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Scale economies, scope economies, and technical change 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 contributed to the overall reduction in costs throughout the 1990s.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2002-57.

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Date of creation: 2002
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Handle: RePEc:fip:fedgfe:2002-57

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Related research
Keywords: Payment systems ; Technology ; Electronic funds transfers;

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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.:
  1. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 501-520, December. [Downloadable!] (restricted)
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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. Hancock, Diana & Humphrey, David B., 1997. "Payment transactions, instruments, and systems: A survey," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1573-1624, December. [Downloadable!] (restricted)
  6. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  7. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November. [Downloadable!] (restricted)
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  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:
(explanations, 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.)

  1. Guido K. Schaefer, . "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW. [Downloadable!]
  2. Ottoz Elisabetta & Di Giacomo Marina, 2008. "Diversification strategies and scope economies evidence from a sample of Italian bus transport providers," Department of Economics Working Papers 200802, University of Turin. [Downloadable!]
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