Imperfect Competition and the Pricing of Interbank Payment Services

I n a modern economy, a large fraction of payments for goods and services involve the services of one or more banks. The provision of payment services is, in fact, one of the distinguishing characteristics of banks. A bank-intermediated payment instrument, such as a check, typically communicates instructions to the buyer’s bank to make payment to the seller or the seller’s bank. Often, then, we think of payment services as being bundled with the deposit services provided by banks, although this is not always the case. Credit cards, for instance, involve payments by the card-issuing bank, at which the cardholder need not hold deposits. Still, many payment services do arise naturally as byproducts of holding deposits with a bank, and some authors have recently begun to focus on this payments function in the theory of banking (McAndrews and Roberds 1999; Prescott and Weinberg 2000). Checks and debit cards are prominent examples of such payment services, but ATM service, which gives people remote access to cash from their deposit accounts, is also an example even though ATM transactions facilitate purchases with cash, not bank liabilities. Accordingly, the industrial organization of the payment services industry, and even the characteristics of the payment services provided, will generally depend on the organization of the banking industry itself. One area in which the structure of the banking industry matters for the nature of payment services is that of interbank payments—payments in which