Payment Process Costs, Innovation, and the Role of Banks as Payment Intermediaries

Abstract:     
The linkage between deposit-taking, lending and the provision of payment services is at the heart of the definition of banking. Nevertheless, the elements that justify why a financial intermediary has been jointly carrying on these activities, and why at the same time payment services business has been recently entered by so many non-bank firms, have not generally been thoroughly analyzed. The paper identifies payment process frictions; therefore, it is made clear why and when product and institutional innovation in payment services can arise. Demand, the level of financial and information technology, and agency costs are found to be the key factors explaining both banks' past dominance and present uncertain perspectives in the business. Regulation impact is also discussed. Scope economies between deposit-taking and lending on one side and payment services on the other side allow the drawing of conclusions about banks' role in the provision of payment services.

JEL Classification: G21

working papers series