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Do Consumers Pay for One-Stop Banking?

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  • Lawrence Pulley
  • Allen Berger
  • David Humphrey

Abstract

The authors use a specialized revenue function to estimate the revenue economies of scope and determine whether banks providing a broad mix of services are able to capitalize on the potential savings in transaction costs afforded their customers. Bank production costs and consumer consumption expenses are thought to be reduced through relationship banking strategies that cultivate one stop shopping for financial services. Much work has been done on estimates of production synergies that correspond to cost economies of scope. The complementarities in the consumption of bank services is potentially as important for bank profitability but it has yet to be examined in detail. Complementarities arise from reductions in user transaction and search costs associated with consuming financial services jointly from the same bank provider, often at the same location, rather than consuming these services separately from different providers at different locations. If benefits from joint consumption are strong, consumers should be willing to pay for them through higher prices at banks that provide services jointly rather than separately. The authors find no evidence of statistically significant revenue complementarities or fixed revenue effects among banks over 1978-1990. Revenues are no larger when deposits and loans are provided jointly rather than separately, and consumers do not pay for one stop banking. This holds for the average small or large bank as well as those on and off the revenue-efficient frontier. Combining revenue scope results with earlier cost scope findings suggests that synergies between bank deposits and loans are small and concentrated in joint production, rather than joint consumption. Consumers may or may not value one stop banking, but they apparently do not have to pay for it.

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File URL: http://fic.wharton.upenn.edu/fic/papers/94/9401.pdf
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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 94-01.

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Date of creation: Aug 1993
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Handle: RePEc:wop:pennin:94-01

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  1. Ferrier, Gary D. & Grosskopf, Shawna & Hayes, Kathy J. & Yaisawarng, Suthathip, 1993. "Economies of diversification in the banking industry : A frontier approach," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 229-249, April.
  2. Benston, George J & Hanweck, Gerald A & Humphrey, David B, 1982. "Scale Economies in Banking: A Restructuring and Reassessment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 435-56, November.
  3. Mester, Loretta J., 1993. "Efficiency in the savings and loan industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 267-286, April.
  4. Allen N. Berger & Gregory F. Udell, 1993. "Lines of credit, collateral, and relationship lending in small firm finance," Finance and Economics Discussion Series 93-9, Board of Governors of the Federal Reserve System (U.S.).
  5. Oi, Walter Y, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 85(1), pages 77-96, February.
  6. Hancock, Diana, 1986. "A model of the financial firm with imperfect asset and deposit elasticities," Journal of Banking & Finance, Elsevier, vol. 10(1), pages 37-54, March.
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  9. Hannan, Timothy H., 1991. "Bank commercial loan markets and the role of market structure: evidence from surveys of commercial lending," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 133-149, February.
  10. Pulley, Lawrence B & Braunstein, Yale M, 1992. "A Composite Cost Function for Multiproduct Firms with an Application to Economies of Scope in Banking," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 221-30, May.
  11. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
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  13. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July.
  14. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
  15. English, M. & Grosskopf, S. & Hayes, K. & Yaisawarng, S., 1993. "Output allocative and technical efficiency of banks," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 349-366, April.
  16. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 317-347, April.
  17. Loretta J. Mester, 1987. "Efficient production of financial services: scale and scope economies," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-25.
  18. Timothy H. Hannan & J. Nellie Liang, 1991. "Inferring market power from time-series data: the case of the banking firm," Finance and Economics Discussion Series 147, Board of Governors of the Federal Reserve System (U.S.).
  19. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 16-33.
  20. Allen N. Berger & David B. Humphrey, 1990. "Measurement and efficiency issues in commercial banking," Finance and Economics Discussion Series 151, Board of Governors of the Federal Reserve System (U.S.).
  21. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
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