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Universal Access, Cost Recovery, and Payment Services

29 Pages Posted: 19 Dec 2005  

Sujit Chakravorti

Independent

Jeffrey Gunther

Federal Reserve Bank of Dallas

Robert R. Moore

Federal Reserve Bank of Dallas

Date Written: November 2005

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.

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

JEL Classification: G28, D72, H42, E58

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: https://ssrn.com/abstract=871078 or http://dx.doi.org/10.2139/ssrn.871078

Sujit Chakravorti (Contact Author)

Independent ( email )

No Address Available

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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