Scale Economies, Scope Economies, and Technical Change in Federal Reserve Payment Processing

Abstract

In the past decade, the US economy has witnessed a tremendous surge in the usage of electronic payment processing services and an increased importance of the firms that provide these services. The payments industry has also undergone changes in cost structure with the introduction of new technology. Unfortunately, data on the private provision of payment processing services are not available. However, the Federal Reserve provides similar services and collects data on its own provision of payments processing, offering an opportunity to gain insights into the cost structure of payments processing. In this paper, we estimate the scope and scale economies and the technical change in the Federal Reserve's provision of payments processing from 1990-2000. We find considerable scale economies and evidence of some scope economies for the provision of automated clearinghouse, fedwire, and book-entry services no matter whether we specify a separable quadratic or a translog cost function. In addition, we find that disembodied technical change also contributed to the overall reduction in costs throughout the 1990s.

Keywords: Productivity, scope economies, scale economies, financial institutions

JEL Classification: D2, G2