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The effect of pricing on demand and revenue in Federal Reserve ACH payment processing

Author: Joanna Stavins; Paul W Bauer
Publisher: Boston : Federal Reserve Bank of Boston, 1997.
Series: Federal Reserve Bank of Boston.; Working paper series; Working paper series (Federal Reserve Bank of Boston), no. 97-6.
Edition/Format:   Print book : EnglishView all editions and formats
Summary:
Because the automated clearinghouse (ACH) has been found to have lower social costs than paper checks, the Federal Reserve has been promoting more widespread use of ACH by lowering ACH processing fees. In this paper we have obtained the first numerical estimates of ACH demand elasticities, a measure of the responsiveness of ACH demand to price changes. In order to determine how robust the estimates are, various  Read more...
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Additional Physical Format: Online version:
Stavins, Joanna.
Effect of pricing on demand and revenue in Federal Reserve ACH payment processing.
Boston : Federal Reserve Bank of Boston, 1997
(OCoLC)694005898
Material Type: Internet resource
Document Type: Book, Internet Resource
All Authors / Contributors: Joanna Stavins; Paul W Bauer
OCLC Number: 37862142
Notes: "October 1997."
Description: 38 pages : illustrations ; 28 cm.
Series Title: Federal Reserve Bank of Boston.; Working paper series; Working paper series (Federal Reserve Bank of Boston), no. 97-6.
Responsibility: by Joanna Stavins and Paul W. Bauer.

Abstract:

Because the automated clearinghouse (ACH) has been found to have lower social costs than paper checks, the Federal Reserve has been promoting more widespread use of ACH by lowering ACH processing fees. In this paper we have obtained the first numerical estimates of ACH demand elasticities, a measure of the responsiveness of ACH demand to price changes. In order to determine how robust the estimates are, various methods were employed to estimate the demand elasticities. Our results show that the volume of ACH items processed by the Federal Reserve does respond to changes in per-item fees. We find that demand for ACH credit is elastic, while demand for ACH debit is inelastic. The difference most likely arises from high customer resistance to automatic payment deduction and from low market penetration of that service among companies. Demand for origination was found to be somewhat more elastic than demand for receipt. We then examined how volume growth initiated by a price cut affected unit costs. Given the relatively large scale economies found for ACH, volume growth leads to lower unit costs. However, to outweigh revenue lost as a result of a price decline, ACH volume would have to increase by an amount greater than our estimates indicate is likely. Consequently, a decline in per-item ACH fees would likely lead to lower net revenues.

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