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The importance of payments-driven revenues to franchise value and in estimating bank performance

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  • Tara N. Rice

Abstract

This paper examines how the production of payment services impacts the franchise value of banks. It also explores whether analysis are incorrectly measuring the performance of the banking sector and failing to realize the full importance of payments-driven revenues to banks. In initial empirical analysis, we find limited evidence to suggest that higher payments-driven revenues are associated with higher franchise value. We find, also, that estimates of productive efficiency change dramatically for a small number of banks heavily involved in payments services. We find evidence to suggest that traditional efficiency estimates that exclude nontraditional bank activities inaccurately measure the relative performance of some types of BHCs. We infer from these results that estimation of efficiency must take into account the different mix of traditional and nontraditional activities in which banks engage.

Suggested Citation

  • Tara N. Rice, 2003. "The importance of payments-driven revenues to franchise value and in estimating bank performance," Emerging Issues, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhei:y:2003:n:eps-2003-1d
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    References listed on IDEAS

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    1. Loretta J. Mester, 1987. "Efficient production of financial services: scale and scope economies," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 15-25.
    2. Sujit Chakravorti & Emery Kobor, 2003. "Why invest in payment innovations?," Emerging Issues, Federal Reserve Bank of Chicago, issue Jun.
    3. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    4. Edward J. Green & Richard M. Todd, 2001. "Thoughts on the Fed's role in the payment system," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 12-27.
    5. Bauer, Paul W & Ferrier, Gary D, 1996. "Scale Economies, Cost Efficiencies, and Technological Change in Federal Reserve Payments Processing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 1004-1039, November.
    6. Terri Bradford & Matt Davies & Stuart E. Weiner, 2002. "Nonbanks in the payments system," Payments System Research Working Paper PSR WP 02-02, Federal Reserve Bank of Kansas City.
    7. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Staff Reports 62, Federal Reserve Bank of New York.
    8. Lawrence J. Radecki, 1999. "Banks' payments-driven revenues," Economic Policy Review, Federal Reserve Bank of New York, vol. 5(Jul), pages 53-70.
    9. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November.
    10. Tara N. Rice & Kristin D. Stanton, 2003. "Estimating the volume of payments-driven revenues," Emerging Issues, Federal Reserve Bank of Chicago.
    11. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, vol. 73(Sep), pages 16-33.
    12. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 1-14.
    13. Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Catharine Lemieux, 2003. "Retail payments innovations and the banking industry," Emerging Issues, Federal Reserve Bank of Chicago.
    2. Catharine Lemieux, 2003. "Network vulnerabilities and risks in the retail payment system," Emerging Issues, Federal Reserve Bank of Chicago.
    3. Iftekhar Hasan & Heiko Schmiedel & Liang Song, 2012. "Returns to Retail Banking and Payments," Journal of Financial Services Research, Springer;Western Finance Association, vol. 41(3), pages 163-195, June.

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