Payment Economics and the Role of the Central Banks

I would like to start by commending the organizers of this conference for their goal of "making payments mainstream." If I could do a bit of wordsmithing, I would add the word "economics" after the word "payment," because a distinct and coherent field of payment economics appears to be emerging, and it deserves some attention, especially among central bank policymakers (Lacker and Weinberg, 2003). In my remarks today, I will say a few words about payment economics, and then discuss the role of the Central Bank in the payment system and implications of that role for several current issues. As always, the views expressed do not necessarily represent the views of my colleagues in the Federal Reserve System. At the core of payment economics are systems of exchange financed by private and/or public liabilities and the institutions that facilitate the clearing and settlement of these instruments. In other words, payment economics can be defined as the study of the mechanics of exchange. It is based on the core insight of monetary economics that the instruments that people use to pay for goods and services serve to communicate reliably (that is, in an incentive-compatible way) about the buyer's past actions (Townsend, 1989, and Kocherlakota, 1998). Payment economics extends banking theory to encompass the role of banks as private issuers of payment instruments, and reflects the observation that virtually all institutions usually thought of as banks are significantly involved in payments. Indeed, the defining feature of banks appears to be their issuance of payment instrument liabilities, as opposed to their role as balance sheet intermediaries between savers and borrowers. Banks, from this perspective, are specialized institutions for facilitating the transmission and recording of relevant payment information, and the industrial organization of the banking system therefore affects the characteristics of the monetary system. Payment economics thus lies at the intersection of monetary and banking economics with industrial organization.