SEPA in the Context of the Financial Crisis

SEPA in the Context of the Financial Crisis

Retail payments business proves to be resilient

19 July 10

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Why needs to be kept high on the agenda

Realising requires a lot of work, energy and money. Dedicating human and financial resources to has been a challenge for the financial industry right from the start. In the context of the financial crisis and the subsequent period of lower growth and higher risks that we experience now, this challenge may seem insurmountable, given that other issues may have higher priority. Doubtlessly, the financial crisis will have consequences for the financial sector with respect to size, scope of activities, governance and risk management. However, it has also shown that at a time when other sources of income are more volatile, the financial industry can count on reliable and regular revenues generated by the provision of payment services. In contrast to other segments, retail payments business has successfully withstood the financial crisis. Thus, financial institutions with a balanced business model have been better equipped  to cope with the situation. To be able to maintain and further develop this business segment, commitment to is crucial, and it needs to be kept high on the agenda.

Discussing entails a lot of attention to detail. Often, we get so much involved in the various aspects of the project that we sometimes run the risk of losing the bigger picture. In the context of the financial crisis, it is useful to take a bird's eye view and identify developments and dynamics that are shaping the retail payments landscape in Europe and beyond. This may provide a fresh perspective on .

Retail payments - the bread and butter of banking business

Retail payment revenues amount up to 25% of total bank revenues1. As already mentioned, unlike other sources of income, they have a reliable and stable character. In addition, retail payment services often provide the foundation for long-term bank-customer relationships. They represent the interface of the financial industry with the day-to-day lives of almost every individual and every company in Europe. Therefore, especially at a time when bankers have often been vilified by the mass media as greedy locusts, the retail payment market has a crucial function in counteracting this populist debate and preserving the public confidence in banks and the financial system.

However, despite their stable nature, retail payment revenues cannot be taken for granted. They are under pressure from different directions: increasing competition due to the progressing integration in the European payments market, substantial investment requirements to keep step with customer demands and technological progress, and a more critical stance of the competition authorities on e.g. interchange fees and float. Somewhat ironically, some of these pressure factors relate to the creation of in one way or the other. Thus, it is not surprising that is seen by some actors in the financial industry rather as a threat than as an opportunity.

On the other hand, there are ways to improve retail payment revenues by cutting back operational costs, increasing non-cash payment volumes and offering innovative payment services. This is where the positive effects of come into play. To realise these opportunities, however, some hurdles must be overcome.

According to the Cap Gemini World Payments Report 2009, non-cash payments could achieve sustained growth throughout Europe if all stakeholders in the payments value chain, i.e. banks, merchants and customers, are committed to their development and use. If this commitment falters and the prerequisite conditions are not created, the volume of non-cash payments is unlikely to expand beyond GDP growth.

Foregoing the chance to expand the non-cash payments business would mean that the chance for reducing operational costs by benefiting from economies of scale is lost. Academic research shows that as a rule of thumb, a doubling of payment volume increases operating expenses by only a third. As regards the commitment of stakeholders, it is expected that the recently created Council, which brings together top-level representatives from both the demand and supply sides of the European retail payments market2, will improve the level of user involvement in the project and will foster consensus between the major stakeholders on the next steps for the full realisation of . As regards the creation of the prerequisite conditions, the determination of (a) migration end date(s) by legislation for Credit Transfer ( ) and Direct Debit ( ), which is strongly supported by the Council, will be a decisive step. In our view, end 2012 for and end 2013 for will be plausible options. Other steps required are the provision of attractive service offerings to customers and the development of innovative solutions.

Innovative payments - more than fads and fashion

Unfortunately, the provision of retail payment services to customers lags behind with respect to the ubiquitous usage of mobile phones, chip technology and the internet. E-commerce grows strongly and has further growth potential, but when it comes to paying through online and mobile channels, customer choice for payment method is still limited. While some solutions for specific consumer needs are available in certain countries, widely available and interoperable solutions at pan-European level are missing. Not surprisingly, the European Commission established that 61% of all cross-border e-commerce transactions fail due to a lack of cross-border shipping and payment methods. Thus, the payments industry needs to be able to deliver attractive solutions for e- and m-payments not only at national, but also at European level. Otherwise, there is the risk that Europe further loses ground in e-commerce.

In this context, it seems that the influence of future consumer behaviour is still being underestimated. At present, a new generation of internet and mobile users is emerging. These new users require new applications and they will ultimately become a completely new type of financial services consumer, not hesitating to use a new generation of financial service providers in order to get the services they want. The new generation will perceive payment services from a different perspective, looking for personalised and simple services anytime, anywhere. The financial industry must be able to address this new generation's trends and lifestyles, otherwise, there is a risk to lose an important customer segment to competitors from other sectors.


In summary, despite the financial crisis, retail payments business has been resilient, providing reliable and regular revenues. Consequently, banks with a balanced business model have been in a better position to weather the storm. The importance of retail payment business is further backed by empirical analysis that shows that the performance of banks in countries with more developed retail payment service markets is better3. This relationship is stronger in countries with a relatively high adoption of retail payment transaction technologies, like automatic teller machines (ATMs) and point-of-sale (POS) terminals. Retail payment transaction technology itself can also improve bank performance. A higher usage of electronic retail payment instruments seems to stimulate banking business4. These observations appear to be informative for the financial industry when reconsidering its business models in the light of the financial crisis and provide strong support for .

Wiebe Ruttenberg is Head of the Market Integration Division in the Directorate General Payments and Market Infrastructure of the European Central Bank. Monika Hempel is Expert in the Market Integration Division of the European Central Bank.

The views expressed are those of the authors and therefore should not be reported as representing the views of the European Central Bank.


1"Retail Payments - Integration and Innovation". A Joint Conference by the ECB and De Nederlandsche Bank 25-26 May 2009, p. 23.

2The newly created Council ( consists of representatives from EACB, EBF, and ESBG (supply side); BEUC, BusinessEurope/EACT Eurocommerce, UEAPME and national public authorities (demand side); four NCBs on a rotating basis, and is co-chaired by the ECB and EC.

3"Retail Payments - Integration and Innovation". A Joint Conference by the ECB and De Nederlandsche Bank 25-26 May 2009, p. 6.

4Ibid. p. 23.

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