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European Retail Payments Systems: Cost, Pricing, Innovation and Regulation

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The Palgrave Handbook of European Banking

Abstract

In this chapter, the authors examine the structure of European payment markets in terms of payment composition, behaviour and cost. Next, the operation of a typical payment network is described, which illustrates the so-called two-sidedness of payment markets. This specific network structure underlies many aspects of the economics of payments. Payment pricing, incentives, competition and cooperation are analysed within this two-sided markets framework. A discussion of payment innovations, the growing importance of “non-banks” in all segments of the payment chain and the European regulatory framework affecting the future of retail payments complete this overview.

We thank Hans Brits for valuable comments. The views expressed are those of the authors and do not necessarily represent the views of De Nederlandsche Bank or the European System of Central Banks.

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Notes

  1. 1.

    As measured by banknotes and coins over nominal gross domestic product (GDP). In the USA the cash ratio lies around 5 %, however, at the same time, they process a high number of paper-based instruments (cheques) and online credit transfer payments are still lagging behind and often at high user cost.

  2. 2.

    Denmark and Sweden have also developed “instant payment” systems where payment processing only takes seconds. For an in-depth analysis of the digitization of retail payments, the reader is referred to Bolt and Chakravorti (2012). See also Schwienbacher (2016) in this Handbook for an analysis how the Internet and crowdfunding shape the banking industry.

  3. 3.

    Electronic money is broadly defined as an electronic store of monetary value on a device that may be widely used for making payments to third parties. It can be issued by both traditional credit institutions as well as by a new type of (non-bank) payment institutions called electronic money institutions (EMIs).

  4. 4.

    It may be comforting to note that, not only has cash demand remained finite, but its response to negative rates has been quite subdued in countries that currently face negative policy rates.

  5. 5.

    Social cost usually contains bank cost, merchant cost and central bank cost. Consumer (“shoeleather”) costs are often ignored in these payment cost studies because they are difficult to measure.

  6. 6.

    According to a fact-finding study by CPMI (2014) “non-banks participate in all stages in the payment process and across all payment instruments”.

  7. 7.

    Shy and Wang (2011) suggest that proportional fees may not only be more profitable for card networks but also socially efficient when card networks and merchants enjoy some market power.

  8. 8.

    A large body of literature on two-sided market theory has been developed to evaluate payment pricing and card market competition issues, see e.g., Schmalensee (2002), Rochet and Tirole (2002, 2003, 2006), Gans and King (2003), Wright (2003, 2004), Guthrie and Wright (2007), Kahn and Roberds (2009), Prager et al. (2009), Rysman (2009), Verdier (2011), Evans (2011), McAndrews and Wang (2012), Wang (2012), Wright (2012) and Bedre and Calvano (2013).

  9. 9.

    This does not apply to business payments that regularly carry per transaction fees and are not “free” on the margin. The different treatment for business transactions is because payment volumes differ considerably across firms so, unlike the situation for consumers where this variance is much smaller, banks need per transaction fees to recover their costs—not charge all firms the same fee based on the average number of business transactions across all firms.

  10. 10.

    Gans and King (2003) prove that when surcharges are allowed the impact of the interchange fee on card usage is neutralized. However, excessive surcharges may shy consumers away from using cards.

  11. 11.

    See Schwienbacher (2016) in this Handbook for a discussion on the rise of digital currencies.

  12. 12.

    Some examples of European FinTech firms are Transferwise (an international money transfer service), iZettle (which makes card readers for mobile devices) and Adyen (an online payments platform that allows customers to accept many payment methods).

  13. 13.

    “Account information services” refer to services provided to consumers that collect and consolidate information on the different current accounts of consumers a single place. These services provide consumers with more than one account to get insight into their net balance and to make payments from various accounts. “Payment initiation services” refer to services to facilitate the use of online banking to make online payments. Payment initiation service providers prepare online credit transfers by transmitting a consumer’s security code to their bank with the credit transfer and inform the merchant that the transaction has been initiated.

  14. 14.

    Member states may apply two other options. Firstly, they may impose lower caps for domestic card payments. Secondly, during a five-year transition period they may allow banks and card schemes to apply a weighted average interchange fee of no more than the equivalent of 0.2 % of the annual average transaction value of all domestic debit card transactions.

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Authors and Affiliations

  1. Economics and Research Division, De Nederlandsche Bank, 1000 AB, Amsterdam, P.O. Box 98, The Netherlands

    Wilko Bolt

  2. Payments Policy Division, De Nederlandsche Bank, Amsterdam, The Netherlands

    Nicole Jonker & Mirjam Plooij

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  1. Wilko Bolt
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  2. Nicole Jonker
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Correspondence to Wilko Bolt .

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Editors and Affiliations

  1. Cass Business School, City University London Cass Business School, LONDON, United Kingdom

    Thorsten Beck

  2. Faculty of Finance, Cass Business School-City Universit Faculty of Finance, London, United Kingdom

    Barbara Casu

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Bolt, W., Jonker, N., Plooij, M. (2016). European Retail Payments Systems: Cost, Pricing, Innovation and Regulation. In: Beck, T., Casu, B. (eds) The Palgrave Handbook of European Banking. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-52144-6_7

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  • DOI: https://doi.org/10.1057/978-1-137-52144-6_7

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