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* Neil B. Murphy, CTP, AAP, is a Professor of Finance in the Department of Finance, Insurance, and Real Estate School of Business at the Virginia Commonwealth University.  The research for this paper was funded through a grant by the FDIC.

1 The payment system as a whole comprises a number of component payment systems; thus the word “system” is used in this paper sometimes to refer to the overall system and sometimes to refer to the individual components.

2 See CPSS (2001).

3 See CPSS (2000, 2003).

4 For a discussion of wholesale payment systems in general, see Folkerts-Landau (1997); and for a discussion of risk management for Fedwire, see Coleman (2002).  The CPSS best practices, or “core principles,” are appropriately applied to “systemically important payment systems,” and Fedwire is certainly such a system.  Recently the Federal Reserve published a “Self Assessment of Compliance with the Core Principles for Systemically Important Payment Systems” (2001).

5 For an extensive discussion of the network characteristics of payment systems, see Lacker and Weinberg (1998).

6 Not all debit transfers are checks, for debit transfers occur in the Automated Clearing House (ACH) system in the United States.  That is, a payer authorizes a payee to transfer funds through the ACH system by having the payee’s bank present an electronic debit through the ACH and deduct funds from the account of the payer in the payer’s bank.  There is still counterparty risk in that the payer must have sufficient funds.

7 Whether something is called a credit transfer or a debit transfer depends on the action of the receiving financial institution.  If the receiving financial institution debits the payer’s account, it is a debit transfer.  If the receiving financial institution credits the payee’s account, it is a credit transfer.  It should be noted that only credit transfers occur on the large-value RTGS payment systems.

8 The exception to this, of course, is the RTGS large-value payment systems in which settlement occurs instantaneously.  However, if the central bank advances funds to participants during the day (daylight overdraft), that transaction involves some credit risk if the bank to which credit has been advanced cannot bring its account back to zero at the end of the settlement period.

9 There may be some debate as to whether a credit card transaction and the credit card networks constitute a payment system, since the payer’s demand deposit account is not debited as a result of the transaction.  However, payment does occur over an interbank network, and the Committee on Payment and Settlement Systems, the ultimate arbiter of things related to payment systems, includes credit card transactions in its data on different countries’ payment systems in its “Red Book.”

10 See Friedman and Schwartz (1963).

11 See Weinberg and Lacker (1998).

12 For a discussion of the legal and regulatory environment of payments in the United States, see CPSS (2003).

13 In Gerdes and Walton (2002), it is noted that the proportion of “on-us” checks has not increased much even though the industry has consolidated.  They attribute this to the reduction in checks written for cash (these are being replaced by ATM withdrawals) while on-us checks sent to payees have increased.

14 For a thorough discussion of the methods and rationale for calculating the private sector adjustment factor (PSAF), see Green, Lopez, and Wang (2003).

15 It is not the usual practice for the central bank to operate substantial segments of retail payment systems, nor is the Federal Reserve’s role as both operator and regulator without controversy.  The Federal Reserve undertook an extensive review of its role several years ago and concluded that present arrangements are satisfactory.  See Board of Governors of the Federal Reserve System (1998).

16 For an excellent review of comparative developments of payment practices in major industrialized nations, see Humphrey, Sato, Tsurumi, and Vesala (1996).

17 See Gerdes and Walton (2002).

18 Their projections were based on data available up to 1996, even though the publication date of the article is 2000.

19 One casualty of this decline is the Federal Reserve System itself, which announced in February 2003 that it was consolidating its check-processing operations, eliminating this activity from 13 offices and reducing staff by a projected net of 400 employees.  See Federal Reserve Bank of Boston (2003).

20 See Board of Governors of the Federal Reserve System (2003a, 2003b).

21 See NACHA—The Electronic Payments Association (2003).

22 See Check 21 Act, Public Law 108-100, October 28, 2003.

23 Many banks and thrift institutions have already truncated checks by not returning them to customers.  This act will stop the movement of paper earlier in the process.  Moreover, for many years, credit union legislation and regulation have made truncation of credit union share drafts mandatory.

24 For a discussion of this, see Murphy (2000).

25 See European Central Bank (2003).

26 Humphrey, Pulley, and Vesala (2000) note that the European credit transfer systems have been much more amenable to technological change than the check (debit transfer) system in the United States.

27 See NACHA (2003).

28 See Daniels and Murphy (1994a, 1994b).

29 For a discussion of the contemporaneous demographic pattern of adoption of ATMs, see Murphy and Rogers (1986).

30 For a thorough discussion of the ATM/debit card network industry, see Hayashi, Sullivan, and Weiner (2003).

31 See Gerdes and Walton (2003).

32 See Mandell and Murphy (1976) and Mandell (1990).

33 See Evans and Schmalensee (1999).

34 See Mandell (1970).

35 See Murphy and Rogers (1986) and Daniels and Murphy (1994a, 1994b).

36 See Kennickell and Kwast (1997).

37 See Stavins (2001).

38 See Mester (2003).

39 It should be noted that the United States ranks high in per capita deployment of EFTPOS (electronic fund transfer point-of-sale) terminals in comparison with other developed countries.  See CPSS (2003).

40 See NACHA (2003).

41 For a discussion of the use of sweep accounts in cash management, see Cook, Murphy, and Silverberg (2000).

42 See Phoenix-Hecht (2002).

43 See Phoenix-Hecht (2003), 2.

44 See Treasury Strategies, Inc. (2003).

45 See Federal Reserve System (2002).

46 See Association for Financial Professionals (2002).

47 See CPSS (2003).

48 A classic review of how payment systems operate in Europe, Japan, and the United States can be found in Humphrey, Sato, Tsurumi, and Vesala (1996).

49 The link between pricing, regulation, and electronic funds transfer is discussed in Murphy (1977).

50 It should be noted that the total cost of making the transaction is important to the payer, including postal costs if the mails are involved as well as the time and transportation costs involved in making the transaction.  The switch to electronic payments by consumers may reflect changes in the total cost even though the explicit transaction costs are not charged directly to them.

51 The Federal Reserve conducts an annual survey of retail fees of depository institutions.  For a summary of the findings of these surveys, see Hannan (2002).  See also Stavins (1999).

52 See Gerdes and Walton (2002).

53 See Phoenix-Hecht (2003).

54 See Association for Financial Professionals (2003, 2003).

55 See Murphy (1991).

56 See Humphrey, Kim, and Vale (2002).  Other studies of cross-country analyses of payments failed to find significant relationships between pricing and use because of poor data and little application of per-item pricing.  See Humphrey, Pulley, and Vesala (1996).

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