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

  • Tanai Khiaonarong

    (Bank of Thailand & Research Department, Bank of Finland)

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    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://econwpa.repec.org/eps/fin/papers/0405/0405004.pdf
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    Paper provided by EconWPA in its series Finance with number 0405004.

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    Date of creation: 03 May 2004
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    Handle: RePEc:wpa:wuwpfi:0405004
    Note: Type of Document - pdf
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    1. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
    2. 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.
    3. 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.
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    5. 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.
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    7. 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.
    8. Dirk Schoenmaker, 1992. "Institutional Separation between Supervisory and Monetary Agencies," FMG Special Papers sp52, Financial Markets Group.
    9. 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.).
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    11. Humphrey, David B. & Keppler, Robert H. & Montes-Negret, Fernando, 1997. "Cost recovery and pricing of payment services," Policy Research Working Paper Series 1833, The World Bank.
    12. Leinonen, Harry, 2000. "Re-engineering Payment Systems for the E-world," Research Discussion Papers 17/2000, Bank of Finland.
    13. Ed Stevens, 1998. "Non-par banking: competition and monopoly in markets for payments services," Working Paper 9817, Federal Reserve Bank of Cleveland.
    14. Edward J. Green & Richard M. Todd, 2001. "Thoughts on the Fed's role in the payments system," Annual Report, Federal Reserve Bank of Minneapolis, issue Apr, pages 6-27.
    15. 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.
    16. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland.
    17. Jeffrey M. Lacker, 1993. "Should we subsidize the use of currency?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 47-73.
    18. Pauli, Ralf, 2000. "Payments Remain Fundamental for Banks and Central Banks," Research Discussion Papers 6/2000, Bank of Finland.
    19. 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.
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