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Universal access, cost recovery, and payment services

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  • Sujit Chakravorti
  • Jeffery W. Gunther
  • Robert R. Moore

Abstract

We suggest a subtle, yet far- reaching, tension in the objectives specified by the Monetary Control Act of 1980 (MCA) for the Federal Reserve’s role in providing retail payment services, such as check processing. Specifically, we argue that the requirement of an overall cost-revenue match, coupled with the goal of ensuring equitable access on a universal basis, partially shifted the burden of cost recovery from high-cost to low-cost service points during the MCA’s early years, thereby allowing private-sector competitors to enter the low-cost segment of the market and undercut the relatively uniform prices charged by the Fed. To illustrate this conflict, we develop a voter model for what begins as a monopoly setting in which a regulatory regime that establishes a uniform price irrespective of cost differences, and restricts total profits to zero, initially dominates through majority rule both deregulation and regulation that sets price equal to cost on a bank-by-bank basis. Uniform pricing is dropped in this model once cream skimming has subsumed half the market. These results help illumine the Federal Reserve’s experience in retail payments under the MCA, particularly the movement over time to a less uniform fee structure for check processing.

Suggested Citation

  • Sujit Chakravorti & Jeffery W. Gunther & Robert R. Moore, 2005. "Universal access, cost recovery, and payment services," Working Paper Series WP-05-21, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-05-21
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2005/wp2005_21.pdf
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    References listed on IDEAS

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    1. Eckel, Catherine & Holt, Charles A, 1989. "Strategic Voting in Agenda-Controlled Committee Experiments," American Economic Review, American Economic Association, pages 763-773.
    2. Joanna Stavins, 2004. "Do bank mergers affect Federal Reserve check volume?," Public Policy Discussion Paper 04-7, Federal Reserve Bank of Boston.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, pages 1042-1061.
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    Cited by:

    1. Hromcová, Jana & Callado-Muñoz, Francisco J. & Utrero-González, Natalia, 2014. "Effects of direct pricing of retail payment methods in Norway," Economic Modelling, Elsevier, vol. 37(C), pages 428-438.
    2. Francisco José Callado Muñoz & Jana Hromcová & Natalia Utrero González, 2010. "Direct pricing of retail payment methods: Norway vs. US," Working Papers. Serie AD 2010-20, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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    Keywords

    Payment systems ; Check collection systems;

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