The Pricing of Interbank Payment Services in a Changing Competitive Environment

Interbank payment arrangements create a tension between competition and cooperation among participating banks. By providing payment services to a rival's depositors, a bank enhances the value of the rival's deposit services. Hence, the pricing of these interbank services will have an effect on the competition between banks for depositors. This paper discusses the pricing of interbank payment services in an imperfectly competitive banking market. The strategic effects of interbank prices are very different in a segmented market in which there is no direct competition for depositors. Public policy often is more accepting of cooperation among banks in setting interbank prices than in setting the prices of "final goods" like deposits. While such a policy stance makes sense in a setting of segmented markets, the case of direct competition in deposit markets is more complicated. Here, cooperation in the setting of interbank prices could dampen competition in the markets in which banks compete directly.