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Universal Access, Cost Recovery, and Payment Services


Sujit Chakravorti


The Clearing House

Jeffrey Gunther


Federal Reserve Bank of Dallas

Robert R. Moore


Federal Reserve Bank of Dallas

November 2005

FRB of Chicago Working Paper No. 2005-21

Abstract:     
We suggest a subtle, yet far-reaching, tension in the objectives specified by the Monetary Control Act of 1980 (MCA) for the Federal Reserve's role in providing retail payment services, such as check processing. Specifically, we argue that the requirement of an overall cost-revenue match, coupled with the goal of ensuring equitable access on a universal basis, partially shifted the burden of cost recovery from high-cost to low-cost service points during the MCA's early years, thereby allowing private-sector competitors to enter the low-cost segment of the market and undercut the relatively uniform prices charged by the Fed. To illustrate this conflict, we develop a voter model for what begins as a monopoly setting in which a regulatory regime that establishes a uniform price irrespective of cost differences, and restricts total profits to zero, initially dominates through majority rule both deregulation and regulation that sets price equal to cost on a bank-by-bank basis. Uniform pricing is dropped in this model once cream skimming has subsumed half the market. These results help illumine the Federal Reserve's experience in retail payments under the MCA, particularly the movement over time to a less uniform fee structure for check processing.

Number of Pages in PDF File: 29

Keywords: Monetary Control Act, payment system, check processing, regulation

JEL Classification: G28, D72, H42, E58

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Date posted: December 19, 2005  

Suggested Citation

Chakravorti, Sujit and Gunther, Jeffrey and Moore, Robert R., Universal Access, Cost Recovery, and Payment Services (November 2005). FRB of Chicago Working Paper No. 2005-21. Available at SSRN: http://ssrn.com/abstract=871078 or http://dx.doi.org/10.2139/ssrn.871078

Contact Information

Sujit Chakravorti (Contact Author)
The Clearing House ( email )
450 West 56th Street
New York, NY 10001
United States
212 613 0143 (Phone)
Jeffrey W. Gunther
Federal Reserve Bank of Dallas
2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
Robert R. Moore
Federal Reserve Bank of Dallas ( email )
2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
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