Cashless payments and financial stability in the EU: the moderating effect of financial regulation

The paper analyzes the relationship between the cashless payment and the financial stability of the 27 European Union (EU) member states, using Panel-Corrected Standard Errors (PCSE) and Feasible Generalized Least Squares (FGLS) estimators to test for differences between the pre-2004 and post-2004 EU groups. The findings show a positive relationship between cashless payments and financial stability, provided sufficient regulatory capital requirements are in place. The EU is very diverse, especially among its member states. Pre-2004 EU members seem to have an advantage in banking infrastructure and the coordination of regulatory oversight, as digital payments multiply without causing disruption. On the other hand, post-2004 EU members have to deal with difficult conditions amid rigid regulation and the challenge of integrating financial innovation into their activities. The policy implications are that, given the heterogeneity of financial systems across the EU, more targeted regulatory actions are needed to foster the healthy development of digital payments and ensure financial stability. The novelty of the study lies in its geographically differentiated view of the effects of digital finance and in its provision of specific recommendations to regulators.