The Organization of Private Payment Networks

O ne of the key roles banks have traditionally played is in the execution of payments among participants in the economy. Liabilities issued by banks, such as demand deposits, are a primary means of payment. The widespread acceptability of such private liabilities requires a reliable method for the settlement of such obligations. In a world where people and economic activity are dispersed in space and time, settlement often requires a method for communication between locations where purchases of goods take place and those where payment liabilities are issued. That is, the use of bank liabilities as means of payment requires the support of an interbank network for clearing and settlement. Throughout U.S. banking history, such multibank networks have played important roles. In New England during the Free Banking period (1836 –1863), the system that was centered around the Suffolk Bank in Boston widened the area over which many banks’ notes could circulate at par.1 In the latter part of the nineteenth century, banks participated in clearinghouses for the clearing and settlement of local checks and had correspondent relationships to handle checks over greater distances.2 While the Federal Reserve (the Fed) ultimately took over a large part of the clearing and settlement of checks, the banking industry has developed other private, multilateral networks for handling interbank payments. Most notable, perhaps, are the nationwide credit card associations. Recently, interbank networks have received considerable attention. The ongoing growth and consolidation of Automated Teller Machine (ATM) networks has stimulated discussions in the academic and public policy communities of possible antitrust issues raised by such large joint ventures of banking organizations. Much of the discussion of possible public policy concerns regarding