Research Discussion Papers, Bank of Finland
No 3/2010:
Return from retail banking and payments
Iftekhar Hasan ()
, Heiko Schmiedel and Liang Song
Abstract: The European banking industry joined forces to achieve a
fully integrated market for retail payment services in the euro area: the
Single Euro Payments Area (SEPA). Against this background, the present
paper examines the fundamental relationship between retail payment business
and overall bank performance. Using data from across 27 European markets
over the period 2000–2007, we analyse whether the provisions of retail
payment services are reflected in improved bank performance, using
accounting ratios and efficiency measures. The results confirm that banks
perform better in countries where the retail payment service markets are
more highly developed, and the relationship is stronger in countries with a
relatively high adoption of retail payment transaction technologies. Retail
payment transaction technology can itself also improve bank performance,
and statistical evidence shows that heterogeneity in retail payment
instruments is associated with enhanced bank performance. Similarly, a
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 do also have a positive influence on the performance of commercial
banks. Additionally, our findings reveal that the impact of retail services
on bank performance is dominated by fee income. Finally, an effective
payment service market is found to be associated with higher bank
stability. Our findings are robust to different regression specifications.
The results may also be informative for the industry when reconsidering its
business models in the light of current financial market developments.
Keywords: retail payment; bank performance; cost and profit efficiency; (follow links to similar papers)
JEL-Codes: G21; G28; (follow links to similar papers)
53 pages, February 21, 2010
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