The Importance of Payments-Driven Revenues to Franchise Value and in Estimating Bank Performance

This paper examines how the production of payment services impacts the franchise value of banks. It also explores whether analysts are incorrectly measuring the performance of the banking sector and failing to realize the full importance of payments-driven revenues to banks. In initial empirical analysis, we find limited evidence to suggest that higher payments-driven revenues are associated with higher franchise value. We find, also, that estimates of productive efficiency change dramatically for a small number of banks heavily involved in payments services. We find evidence to suggest that traditional efficiency estimates that exclude nontraditional bank activities inaccurately measure the relative performance of some types of BHCs. We infer from these results that estimation of efficiency must take into account the different mix of traditional and nontraditional activities in which banks engage. Economist, Federal Reserve Bank of Chicago. [email protected]. The author thanks Robert DeYoung, Cathy Lemieux, Ed Green, Victor Stango, Sujit Chakavorti, Paul Kellog, Kristin Stanton, and seminar participants at the Federal Reserve Bank of Cleveland for helpful comments. The views expressed are those of the author and do not represent the views of the Federal Reserve Bank of Chicago or the Board of Governors of the Federal Reserve System.