Risk sharing in the pricing of payment services by banks

Abstract

The banking industry has traditionally covered a large part of its operating costs by net interest earnings, based on the spread between deposit and lending rates.This reflects the common practice of underpricing various services provided to customers, especially depositors.The purpose of this paper is to present an explanation to this phenomenon by analyzing the pricing of transaction deposit accounts as arrangements for pooling transaction cost uncertainty among depositors.It turns out that, when transactions are stochastic, and depositors are risk averse, there is an incentive to minimize explicit transaction charges.Moral hazard may explain why some service charges are applied, however.