18 June 2013

ECB Working Paper: Convergence in European retail payments

Financial integration in some segments of the financial markets started to deteriorate during the recent period of economic turmoil in Europe. This paper examines whether this phenomenon also holds true for the European retail payments market.

Based on economic theory and empirical evidence, financial integration promotes competition, efficiency and growth. Even though there are an increasing number of studies on integration in other segments of the financial markets, the level and evolution of integration in the retail payments market has been difficult to measure, and the empirical literature is very limited. The present study evaluates the level and evolution of integration by measuring the cross-country convergence of payment behaviours in the European retail payments market. The findings increase the general understanding of how integration has evolved since the introduction of the single currency, the creation of the Single Euro Payments Area (SEPA) and during the recent economic crisis.

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 27 countries of the European Union (EU) over the period 1995-2011. The present paper is the first to use recent enough data to measure fully the impact of the introduction of the single currency on retail payment integration. Moreover, the study provides some preliminary results regarding the impact of SEPA and the recent economic crisis on the integration process.

The study applies two methods to quantify convergence: sigma convergence and beta convergence. The rationale behind sigma convergence is that if countries become increasingly homogeneous over time, the cross-country distribution of transactions should become less dispersed. In estimations, this translates to the standard deviation having a negative time trend, i.e. it decreases over time. Beta convergence is based on the idea of a catching-up process; in countries which start from low-level use of a particular payment instrument, the volume or the value of transactions should grow faster than in countries which start from a higher level.

It is found that countries have become less dispersed in terms of cash, debit card, credit card, direct debit and credit transfer use in the period after the introduction of euro. However, in terms of cash use, cross-country convergence is very slow. For cheques and e-money, the standard deviation is volatile and there is no unambiguous evidence of sigma convergence, even in the period after the introduction of the euro. For beta convergence, countries that started from a low level of debit and credit card use have been catching up, when card use is measured in terms of the number of per capita transactions. There is also evidence of beta convergence for the value of direct debits and credit transfers.

Based on the results of the study, the positive financial integration process in the retail payments market, which has been stronger since the introduction of the single currency, seems to have continued regardless of the period of financial turmoil. However, despite the evidence of convergence for most payment instruments, payment behaviours have been slow to change and there are significant cross-country differences. The present paper intends to aid policy-makers and market stakeholders in assessing the current and expected level of integration and future developments in the European retail payments market.

Full working paper

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