Return from Retail Banking and Payments

56 Pages Posted: 12 Mar 2010

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Heiko Schmiedel

European Central Bank - Securities Settlement Systems Policy Division

Liang Song

Date Written: February 21, 2010


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

JEL Classification: G21, G28

Suggested Citation

Hasan, Iftekhar and Schmiedel, Heiko and Song, Liang, Return from Retail Banking and Payments (February 21, 2010). Bank of Finland Research Discussion Paper No. 3/2010. Available at SSRN: or

Iftekhar Hasan (Contact Author)

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101

Heiko Schmiedel

European Central Bank - Securities Settlement Systems Policy Division ( email )

Directorate General Payment Systems
Kaiserstrasse 29
D-60311 Frankfurt am Main
+49-69 13 44 70 59 (Phone)
+49-69 13 44 60 00 (Fax)

No contact information is available for Liang Song

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