Impending regulatory changes will shake up the European banking industry, threatening the revenues and profitability of established institutions while creating fresh opportunities for new players. In a recent study,¹ we analyzed the implications of an EU plan to combine the present patchwork of national payments systems into a Single Euro Payments Area (SEPA) by the decade's end.

The European Commission has been advocating this move since EU countries adopted the euro, in 1999. The new rules, which will harmonize the use of payments instruments and establish standards for transactions (including current accounts and credit and debit cards), will not take effect until at least 2008. However, since the convergence of standards will likely increase cross-border competition—and lower the fees that consumers pay—Europe's banks should immediately explore new revenue-generating and cost-cutting strategies.

Our research, which examined the payments practices of banks in nine European countries,² found that the current system is largely inefficient. Indeed, though payments made up one-quarter of the European banks' revenues in 2002 (the latest year for which comprehensive pan-European data are available), they accounted, on average, for a mere 9 percent...