Payment scale economies, competition, and pricing

Payment scale economies affect banking costs, competition in payment services, and pricing. Our scale measure relates operating cost to physical measures of European banking "output", finding large economies. This differs from relating total cost to the value of balance sheet assets (the conventional approach). Interest expenses are excluded since differences here are primarily due to mix, not scale. Also, since standard indicators of competition can give inconsistent results, a revenue-based frontier measure is developed and applied to European banks, with little difference evident across countries. Existing differences in bank prices (EC report) are associated with small differences in competition. JEL Classification: E41, C53Bank competition, European banks, frontier analysis, Payment scale economies

Delivering deposit services: ATMs versus branches

Automated tellers ; Branch banks

Productivity in banking and effects from deregulation

Over the last decade, banking productivity growth has been quite low, between 0.60 to –0.07 percent a year. Deregulation has served to raise banking costs but not measured output. Consumers may have benefited, but banks have not.Productivity ; Banks and banking

Why do estimates of bank scale economies differ?

A number of public policy issues turn on whether or not there are scale economies in commercial banking. This paper examines why empirical tests in this area have yielded differing results. Sorting out the different methodological approaches enables us to develop general conclusions on the size and significance of scale economies in banking.Economies of scale ; Banks and banking - Costs ; Bank size

The economics of electronic benefit transfer payments

Electronic funds transfers

Settlement finality as a public good in large-value payment systems

Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs — but not risks — would be equalized between networks. Full collateralization on DNS networks would equalize both user costs and risks.payments, settlement, public good

Payment network scale economies, SEPA, and cash replacement

The goal of SEPA (Single Euro Payments Area) is to facilitate the emergence of a competitive, intra-European market by making cross-border payments as easy as domestic transactions. With crossborder inter-operability for electronic payments, card transactions will increasingly replace cash and checks for all types of payments. Using different methods, the authors estimate card and other payment network scale economies for Europe. These indicate substantial cost efficiency gains if processing is consolidated across borders rather than "piggybacked" onto existing national operations. Cost reductions likely to induce greater replacement of small value cash transactions are also illustrated.

Settlement finality as a public good in large-value payment systems

Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs but not risks would be equalized between networks. Full collateralization on DNS networks equalizes both user costs and risks. JEL Classification: E58, G15, H23, H41payments, public good, settlement

Bank Scale Economies, Mergers, Concentration, and Efficiency: The U.S. Experience

There have been numerous econometric studies of bank scale and scope economies, efficiency, mergers, and market structure and performance in U.S. banking. According to the authors, these studies have come to the following conclusions: Scale: For the very smallest banks, there are scale economies that allow average costs to fall with increases in bank size, but they account for less than 5% of costs. For larger banks, constant average costs or slight diseconomies of scale prevail. Scope: There are at most relatively minor scope economies that reduce cost by 5% or less when multiple products are produced jointly. Revenues appear to be unaffected by product mix. X-Efficiency: Managerial ability to control costs is much more important than scale and scope. Banks may have costs 20% higher than the industry minimum for the same scale and product mix. Mergers: On average, mergers had no significant, predictable effect on cost and efficiency. Market Structure and Bank Performance: Greater local market concentration results in slightly lower deposit rates for small borrowers and slightly higher loan rates for small borrowers. Differences in local market concentration have virtually no effect on bank profitability. The implications of the U.S. experience for Europe are that cross-border mergers and acquisitions by banks in Europe are not like to lower costs by any significant amount. What cost improvements there are will most likely be generated by improvement in X-efficiency, or better management of resources, rather than through improved scale or scope economies. There may be more potential for efficiency gains from mergers on the revenue side than on the cost side, but these have not yet been thoroughly explored. To the degree that cross-border expansions increase local market competition, they may also yield the social benefit of slightly more favorable prices for the consumer of financial services.