_33_ Scale economies exist in making and processing payments. As a result, the primary discriminating characteristic among payment users (consumer, business, and government payors and payees, plus intermediary banks) is the volume of payments associated with each participant or participant group. A pricing methodology which recovers all costs but yet properly discriminates among users according to their payment volume is two-part pricing. Two-part pricing contains a price covering the average fixed cost of serving each participant and a second price covering the average variable cost. Two-part pricing is sustainable in the sense that a competitor could not supply the same service without incurring a loss, unless its costs were truly lower. If a competitor's costs were indeed lower, then it-and not the existing supplier-should be the entity providing the payment service, otherwise resources are being wasted. Other, less important, discriminating characteristics among payment service users would include possible differences in the elasticity of demand among payment users and the possibility that both payors and payees benefit from making a payment. There are ways of accommodating these additional discriminating characteristics through so-called market sensitive pricing and benefit-flow pricing, and both are noted in the text. However, most of the goals of pricing can be achieved by implementing two-part pricing. As experience with pricing is gained over time, the pricing components may be modified to accommodate additional discriminating characteristics (if they are deemed to be important), potentially improving the sustainability of the pricing structure.

Two-part pricing, fortunately, is relatively simple to implement. It only requires that: (1) payment service costs (or cost estimates) be decomposed into their fixed and variable cost components; and (2), an estimate be made regarding the expected volume of payments that will be demanded. The first requirement is met through application of an elementary cost accounting system while the second relies on having collected some current or historical volume data. Many banks and central banks in developed countries have implemented two-part pricing, as well as some of its variants, for the payment services they offer. The fact that this pricing structure has remained in place is testamen **t** o its usefulness in attaining the payment goals outlined above.

The Bank's work in the payments system reform environment focuses, in the main, on the initial development and implementation of payment mechanisms by the central bank or by the central bank in conjunction with some or all commercial banks in a specific country. In most cases, new inter-bank payment mechanisms, are established under the leadership of the central bank and are initially owned and operated by the central bank. However, in some cases, the Bank may become involved with the establishment of private clearing houses. With this in mind, the primary purpose of this paper is to further consider the specifics of cost recovery and pricing policy from the view of the publicly or privately owned system provider in both the initial and longer term more stable operating phases of a payments systems reform initiative in a developing economy. As such initiatives are frequently funded through re-payable loans some suggestions are made as to how the cost recovery policy might relate to loan re-payment.