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FOCUS: ON INTEGRATION AND INNOVATION
Research by the European Central Bank Explores the Progress of
Payment Integration in Europe
Main findings of the European Central Bank report 'Convergence in European retail
30.01.14 BY EMMI MARTIKAINEN, HEIKO SCHMIEDEL AND TUOMAS TAKALO
In October 2013, Mario Draghi, President of the European Central Bank (ECB), reiterated: “Theadvantages of SEPA are considerable for the euro area (.) in particular, the SEPA project is animportant element for the integration of financial services in Europe. The Eurosystem, under itsmandate, is committed to supporting the SEPA project to promote the smooth operation ofpayment systems, both as a contribution to the efficiency of the euro area economy and as away to support continued trust in the euro” (ECB SEPA e-Brochure, October 2013). TheEurosystem comprises the European Central Bank and the national central banks of theEuropean Union (EU) Member States whose currency is the euro. Based on economic theoryand empirical evidence, financial integration promotes competition, efficiency and growth. As aresult, the convergence of retail payments has many implications for the overall performance ofthe economy.
The progress of payment integration is explored within the research paper released by the ECB,entitled ‘Convergence in European retail payments’. The authors Emmi Martikainen, HeikoSchmiedel and Tuomas Takalo find that retail payment integration in the euro area – and inEurope – has made progress however, considerable efforts are still required to further promotethis development. Currently there is evidence of cross-country convergence in the euro area withregard to payment behaviours, especially for card payments, direct debits and credit transfers,and the speed of integration has accelerated for most of the payment instruments studied sincethe introduction of the single currency. The paper intends to aid policy-makers and marketstakeholders in assessing the current and expected level of integration and future developmentsin the European retail payments market. This article summarises the main findings of the paper‘Convergence in European retail payments’. European Payments Council copyright 2014 Key Information in this Article
The European Central Bank (ECB) Occasional Paper ‘Convergence in European retail payments’ includes the following key findings: The positive financial integration process in the retail payments market seems to have continued regardless of the period of There is evidence of convergence for the payment behaviours in European countries, and the convergence process has accelerated since the introduction of the single currency.
However, payment behaviours have been slow to change and there are significant cross-country differences for card payments, Despite this, it can be concluded that the European Union (EU) payment markets are now less fragmented than they were before the introduction of the single currency and the creation of SEPA.
This research increases the general understanding of how integration has evolved since the introduction of the euro, the creation of SEPA and during the recent economic crisis.
The link to the paper ‘Convergence in European retail payments’ is included in the ‘related links’ at the end of this article.
Measuring the convergence in European retail payments.
Financial integration is important for both the smooth operation and the efficiency of the payment system, andpromoting it is also one element of the Eurosystem’s mission 1 . The Eurosystem comprises the European CentralBank (ECB) and the national central banks of the European Union (EU) Member States whose currency is the euro.
Based on economic theory and empirical evidence, financial integration promotes competition, efficiency andgrowth. As a result, the convergence of retail payments has many implications for the overall performance of theeconomy.
In order to promote integration, policy-makers need tools and indicators to measure its level and progress. Eventhough there are an increasing number of studies on integration in other segments of the financial markets, its leveland evolution in the retail payments market has been difficult to measure, and the empirical literature is very limited.
With the ECB Occasional Paper ‘Convergence in European retail payments’ (see ‘related links’ below), methodswhich had been applied previously to measure integration in other segments of the financial markets have beenapplied to quantify integration in the retail payments market. The paper evaluates the level and evolution ofintegration by measuring the cross-country convergence of payment behaviours in Europe.
The analysis is based on data on the volume and the value of transactions made in cash, by debit card, credit card,direct debit, credit transfer and cheque, and in e-money, in the then 27 countries of the EU over the period 1995 to20112 . The present paper is the first to use recent enough data to fully measure the impact of the introduction ofthe single currency on retail payment integration. Moreover, the study provides some preliminary results regardingthe impact of the Single Euro Payments Area (SEPA) and the recent economic crisis on the integration process.
The study applies two methods to quantify convergence: sigma convergence and beta convergence. The rationalebehind sigma convergence is that if countries become increasingly homogeneous over time, the cross-countrydistribution of transactions should become less dispersed. In estimations, this translates to the standard deviationhaving a negative time trend, i.e. it decreases over time. Beta convergence is based on the idea of a catching-upprocess; in countries which start from low-level use of a particular payment instrument, the volume or the value oftransactions should grow faster than in countries which start from a higher level.
Based on the findings in this paper, it can be argued that payment behaviours in the 27 EU countries have becomemore similar since the introduction of the single currency. However, considerable efforts are still required to furtherpromote this development. Currently there is evidence of cross-country convergence in the euro area with regard topayment behaviours, especially for card payments, direct debits and credit transfers, and the speed of integrationhas accelerated for most of the payment instruments studied since the introduction of the single currency.
European Payments Council copyright 2014 has accelerated for most of the payment instruments studied since the introduction of the single currency.
The findings also show that the level of integration depends on the market segment and seems to be sensitive to theoverall trends in economic development.
The speed of sigma convergence for cash has been very slow. Moreover, cheques and e-money are exceptions, ascountries diverge in their use of these two payment instruments. One possible reason for this lack of convergencecould be that there is a negative overall trend in the volume and the value of transactions made by cheque. Thedivergence result reflects the fact that consumers are making fewer transactions by cheque in most of the 27 EUcountries, while in the remaining EU countries, cheques are still relatively popular. For e-money, the overall numberand value of transactions is increasing. This payment instrument is, however, still in its early stages of developmentand the total volume and value of transactions is relatively low. Countries differ in terms of the way in which theyadopt payment innovations, and the dispersion in the use of e-money across countries is likely to reflect thesedifferent adoption patterns.
The recent financial crisis discouraged integration in many segments of the financial markets, especially in money,bond and equity markets. There is also evidence that in banking, cross-border activity declined during the period offinancial turmoil. Even though payment behaviours are not likely to be affected by the same factors that led todisintegration in other financial market segments, namely mistrust and increasing differences in country-specificrisks, it is nonetheless interesting to note that the convergence in retail payment behaviours has continuedregardless of the Europe-wide crisis. However, it is hard to disentangle the effects of SEPA and those of theeconomic crisis on the convergence process, and the present study offers only some preliminary conclusions.
Since economic theory and empirical findings support the fact that integration promotes competitiveness, efficiencyand growth, the process of integration should be considered beneficial, even at times of extreme economicuncertainty. Regardless of the positive findings regarding financial integration, it should be noted that paymentbehaviours are slow to change, and the differences in payment habits across Europe remain significant. The singlemarket for European retail payments has not yet fully materialised and neither have its benefits. This paper mayserve as a useful tool for policy-makers and market stakeholders when predicting the future trajectories of theEuropean retail payments market.
Emmi Martikainen is Senior Research Officer at the Finnish Competition and Consumer Authority. Heiko Schmiedelis a Senior Expert in the Directorate General Payments and Market Infrastructure at the European Central. TuomasTakalo is a Research Advisor at the Bank of Finland. He is also a Senior Researcher at the Katholieke UniversiteitLeuven, and an External Advisor at the Finnish Competition and Consumer Authority. The views expressed in this text are those of the authors and do not necessarily reflect the views of the
ECB nor the Bank of Finland.
Related articles in this issue:
European Payments Council copyright 2014 Related articles in previous issues:
1 See “The mission of the Eurosystem” on the ECB’s website ().
2 Croatia joined the EU in July 2013.
European Payments Council copyright 2014
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