Imperfect Competition and the Pricing of Interbank Payment Services

Interbank payment arrangements create tension between competition and cooperation among banks. One bank’s payment services to a rival's depositors enhance the value of the rival's deposit services. The strategic effects of the pricing of interbank services are very different in a segmented market than in a market with 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. Such a policy stance makes sense in segmented markets. With direct competition for depositors, however, cooperative interbank pricing could dampen competition in deposit markets.