial banks," Working Papers 1997-003, Federal Reserve Bank of St. Louis. [Downloadable!]
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  6. Evans, David S & Heckman, James J, 1984. "A Test for Subadditivity of the Cost Function with an Application to the Bell System," American Economic Review, American Economic Association, vol. 74(4), pages 615-23, September. [Downloadable!] (restricted)
  7. Evans, David S & Heckman, James J, 1986. "A Test for Subadditivity of the Cost Function with an Application to the Bell System: Erratum," American Economic Review, American Economic Association, vol. 76(4), pages 856-58, September. [Downloadable!] (restricted)
  8. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April. [Downloadable!] (restricted)
  9. 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.
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  10. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12. [Downloadable!]
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Cited by:
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  1. David Humphrey & Magnus Willesson & Ted Lindblomand & Goran Bergendahl, 2003. "What does it Cost to Make a Payment?," Review of Network Economics, Concept Economics, vol. 2(2), pages 159-174, June. [Downloadable!]
  2. Christine Beijnen & Wilko Bolt, . "Size Matters: Economies of Scale in European Payment Processing," FIW Working Paper series 013, FIW. [Downloadable!]
  3. Wilko Bolt & David Humphrey, 2005. "Public good issues in TARGET - natural monopoly, scale economies, network effects and cost allocation," Working Paper Series 505, European Central Bank. [Downloadable!]
  4. 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. [Downloadable!]
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