Deposit Banks and the Market for Payment Media

William C Whitesell

Journal of Money, Credit and Banking, 1992, vol. 24, issue 4, 483-98

Abstract: This paper develops a model of bank deposit pricing with optimal consumer choices of spending shares among alternative media of exchange. Interpreting deposits as a tie-in feature of the sale of bank payment services, the paper shows that the wedge between consumer and social costs of currency use may reverse typical prescriptions regarding bank market structure and distortionary taxes on banks. An explanation is offered for below-cost bank service fees, despite deregulated deposit interest rates, while rate ceilings are shown to induce substitution into payment media with higher social costs. Copyright 1992 by Ohio State University Press.

Date: 1992
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