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There are different ways to establish and maintain a domestic, integrated retail payments market. To illustrate this, Cœuré first briefly looks at the retail payments market in Europe, which has been fragmented along national lines and is still integrating, and then compares it with the market in the US.
Why do the retail payments markets in the US and euro area differ? As he explains, it’s not only because of customer preferences and technology, but also because of different approaches to regulation and different pricing. The paths followed for payment transactions will always differ from country to country and region to region. But, the diversity of instruments reveals some interesting facts about the retail payments market in both areas.
In the US, about two-thirds of cashless payment transactions are card payments. Of those card payments, one-third of them are made with credit cards. In the euro area, card payments are less dominant: just over one-third of cashless payment transactions are card payments. Debit cards are generally preferred. Consequently, whereas consumer credit cards are the biggest driver of revenue in the US payments industry, their role in the euro area is less prominent.
An Occasional Paper published by the ECB in September 2012, entitled “The social and private costs of cash and retail payment instruments – A European perspective”, shows that in Europe debit card payments have on average the lowest social costs per euro transaction value. In other words, society may benefit from an increase in their usage.
The same paper reported that cheques were the most expensive form of payment. Thus, they are not part of the integration efforts in the retail payments market in Europe. In the US however, despite a steady decline, cheques still play an important role as a cashless payment instrument. In fact, they are used more often than credit transfers and direct debits put together. The low number of electronic payments (i.e. credit transfers and direct debits) in the US has not only to do with consumer preference and systemic restrictions on consumer-initiated transfers but also with the set-up of batch processing of electronic payments. The CEO of Western Union has commented that bank-to-bank credit transfers in the US are so complicated that banks ask Western Union to process them.
The ultimate aim of SEPA is to create a truly domestic European retail payments market which does not differentiate between euro payments made by individuals, businesses or public administrations within one country or between SEPA countries. Tommaso Padoa-Schioppa, a former member of the ECB’s Executive Board, called this the “principle of indifference”. In that sense, SEPA is also part of the political objective to create a more integrated Europe.
The creation of a safe and efficient domestic retail payments market is also an issue of social relevance because individuals and businesses in any country can benefit from retail payment services. It is a means to increase financial inclusion and it strengthens the formal economy. It also has great potential to make remittance payments cheaper and more efficient.
SEPA is one of Europe’s most successful financial integration projects. Even during the current financial crisis, SEPA has shown its strengths and its implementation has continued without major obstacles. This may be because, as research has shown, effective retail payment services are associated with greater bank stability and because banks perform better in countries with more developed retail payment services. Last but not least, there is evidence that retail payments have a positive impact on economic growth.