A comparative analysis of the US and EU retail banking markets - Wsbi

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- ACH credits and debits: the statistics from the Federal Reserve Bank merely consolidate credit and debit transfer transactions processed according to the rules of the ACH network (actually by NACHA, the National Automated Clearing House Association). In this category too, one will notice that debits enjoy a far more rapid growth than credits, admittedly fuelled by a certain volume of cheque conversion applications. This rapid overview clearly shows that the US retail and commercial payments market is undergoing profound change, with greater structural shifts in the position of payment instruments than had been observed for decades. It is interesting to note that none of these “newly favored” payment instruments (be it debit transfers or debit cards) builds on any new technology (if we exclude here the development of contactless cards, a promising advance yet still marginal in terms of total transactions). On the contrary the technology underpinning these payment instruments has also been around for decades. That they now find rapidly greater acceptance is due to a change in customer preferences, induced on one side by a growing reliance on home and electronic banking channels (in 2004 89% of households used an electronic method as one of their main ways of conducting banking business), on the other by concerted efforts of the banking regulator and the banking industry to dematerialise payments in order to decrease payment systems costs, contribute to fraud reduction, and increase overall economic efficiency. The biggest driver for change of course could be provided by the “Check Clearing for the 21st Century Act” (or “Check 21”) enacted in 2003 and which became effective in 2004. This law facilitates the move to electronic exchange by allowing cheque collecting banks to discontinue the paper flow and exchange electronic images of the cheque instead. If required by the account owner this cheque image can be converted back to a paper document called a substitute cheque which then enjoys the same legal status as the original cheque. While Check 21 beyond doubt contributes to cost reductions, as today the end customer product is often still paper-based, some believe that bigger changes (including the discontinuation of cheque usage altogether) are yet to come. These preliminary considerations would have benefited from the availability of more statistical data, in particular as regards on one side the number of cash transactions (compared to non-cash transactions), and the local or regional patterns that exist within the US as regards the use of the various payment instruments and channels. Regarding cash, as an indication, there were at the end of 2004 banknotes and coins in circulation (i.e. issued by the Federal Reserve and Treasury) for a total value of USD 754 billion (of which USD 35 billion were coins) – or USD 245 per capita. This compares with €550 billion banknotes in circulation in the eurozone – or €176 per capita. These figures only provide a relative indication, due to the varying amounts of cash which are hoarded, and not circulating from an economic perspective. However, given ceteris paribus the similarity of these figures, this would allow the assumption that for the purpose of this comparison the influence of cash can be ignored. 6.3.1.3 Settlements of high value transactions in the US 6.3.1.3.1 Real time gross settlement system The Federal Reserve System owns and operates “Fedwire”, a real time gross settlement system which allows participants in the system to settle with finality in Central Bank money. Payments to the receiving participant are final and irrevocable. In 2004 there were some 125 million Fedwire payments effected by 9,500 participants for a total value of USD 470 trillion. Fedwire pricing conforms to the cost recovery principles laid down in the Monetary Control Act. 6.3.1.3.2 The National Settlement Service The Federal Reserve System also allows participants in private clearing arrangements (in 2002 over 70 cheque clearing houses, the ACH network with two operators as well as bank card processors) to settle with finality transactions on a net basis using accounts held at the Federal Reserve. During 2004 the netted value settled topped USD 20 trillion for over 15 billion transactions processed. 132
6.3.1.3.3 CHIPS The privately owned and operated CHIPS (Clearing House Interbank Payment Systems) combines functionalities of real time final settlement (during the operating day, for payments queued and matched, using participants’ pre-funded positions deposited via Fedwire) with an end of day multilateral net settlement process for remaining payment orders. In 2004 there were over 68 million CHIPS payments effected by 63 direct participants for a total value of USD 346 trillion. 6.3.1.4 Clearing of retail and commercial transactions in the US Three types of clearing mechanisms are in operation: - Cheque clearing: approximately 70% of cheques paid in the US are “not on us” and are cleared either through direct exchange, through some 66 local cheque clearing houses, through corresponding bank networks, or through one of the Federal Reserve Bank’s 45 cheque clearing centres (to be consolidated into 22 centres this year). - The Automated Clearing House: it clears batches of electronic credit and debit transfers instructions according to the rules set by NACHA. There are two operators: the Federal Reserve, and the privately owned EPN. In 2004 the ACH network processed over 12 billion transactions, a 21.4% increase compared to 2003. - Card networks: there are some 40 credit card, ATM or POS associations providing transaction authorisation and interbank financial settlement to their members. It is worth noting at this point that in most cases in the US there appears to be, at industry association or scheme level, a de-facto separation between rulemaking activities and actual operational functions (supported by market operators complying with set rules, yet in competition with each other as regards the provision of relevant services to market participants). 6.3.2 Payments in the European Union 6.3.2.1 Market participants 6.3.2.1.1 National Central Banks and the Eurosystem In the European Union, conducting monetary policy operations and overseeing payment systems is the responsibility of National Central Banks (NCBs) at national level and of the Eurosystem, led by the European Central Bank, at eurozone level. As regards payment systems, eurozone policies are coordinated, as far as practically possible, between the Eurosystem and the National Central Banks from non-eurozone countries, all represented within the European System of Central Banks (ESCB). As recently as early August 2005 the Eurosystem issued a policy statement (to which the National Central Banks of the European System of Central Banks that are not members of the Eurosystem also subscribe) in which it spells out its position as regards the “provision of retail payment services in euro to credit institutions”, as follows: - It confirms that one of the main tasks of the Eurosystem is “to promote the smooth operation of payment systems…” and that it may “provide facilities to ensure efficient and sound clearing of payment systems”. - It states that “Individual national central banks may provide processing facilities for retail payments in euro for credit institutions, either via participation in private retail payment systems or acting as operators of their own retail payment systems”…”they may also facilitate access to payment systems for all credit institutions”. - It also states that “…in order to avoid competitive distortions or a crowding-out of market initiatives, NCBs which offer retail payment services to credit institutions take due account of the requirements and competitive environment of the market place concerned, including cost recovery”. 133
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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In addition, for regulations define
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The European Parliament has to be k
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In fact, it should be mentioned her
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As far as coordination at the feder
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Despite the trend towards the estab
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Another important factor in the cho
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In the European Union, contrary to
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Although younger than CESR, both CE
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4.2.5.1.1.1.1 Limitation of the geo
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4.2.5.1.1.3 Recent trend: regulatio
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Another important common feature be
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The best execution rule was first m
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4.3.2.2.4 National Market System ru
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The ISD set a basis for the develop
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Best execution rules exist in both
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The decline of savings institutions
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Relative to population, the Europea
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5.2.2 Size of credit institutions 5
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Page 94 and 95: 5.3.2 Efficiency of credit institut
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Page 98 and 99: Finally, looking at cost-income rat
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Page 108 and 109: Table 19: Evolution of outstanding
Page 110 and 111: 6.2.1.2.2 Regulatory framework over
Page 112 and 113: 6.2.1.3 Comparison 6.2.1.3.1 Size o
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Page 116 and 117: The residential mortgage market in
Page 118 and 119: Funding by retail deposits represen
Page 120 and 121: In sharp contrast, the US mortgage
Page 122 and 123: 6.2.3.1.2 Lenders to small business
Page 124 and 125: The securitisation process requires
Page 126 and 127: Factoring is also continuously gain
Page 128 and 129: 6.2.3.2.4 Securitisation of small b
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Page 134 and 135: 6.3.2.1.2 Financial intermediaries
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Page 138 and 139: Assuming that technology, globalisa
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Page 142 and 143: Graph 19: Use of different distribu
Page 144 and 145: In terms of funding of the business
Page 146 and 147: Since then, established banks have
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Page 150 and 151: MoU Memorandum of Understanding OTC
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Page 154 and 155: Table F: Share of US banking indust
Page 156 and 157: Table L: Structure of the liabiliti
Page 158 and 159: Table R: Number of ATMS in the EU a
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A comparative analysis of the US and EU retail banking markets - Wsbi

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