The rather poor contribution of electronic commerce to further liberalization of financial services in Europe, especially at the retail level, is neither surprising nor incidental. It is yet another instance of gaps in the legal and institutional framework of the single European market and symptomatic of the ongoing antagonism between legal and regulatory control – which is inherently national and local – and the provision of financial services across national borders.

The causes of incomplete European integration in online financial services

Although physical barriers at the border and tariffs do not obstruct the cross-border flow of capital and financial services, certain types of laws and regulations raise significant obstacles to international finance.

Legal barriers and international banking

Legal barriers to international economic integration can be express and intentional (direct or discriminatory barriers) or indirect and inadvertent (non-discriminatory or indirect barriers). Direct or discriminatory measures draw an explicit distinction between resident and non-resident financial institutions, investors or borrowers to the disadvantage of the non-residents (overt discrimination) or result in disadvantageous treatment of non-residents without stating so explicitly (covert discrimination). At one extreme, direct barriers can take the form of complete prohibition of cross-border capital flows and international banking by way of branches and subsidiaries. In practice, more common are less draconian operating restrictions such as exchange controls on movements of capital, limiting the presence of foreign firms to a single city or region or limiting their assets and market share to a fixed percentage of the total value of the local market.