Why do barriers to cross-border payments exist in the EU?

People living and travelling in the European Union face ongoing difficulties managing their finances across national borders. Payments present ongoing problems for cross-border travellers and commuters, since EU countries differ as to what kinds of payment mechanisms dominate, and credit cards aren't accepted everywhere.

For example, some parking meters in the Netherlands only accept Dutch debit cards, which can cause problems for German and Belgian day-trippers who cross the border to shop. And if the situation is difficult for EU residents, it is even harder for migrants from outside the EU. 

Payments aren't the only area where financial integration is incomplete. Shopping for consumer finance products internationally, such as mortgages, payment tools, or insurance, is fraught with risks and uncertainties. Pension schemes are still under-integrated, and taxation systems differ from country to country. 

In some instances, an absence of integration benefits consumers, as they can take advantage of certain cross-border differences such as the persistence of asymmetrical pricing for financial products and services (e.g., mortgages, insurance) or consumption opportunities (e.g., culturally unique shopping environments or product availability). In fact, this is the logic behind cross-border employment – arbitrage – and also behind the idea of a single market that increases consumers’ choices.

Overall, however, these problems deter the emergence of a single market for financial services and discourage mobility across borders, especially labour mobility.

In recent years, significant advances have been made in financial integration in the EU. These including the construction of the Single Europe Payments Area (SEPA), cross-border taxation agreements, Europe-wide pension plans, and the purchase of mortgages across EU borders. By late 2018, EU residents should also be able to make instant payments using the TARGET Instant Payments System (TIPS). These initiatives have vastly improved consumers’ choices and smoothed their financial management.

However, this financial integration is far from complete, even in Euroregions that have undergone up to five decades of governmental and technical integration. Why do these barriers persist?

Technical, regulatory, or cultural barriers?

These different problems persist for different reasons. To date, most discussion of these problems has focused on technical/regulatory barriers (e.g., system integration, legislative boundaries) or the characteristics of single products/services (e.g., payments, health insurance). But barriers can also be cultural. 

Table 1. Barriers to using financial products across European borders

At first glance, people’s decisions about using consumer finance products across borders may seem to be based largely on technical / regulatory considerations (e.g., system integration, legislative boundaries) or the characteristics of single products/services (e.g., payments, insurance).  

In fact, these are precisely the areas in which most research has been carried out. Navigating different national systems of taxation and pensions, for example, depends on a large extent to having sufficient information about how such systems differ from country to country, and on making quantitative judgements about whether or not a relocation will result in a net monetary benefit. 

However, a growing body of evidence suggests that the problem of financial integration is complicated by the existence of multiple cultural-economic systems. Sander, Kleimeier & Heuchemer note that "cultural distance limits international financial integration over and above what can be expected from economic trade and transaction costs." There are two ways in which cultural and psychological factors come into play: 

  1. People’s decisions about product use are influenced by their personal preferences and cultural attitudes.
  2. Consumer finance products and services are themselves shaped by psychological and cultural considerations; for example, attitudes about appropriate prices, risk levels, savings and debt, insurance needs, and so on vary significantly from one cultural group to the next. 

There are many other norms, values, and practices with cultural inflections that influence what we do with financial tools and how we think about money. The concept of “cultural economy” provides a way to examine the interplay between monetary and non-monetary values and preferences.

Developed primarily by anthropologists, sociologists, and economists, it recognizes that markets and other economic activities can only be understood in relation to the broader norms, values, practices, and institutions that support and reproduce social relations. 

Cultural meanings and social relations shape economic activities, whether we are concerned with money exchange, contemporary capitalism, gift economies, or hunter-gatherer provisioning.

These processes have been recognized for centuries by scholars such as economist Adam Smith (18th century), sociologist Georg Simmel (19th-20th centuries), and recently, through a substantial corpus of work in the sociology and anthropology of economics and finance.

The interplay of culture and market structures (“cultural economics”) shapes financial management across borders, particularly at the national level, because there is feedback between technical features of markets (e.g., pricing, distribution, regulation) and sociocultural dimensions of markets (e.g., language, aesthetic preferences, household structures).

Since this phenomenon has been studied very little, it is unclear precisely why financial barriers remain entrenched, in what ways they affect consumer mobility, and what could be done to overcome these barriers effectively.

Behavioural economists, marketing teams, and policy makers are generally well aware of the effects of culture on various aspects of microeconomics, ranging from product development to pricing, distribution, and consumer decision-making.

Cultural-economic effects can appear at different social levels: they can be due to norms in national culture, preferences within a particular ethnic group, gender-specific trends, age-related effects, or even geographic location.

They can emerge from all kinds of socioeconomic institutions, hence we can talk about not only national culture or ethnic culture, but also subcultures, consumer culture, government culture, or business culture. Extending Haviland’s definition of culture as “shared and learned behaviour,” cultural economics is shared and learned behaviour around economic practices. 

The influence of culture on price levels is particularly well understood, since its quantitative aspect makes it relatively straightforward to observe. For example, Ackermann and Tellis, in their study of pricing differences in American and Chinese supermarkets in California, concluded that the average 37% price difference they observed was due to cultural differences in notions of value. Similarly, Paul Hunt notes that national preferences for local versus foreign goods can have a significant effect on pricing structures

While these findings are in keeping with microeconomic models, they add a missing dimension, since they show how utility is shaped by one’s belonging in a social group.

This is a potentially fruitful area of inquiry in the European Union since, despite the existence of a single currency, price differences continue to produce “grey markets” in which identical goods trade for different values in different countries. Comparing prices across European borders and purchasing goods over the Internet or when travelling is a commonplace and well-documented phenomenon (especially when it comes to alcohol).  

Overcoming assumptions

Considering cultural effects can helps us overcome misleading methodological assumptions. A problem with comparing indebtedness across national contexts is that simply looking at a household’s total liability may tell you very little about their ability to pay their debt back. 

A clear example of this is in José Ossandón's research, which used interviews, observations, and network analysis to show how many Chileans will lend out their credit cards and store cards to their family, friends, and neighbours. This means that an individual may have a large personal liability on the books, but in fact owe very little of the money themselves.

This is critical information for a government body or charity that conducts financial interventions, such as literacy programs or providing relief, who may otherwise be alarmed at levels of personal debt and prematurely judge the debtors to be incapable of financial management.

To understand how European consumers use financial products across borders, we therefore need to analyse this nexus between the cultural, economic, and technical aspects that shape them. In separate articles, I discuss these three aspects with respect to two areas in which cross-border consumer finance is problematic in the Eurozone: taxation (forthcoming) and payments (see here). 

We should, however, be wary of pointing to culture as an explanation for everything, as it can lead to erroneous assumptions. For example, there is a tendency to blame indebtedness on either rampant consumer culture, or a “culture of poverty,” or both.

Yet the reasons why people accumulate unmanageable debts are at least as much due to quantifiable effects, such as having to service a household’s basic needs when faced with decreasing purchasing power and higher interest rates.

This is precisely what “cultural economics” means: that contexts and behaviours will be shaped by a variety of factors. Without investigating, we cannot say whether debt, savings behaviours, payment choices, level of insurance, or any other aspect of consumer finance will be more or less cultural, more or less economic. Our task is to discover precisely how each factor weighs in. 

Further reading

Ackerman, D. and G. Tellis. 2001. Can culture affect prices? A cross-cultural study of shopping and retail prices. Journal of Retailing 77(1): 57-82.

Allen, F. 2011. Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies. CEPR.

Asplund, M., R. Friberg and F. Wilander. 2007. Demand and distance: Evidence on cross-border shopping. Journal of public Economics 91(1): 141-157.

Assmus, G.,and C. Wiese. 1997. How to address the grey market threat using price coordination. International Marketing Strategy: Contemporary Readings, https://sloanreview.mit.edu/article/how-to-address-the-gray-market-threat-using-price-coordination/ 

Callon, M. 1990. Techno‐economic networks and irreversibility. The Sociological Review 38(S1): 132-161.

Cetina, K. and A. Preda. 2012. The Oxford Handbook of the Sociology of Finance. Oxford University Press on Demand.

Chibnik, M. 2011. Anthropology, Economics, and Choice. University of Texas Press.

Cornips, L. and V. De Rooij. 2015. Cultural practices in the periphery: The politics of carnival in the Dutch Province of Limburg. Anthropological Journal of European Cultures 24(1): 83-101.

Decoville, A. et al. 2013. Comparing cross-border metropolitan integration in Europe: towards a functional typology. Journal of Borderlands Studies 28(2): 221-237.

European Payments Council. 2015. EPC Report to the ERPB on Instant Payments.

Gaspar, V., P. Hartmann and O. Sleijpen. 2003. The Transformation of the European Financial System. ECB.

Guardiancich, I. and D. Natali. 2012. The cross-border portability of supplementary pensions: Lessons from the European Union. Global Social Policy 12(3): 300-315.

Hart, K. 2010. The Human Economy. Oxford: Polity.

Haviland, W. A. 1975. Cultural Anthropology (3rd ed.). New York: Holt, Rinehart & Winston. 

Hong, H. and M. Kacperczyk. 2009. The price of sin: The effects of social norms on markets. Journal of Financial Economics 93(1): 15-36. 

Joossens, Luk, and Martin Raw. 1995. Smuggling and cross border shopping of tobacco in Europe. BMJ: British Medical Journal 310.6991 (1995): 1393-1397.

Knippenberg, H. and J. Markusse (eds.) 1999. Nationalising and Denationalising European Border Regions, 1800–2000. Vol. 53. Springer Science & Business Media.

Österle, A. 2007. Health care across borders: Austria and its new EU neighbours. Journal of European Social Policy 17(2): 112-124.

Rabinovich, L. et al. 2009. The Affordability of Alcoholic Beverages in the European Union: Understanding the Link Between Alcohol Affordability, Consumption and Harms. Cambridge: Rand Corporation (2009).

Sahlins, M. 1972. Stone Age Economics. London: Tavistock.

Simmel, G. 1978. The Philosophy of Money. London: Routledge & Kegan Paul.

Sander, H., S. Kleimeier & S. Heuchemer. 2016. The resurgence of cultural borders during the financial crisis: The changing geography of Eurozone cross-border depositing. Journal of Financial Stability 24: 12-26.

Scott, J. 1976. The Moral Economy of the Peasant. New Haven: Yale University Press.

Spierings, B. & M. van der Velde. 2013. Cross-border differences and unfamiliarity: Shopping mobility in the Dutch-German Rhine-Waal Euroregion. European Planning Studies 21(1): 5-23.

Thompson, E. P. 1971. The Moral Economy of the English Crowd. Past & Present 50: 76-136.

van der Velde, M. & B. Spierings. 2010. Consumer mobility and the communication of difference: Reflecting on cross‐border shopping practices and experiences in the Dutch‐German borderland. Journal of Borderlands Studies 25(3-4): 191-205.