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Payment systems efficiency, policy approaches, and the role of the central bank

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  • Khiaonarong, Tanai

    (Bank of Finland Research)

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    Abstract

    Central bank spending on the operation of inter-bank funds transfer systems may range from below one million to nearly a billion US dollars annually. This paper examines how such costs are incurred and recovered to pursue payment systems efficiency in different countries and under alternative policy approaches. The key findings are as follows. First, strong scale economy effects were found, with unit costs comparatively lower in retail than large-value payment services, while subsidisation was also evident in a survey of thirty-one payment systems. Second, the minimalist approach was more efficiency enhancing than the competitive and public service policy alternatives, due to higher cost-reducing effects, stronger private sector involvement, and the avoidance of the central bank’s conflicting role as regulator and service provider in the payments system. And third, regulatory and financial innovations, in addition to technological means, are found to be equally important policy tools that the central bank may adopt to improve the technical and economic efficiency of payment systems.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0301.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2003.

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    Length: 72 pages
    Date of creation: 15 Jan 2003
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2003_001

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: payment systems; efficiency; cost; revenues; innovations;

    References

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    1. Goodhart, C A E, 1987. "Why Do Banks Need a Central Bank?," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 75-89, March.
    2. repec:fth:bfdipa:17/00 is not listed on IDEAS
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    4. Leinonen, Harry, 2000. "Re-engineering Payment Systems for the E-world," Research Discussion Papers 17/2000, Bank of Finland.
    5. repec:fth:bfdipa:6/2000 is not listed on IDEAS
    6. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers sp52, Financial Markets Group.
    7. repec:fth:bfdipa:16/99 is not listed on IDEAS
    8. Jeffery M. Lacker & Jeffrey D. Walker & John A. Weinberg, 1999. "The Fed's entry into check clearing reconsidered," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-32.
    9. 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.
    10. Allen Frankel & Jeffrey Marquardt, 1983. "Payments systems: theory and policy," International Finance Discussion Papers 216, Board of Governors of the Federal Reserve System (U.S.).
    11. 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.
    12. Ed Stevens, 1998. "Non-par banking: competition and monopoly in markets for payments services," Working Paper 9817, Federal Reserve Bank of Cleveland.
    13. Clyde Goodlet, 1997. "Clearing and settlement systems and the Bank of Canada," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 49-64.
    14. Jeffrey M. Lacker, 1993. "Should we subsidize the use of currency?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-73.
    15. Bernell K. Stone & George C. White, 1986. "Scenarios for the future of the ACH," Economic Review, Federal Reserve Bank of Atlanta, issue Apr, pages 29-49.
    16. Kjersti-Gro Lindquist, 2002. "The Effect of New Technology in Payment Services on Banks' Intermediation," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-2, International Conferences on Panel Data.
    17. Pauli, Ralf, 2000. "Payments Remain Fundamental for Banks and Central Banks," Research Discussion Papers 6/2000, Bank of Finland.
    18. John A. Weinberg, 1994. "Selling Federal Reserve payment services: one price fits all?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-24.
    19. Bauer, Paul W. & Hancock, Diana, 1993. "The efficiency of the Federal Reserve in providing check processing services," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 287-311, April.
    20. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland.
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    Citations

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    Cited by:
    1. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    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.

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