Journal of Financial Services Research

, Volume 41, Issue 3, pp 163–195 | Cite as

Returns to Retail Banking and Payments

  • Iftekhar Hasan
  • Heiko Schmiedel
  • Liang SongEmail author


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.


Retail payment Bank performance Cost and profit efficiency 

JEL classification

G21 G28 


  1. Amromin G, Chakravorti S (2009) Whither loose change? The diminishing demand for small-denomination currency. J Money Credit Bank 41(2–3):315–335CrossRefGoogle Scholar
  2. Barth JR, Caprio G Jr, Levine R (2001) The regulation and supervision of banks around the world: a new database. In: Litan RE, Herring R (eds) Integrating emerging market countries into the global financial system. Brookings Institution Press, WashingtonGoogle Scholar
  3. Behr P, Schmidt RH, Xie R (2010) Market structure, capital regulation and bank risk taking. J Financ Serv Res 37(2–3):131–158CrossRefGoogle Scholar
  4. Beijnen C, Bolt W (2009) Size matters: economies of scale in the European payments market. J Bank Finance 33:203–210CrossRefGoogle Scholar
  5. Berger AN, DeYoung R (2006) Technological progress and the geographic expansion of commercial banks. J Money Credit Bank 38(6):1483–1513CrossRefGoogle Scholar
  6. Berger AN, Mester LJ (1997) Inside the black box: what explains differences in the efficiencies of financial institutions. J Bank Finance 21:895–947CrossRefGoogle Scholar
  7. Berger AN, Hancock D, Marquardt JC (1996) A framework for analyzing efficiency, risks, costs, and innovations in the payments system. J Money Credit Bank 28(Part 2):696–732CrossRefGoogle Scholar
  8. Berger AN, Hasan I, Klapper L (2004) Further evidence on the link between finance and growth: an international analysis of community banking and economic performance. J Financ Serv Res 25:169–202CrossRefGoogle Scholar
  9. Berger AN, Klapper LF, Turk-Ariss R (2009) Bank competition and financial stability. J Financ Serv Res 35(2):99–118CrossRefGoogle Scholar
  10. BIS (2003) Policy issues for central banks in retail payments. Report of the Working Group on Retail Payment Systems, Committee on Payment and Settlement Systems, Bank for International Settlements, Basel.Google Scholar
  11. Bolt W, Humphrey D (2007) Payment network scale economies, SEPA, and cash replacement. Rev Netw Econ 6:453–473Google Scholar
  12. Bolt W, Humphrey D, Uittenbogaard R (2008) Transaction pricing and the adoption of electronic payments: a cross-country comparison. Int J Central Bank 4(1):89–123Google Scholar
  13. Boston Consulting Group (2009) Global payments 2009: weathering the storm. Boston Consulting Group report, March.Google Scholar
  14. Boyd J, Graham S (1986) Risk, regulation, and bank holding company expansion. Federal Reserve Bank of Minneapolis Quarterly Review (spring).Google Scholar
  15. Brits H, Winder C (2005) Payments are no free lunch. De Nederlandsche Bank Occasional Studies 3 (2).Google Scholar
  16. Campbell D, Jerez FAM, Tufano P (2008) Bouncing out of the banking system: an empirical analysis of involuntary bank account closures. Harvard Business School Working Paper.Google Scholar
  17. Carlton D, Frankel A (1995) Antitrust and payment technologies. Fed Reserv Bank St Louis Rev 77(6):41–54Google Scholar
  18. Chakravorti S, Kobor E (2002) Why invest in payment innovations? Federal Reserve Bank of Chicago Working Paper.Google Scholar
  19. Chakravorti S, Rosen R (2006) Platform competition in two-sided markets: the case of payment networks. Rev Netw Econ 5(1):118–142CrossRefGoogle Scholar
  20. Čihák M, Hesse H (2010) Islamic banks and financial stability: an empirical analysis. J Financ Serv Res 38(2–3):95–113Google Scholar
  21. Columba F (2009) Narrow money and transaction technology: new disaggregated evidence. J Econ Bus 61(4):312–325CrossRefGoogle Scholar
  22. DeYoung R, Rice T (2004) Noninterest income and financial performance at U.S. commercial banks. Finance Rev 39(1):101–127CrossRefGoogle Scholar
  23. Economidies NS (1993) Network economics with application to finance. Financ Market Inst Instrum 2(5):89–97Google Scholar
  24. Economidies NS (1996) The economics of networks. Int J Ind Organ 14(6):673–699CrossRefGoogle Scholar
  25. European Central Bank (2000) EU banks’ income structure. Banking Supervision Committee, April.Google Scholar
  26. Fama EF, French KR (2004) The capital asset pricing model: theory and evidence. J Econ Perspect 18(3):25–46CrossRefGoogle Scholar
  27. Furst K, Lang W, Nolle D (1998) Technological innovation in banking and payments: industry trends and implications for banks. Office of the Controller of the Currency Quarterly Journal 17(3):23–31Google Scholar
  28. Granger CWJ, Newbold P (1986) Forecasting economic time series. Academic, CaliforniaGoogle Scholar
  29. Gresvik O, Owre G (2003) Costs and income in the norwegian payment system 2001. An application of the activity based costing framework. Working Paper, Norges Bank Financial Infrastructure and Payment Systems Department.Google Scholar
  30. Heffernan SA (1993) Competition in british retail banking. J Financ Serv Res 7(4):309–322CrossRefGoogle Scholar
  31. Hirtle BJ (2007) The impact of network size on bank branch performance. J Bank Finance 31(12):3782–3805CrossRefGoogle Scholar
  32. Hirtle BJ, Stiroh KJ (2007) The return to retail and the performance of U.S. Banks. J Bank Finance 31:1101–1133CrossRefGoogle Scholar
  33. Humphrey D, Pulley LB, Vesala JM (1996) Cash, paper, and electronic payments: a cross-country analysis. J Money Credit Bank 28(Part 2):914–939CrossRefGoogle Scholar
  34. Humphrey D, Kim M, Vale B (2001) Realizing the gains from electronic payments: costs, pricing, and payment choice. J Money Credit Bank 33:216–234CrossRefGoogle Scholar
  35. Humphrey D, Willesson M, Lindblom T, Bergendahl G (2003) What does it cost to make a payment? Rev Netw Econ 2:159–174Google Scholar
  36. Humphrey DB, Vale B (2004) Scale economies, bank mergers, and electronic payments: A spline function approach. J Bank Financ 28(7):1671–1696Google Scholar
  37. Humphrey D, Willesson M, Bergendahl G, Lindblom T (2006) Benefits from a changing payment technology in European banking. J Bank Finance 30(6):1631–1652CrossRefGoogle Scholar
  38. Kahn C, Roberds W (2009) Why pay? an introduction to payments economics. Journal of Financial Intermediation 18:1–23CrossRefGoogle Scholar
  39. Kemppainen K (2003) Competition and regulation in European retail payment Systems. Bank of Finland Discussion Papers No. 16.Google Scholar
  40. Kemppainen K (2008) Integrating European retail payment systems: some economics of SEPA. Bank of Finland Discussion Papers No. 22.Google Scholar
  41. Leonard PA, Biswas R (1998) The impact of regulatory changes on the risk-taking behavior of state chartered savings banks. J Financ Serv Res 13(1):37–69CrossRefGoogle Scholar
  42. Lusardi A, Tufano P (2009) Debt literacy, financial experiences, and overindebtedness. National Bureau of Economic Research, Working Paper 14808.Google Scholar
  43. Massoud N, Saunders A, Scholnick B (2006) The impact of ATM surcharges on large versus small Banks: is there a switching effect? J Bus 79(4):2099–2126CrossRefGoogle Scholar
  44. Radecki L (1999) Banks’ payments-driven revenues. Fed Reserv Bank New York Econ Pol Rev 4(2):53–70Google Scholar
  45. Rice T (2003) The importance of payments-driven revenues to franchise value and in estimating bank performance. Emerging Payment Occasional Papers Series 2003-1D.Google Scholar
  46. Rice T, Stranton K (2003) Estimating the volume of payments-driven revenues. Emerging Payment Occasional Papers Series 2003-1C.Google Scholar
  47. Scholnick B (2009) Credit card use after the final mortgage payment: does the magnitude of income shocks matter? Mimeo.Google Scholar
  48. Scholnick B, Massoud N, Saunders A, Carbo-Valverde S, Rodríguez-Fernández F (2007) The economics of credit cards, debit cards and ATMs: a survey and some new evidence. J Bank Finance 32(8):1468–1483CrossRefGoogle Scholar
  49. Sealey CW, Lindley JT (1977) Inputs, outputs, and theory of production cost at depository financial institutions. J Financ 32:1251–1266Google Scholar
  50. Sinkey JF, Greenawalt MB (1991) Loan-loss experience and risk-taking behavior at large commercial banks. J Financ Serv Res 5(1):43–59CrossRefGoogle Scholar
  51. Sinkey JF, Nash RC (1993) Assessing the riskiness and profitability of credit-card banks. J Financ Serv Res 7(2):127–150CrossRefGoogle Scholar
  52. Stiroh K (2004) Diversification in banking: is non-interest income the answer? J Money Credit Bank 36(5):853–882CrossRefGoogle Scholar
  53. Stiroh K, Rumble A (2006) The dark side of diversification: the case of US financial holding companies. J Bank Finance 30(8):2131–2161CrossRefGoogle Scholar
  54. Zandi M and Singh V (2010) The impact of electronic payments on economic growth. economic analysis from Moody’s Economy.comGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Fordham UniversityNew YorkUSA
  2. 2.Bank of FinlandHelsinkiFinland
  3. 3.European Central BankFrankfurtGermany
  4. 4.The School of Business and Economics of Michigan Technological UniversityHoughtonUSA

Personalised recommendations