Selling Federal Reserve Payment Services: One Price Fits All?

I n a large modern economy, there is a vast and constant movement of funds in the conduct of commerce and finance. The channels through which these funds move constitute the payment system, which, ultimately, forms a network connecting all participants in the economy. In dollar value, the bulk of this movement is not in cash but in the form of instructions for the crediting and debiting of accounts held with public or private financial institutions.1 As a network for sending and receiving instructions, the payment system bears a resemblance to transportation and, especially, communication systems. Accordingly, many of the issues and questions that arise in discussions of markets for payment services have parallels in discussions of these other markets. Markets that are characterized as networks are often thought to be driven by the existence of economies of scale. In the presence of scale economies, the average cost of providing services declines with the size of the network and the volume of traffic it carries. The belief in such economies has motivated a long history of direct government involvement and intervention in network markets, from the operation of the postal service to the regulation of telecommunications and transportation networks. Much of the evolution of the structure of markets for payment services has been driven by the desire of participants to take advantage of the economies of network expansion. The most fundamental example is the replacement of a system in which payments are made in currency directly between individuals to one in which payments are made through accounts with financial intermediaries. Specifically, a check-based payment system opened the door to