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

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Assuming that technology, globalisation, customer requirements as well as regulatory and legal obligations continue to drive a gradual convergence across countries and continents of the types of payment instruments being used, assuming as well that cash’s favour will erode over time, what could a future snapshot of EU and US retail and commercial payment systems be To try and answer that question, we have elected to take as benchmark the country which a) already today boosts the highest number of cashless payment transactions per inhabitant (ATM withdrawals being excluded), b) has already over the past decade taken decisive steps to optimize the role of cash in society, and c) has the reputation of rapidly implementing new technology in payment solutions (e.g. mobile payments, electronic bill payments,…). This country is Finland. The table below compares the US and US numbers per type of payment transaction and per inhabitant to those of Finland, and derives theoretical “gaps”: Assuming that the overall population remains stable (which is not necessarily true, as we know that the US, notably thanks to the direct and indirect effects of migration, see their population grow more rapidly than the European Union), and that the average growth rate for cashless payments (excluding ATM withdrawals and cheques) remains stable as well, the US could already reach the compounded figure of 69 billion (i.e. 238 cashless transactions per capita, times the area’s population) of such transactions suggested by the number of transactions per inhabitant of the “benchmark” country in the course of 2007 (i.e. within three years). The European Union (limited for the purpose of this exercise to the 15 Member States as existing prior to 2004) would not reach the figure of 92 billion (i.e. 238 cashless transactions per capita, times the area’s population) transactions any earlier than 2011 (i.e. it would need seven years). Payment transactions Payment transactions Payment transactions per inhabitant per inhabitant per inhabitant per annum (2004) per annum (2004) Gap vs. per annum (2004) Gap vs. in Finland (“the benchmark”) in the US “benchmark” in the EU “benchmark” Credit transfers 110 17 -93 45 -65 Debit transfers 16 20 4 42 26 Cheques 0 119 119 19 19 Debit card transactions 97 67 -30 42 -55 Credit card transactions 15 65 50 11 -4 ATM cash withdrawals 42 20 -22 25 -17 Total cashless transactions 280 308 28 184 -96 Excluding ATM cash withdrawals 238 288 50 159 -79 Excluding cheques and ATM cash withdrawals 238 169 -69 140 -98 In the present historical and economic context, these considerations lead to raising two questions: - The US have been traditionally presented as a payment area still relying to a great extent on paper for conducting retail and commercial payment transactions. The above summary shows that this assertion has become less true in recent years, and that the US growth rate for genuine electronic payment transactions (i.e. excluding ATM withdrawals and cheques) outpaces the European Union growth rate by 1,5 to 1 (12,5% vs 8%). 138
Assuming that a shift towards efficient instruments can be achieved (as suggested as a hypothesis in the table immediately above), what types of economies of scale can be achieved by US banks, payment schemes and operators Would such economies be all passed on to US customers, or would they be (partly) used to finance banks’, card schemes’ and operators’ expansions abroad, and notably in the European Union - Banking payment communities in the European Union have for a long time taken pride in the high level of efficiency and customer friendly instruments and payment solutions that they have developed. This pride was justified. However, in this post-euro phase, regulators have began exerting pressure on the banking industry to establish a Single Euro Payments Area (SEPA), which would deliver core customer payment functions in 2008, with a full migration from current national solutions ideally completed by the end of 2010. Some regulators have been pressing to include as many technological changes and innovations into this migration to pan-European payment instruments as possible. Some regulators also expect the economies of scale to be reaped from the accompanying standardisation to be fully passed on to customers. Because of the present focus on SEPA, the European payment industry should however not lose sight of the developments currently underway outside the European Union, and decide from a market participant perspective the level and the pace of the migration to undertake, and which alliances to form in order to accompany that migration. 6.4 Distribution channels in retail banking 6.4.1 United States 6.4.1.1 The bank branch As reported in the economic section of this paper, though the number of credit institutions in the US has decreased significantly in the last couple of decades (by 44% between 1985 and 2003, and by 22% between 1995 and 2003), the number of branches of credit institutions has in fact been increasing: from 89,509 branches in 1995 to 99,807 in 2003, an increase of 12%. This increase has in fact been driven by growth in the branches of commercial banks (19% over that same period), since the number of branches of savings institutions has actually fallen over that period, while that of the credit unions has remained stable (see table 2 in the economic comparison). On a per capita basis, as we reported also in the economic comparison, the total number of branches per 1 million heads of population has remained stable, with 336 branches recorded in 1995 and 343 in 2003. Looking at commercial banks alone however reveals that they grew their branch network over that period by nearly 10% (see table B in table annex). It isn’t known exactly why the number of (mainly commercial) bank branches has grown to such an extent in the US in spite of significant decreases in the number of credit institutions. There exists enough anecdotal evidence however to suggest first of all that banking executives still regard the bank branch as an essential distribution channel, and second that many also regard having a wide retail network as a competitive necessity in the US today. A 2004 survey 376 of bank executives in the US conducted by The Economist publication goes some way to explaining the nature of the importance of bank branching in the US, as well as the reasons for recent growth in bank branches there. It reports on ‘WaMu’, once a Seattle thrift, which has recently risen to rival with Wells Fargo for leadership of the national mortgage market in the US by buying 1,000 branches in the last 4 years. 376 “Trust me, I’m a banker: survey on international banking”, 15th April 2004, The Economist. 139
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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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5.2.2.2 European Union In Europe, t
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5.2.3 Concentration and consolidati
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5.2.3.2 European Union Average CR5
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A comparative analysis of the US and EU retail banking markets - Wsbi

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