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Efficient retail payments: An untapped source for reviving growth in Europe?

Efficient retail payments are associated not only with lower direct costs but also with indirect benefits, and ultimately – with enhanced economic growth. This column presents research on different retail payment habits in the Eurozone. A correlation exists between the forms of payment in a country and its recent economic fortune. There are a number of methods to promote more efficient payments. The biggest challenge to increase the efficiency of retail payments in Europe is the heavy regulation and barriers to entry of new payment methods.

Retail payments are an inherent part of most adults’ daily life in Europe. But promotion of efficient retail payments is seldom an inherent part of European growth agendas. It should be.

Schmiedel et al. (2012) estimate that the costs of providing and making retail payments are approximately 1% of Europe’s GDP. This suggests that making retail payment infrastructure more efficient would directly boost European GDP. And as in the case of other infrastructures, the effects of more efficient retail payments are not limited to direct cost savings. There is evidence that such efficiency would also yield indirect benefits by improving the supply chain, facilitating trade, boosting consumption, and enhancing bank sector performance (Hasan et al. 2012a and 2012b). Furthermore, cash is an attractive method of paying in the shadow and underground economies (see, e.g., Drehmann et al. 2002, Schneider and Windischbauer 2008, and Schneider and Buehn 2010). Hence, the promotion of electronic payment methods might not only stimulate economic growth, but also might provide a means to improve public finances for indebted European economies.

Payment habits differ across Europe

Despite the use of a common currency, there is a significant variation of payment habits across the Eurozone, as documented in Figure 1. Electronic forms of payments are popular, and increasingly so in Finland, the Netherlands, Estonia, Luxembourg, Germany, and Austria (Figure 1). In contrast, they remain particularly little used in Greece, Italy, Malta, and Cyprus. While data on cash transactions are not directly available, our calculations indicate that this is because of popularity of cash payments in these countries.1 More generally, Figure 1 suggests a correlation between payment habits and recent economic fortunes, which we try to capture in Figure 2. Our research shows that payment habits are slowly converging within the EU (Schmiedel et al. 2013), perhaps too slowly given the issues at stake.

Figure 1. Number of paperless payments per inhabitant, Eurozone

Figure 2. Credit ratings and paperless payments per inhabitant

It is, of course, possible that economic development is driving more efficient payment choices and not vice-versa. Hasan et al. (2012a), however, argue that causality goes from payment methods to growth. Furthermore, some of the most exciting experimentation with new payment methods is currently taking place in the developing world (e.g., Kenya is a leading country in the adoption of mobile payments). While much more needs to be done to isolate the effects of retail payment methods on the real economy, the available evidence suggests that promotion of efficient retail payments should be incorporated into the agenda of structural reforms to cure public finances and boost growth in Europe.

SEPA is not enough

Single Euro Payments Area (SEPA) is an important policy initiative to harmonize payment methods in Europe. But SEPA alone is hardly enough. It does not automatically increase the speed of convergence of payment habits, nor does it ensure that such convergence would lead to an efficient payment frontier. It is also likely to further enhance the market power of international payment card platforms such as MasterCard and Visa. Thus, much more could be done to ensure the development of efficient retail payment infrastructure in Europe.

What are the best methods to promote the adoption and use of more efficient retail payments?

  • Enhancing consumer awareness sounds like a trivial answer, but our research suggests that it works. Hyytinen and Takalo (2009) show that an increase in consumer awareness was a major force behind the spread of electronic payments in Finland (where such payment forms are the most popular in the Eurozone according to Figure 1).
  • The need for vigorous competition policy to ensure competition among the payment card platforms is also well understood. With a vigorous competition policy, there might even be a case for subsidizing the adoption of EFTPOS terminals and related mobile payment devices by smaller merchants.
  • Similarly, while cash remains a competitive method for small transactions, large value cash transactions should be discouraged. Some countries have already implemented restrictions on large value cash transactions (e.g., cash transactions above 3000 and 2500 euros are not permitted in France and Spain, respectively). Others should follow, and the limit could be lower.
  • The European monetary authorities could also reassess the costs and benefits of issuing large value euro banknotes (as already emphasized by Drehmann et al. 2002).
Tackling vested interests

But perhaps most importantly, there is a need in Europe to remove entry barriers to both new service providers and new payment methods, such as e-money and mobile money. For example, in adoption of mobile payments, Europe is lagging behind. One problem in the EU is that the incumbent providers of payment media are protected by heavy regulation. The recent financial crisis is only increasing the regulatory burden on banks, although the payment system functioned remarkably well throughout the crisis. Incumbents protected by entry have little incentive to introduce new payment methods, as this would cannibalise their existing products.

Developing an efficient regulatory framework for new forms of payments is, however, challenging. The regulatory structure is fragmented, calling for cross-border cooperation among competition policy authorities, and banking, internet, and telecommunication regulators. While ensuring safety and stability of new forms of payments is obviously important, it is the nature of regulators to err on the safe side and to remain sceptical about new payment methods, especially after the crisis. The central banks may also have a vested interest – their seigniorage revenue is linked to cash use.
Despite these challenges – or perhaps because of them – it is vitally important for Europe to ensure the adoption of existing electronic forms of payments across the continent, and to speed up the spread of new payment media. The European Commission’s Green Paper, “Towards an integrated European market for card, mobile and internet payments,” is a step in the right direction, but is not nearly enough.


Drehmann M, C Goodhart, and M Krueger (2002), “The challenges facing currency usage: will the traditional transaction medium be able to resist competition from the new technologies?”, Economic Policy 17, 195-227.

Hasan, I., De Renzis, T., Schmiedel, H., and Zhang, G. (2012a), “Retail payments and economic growth”, Bank of Finland Research Discussion Papers No 19/2012.

Hasan I, H Schmiedel and L Song, (2012b), “Return from retail banking and payments”, Journal of Financial Services Research 41, 163-195.

Hyytinen, A and T Takalo (2009), “Consumer awareness and the use of payment media: Evidence from young Finnish consumers”, Review of Network Economics 8, 164-188.

Martikainen E, H Schmiedel and T Takalo (2013), “Convergence in European retail payments”, Occasional Paper Series No 147, European Central Bank.

Schmiedel, H, G Kostova and W Ruttenberg (2012), “The social and private costs of retail payment instruments: A European perspective”, Occasional Paper Series No 137, European Central Bank.

Schneider, F and A Buehn (2010) “New estimates for the shadow economies all over the world”, International Economic Journal 24, 443-461.

Schneider, F and U Windischbauer (2008) “Money laundering: some facts”, European Journal of Law and Economics 26, 387-404.

1 Our estimations suggests that the number of cash transactions per inhabitant in the Eurozone have been the highest in Italy, Greece, Malta and Spain over the recent years despite the economic crisis.

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