Returns to Retail Banking and Payments

Abstract

The present paper examines the fundamental relationship between the country-level infrastructure of the retail payment market and overall bank performance. Using data from across 27 European markets over the period 2000-07, the results confirm that the performance of banks in countries with more developed retail payment service markets is better. This relationship is stronger in countries with a relatively high adoption of retail payment transaction technologies. Retail payment transaction technology itself can also improve bank performance, and evidence shows that heterogeneity in retail payment instruments is associated with enhanced bank performance. Similarly, higher usage of electronic retail payment instruments seems to stimulate banking business. We also show that retail payment services have a more significant impact on savings and cooperative bank performance, although they have a positive influence on the performance of commercial banks as well. Additionally, the findings reveal that the impact of retail services on bank performance is more pronounced through fee income, although their impact through interest income is also positive. Finally, an effective payment service market is found to be associated with higher bank stability. Our findings are robust to different regression specifications.

Entry of FinTech Firms and Competition in the Retail Payments Market

“…From a cross‐country analysis, Hasan et al . () find that heterogeneity among retail payment instruments is associated with enhanced bank performance, and that an effective payment service market is found to be associated with higher bank stability…”

Convergence of European retail payments

“…The fi nancial integration of the retail payments market facilitates the cross-border movement of people, goods and capital, and thus promotes the integration of the European single market. The convergence of payment behaviours can have an important role in the diffusion of new payment technologies and thus economic performance; there is empirical evidence that the electronifi cation of the retail payments system promotes economic growth (Hasan et al, (2012a) and banking performance (Hasan et al, (2012b)). The convergence of cross-country habits is important because payment instruments are network goods; the benefi t of using a payment instrument depends on the number of other people using it: 2 1 See "The mission of the Eurosystem" on the ECB's website (http://www.ecb.int/ecb/orga/escb/html/mission_eurosys.en.html).…”

Competition in the clearing and settlement industry

“…A developed payment infrastructure is also important for performance of the banking system. Hasan et al (2012b) show that bank performance is higher in countries with more developed retail payment service markets. 8 The decision by the European Commission in 2004 with respect to Clear stream Banking AG, a principal depository for securities in Germany, was instructive.…”