The 12 countries in the eurozone have been members of an economic and monetary union for almost three years and will soon have a single currency. But the arrival of notes and coins in January, the final step in introducing the euro, will highlight just how far the European Union is from creating a single financial market.

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Some 300m Europeans will for the first time be able to compare directly prices across much of the Continent, and are expected to use the opportunity to shop across borders to find the best deals. They will, however, find it much less easy to transfer money outside their home countries or to buy financial services abroad.

While large companies can now effectively treat the eurozone as a single financial market in raising capital and managing their funds, smaller enterprises and individual consumers remain largely confined to national boundaries. The launch of euro notes and coins is thus seen by many as only the first step in creating a truly European financial services market that will help the Continent’s citizens reap the benefits of monetary union.

The most obvious obstacle in turning the euro into a single means of payment is the absence of settlement systems spanning the eurozone - apart from those operated by the credit card companies. Each of the 12 countries has its own systems for clearing both small and large transactions and cheques where they are still used.

"It may be called a single currency," says Norman Bernard of First Consulting, which advises European banks on strategy, "but until you have a pan-European payments system, it is only one small step towards financial integration."

There are mechanisms for settling cross-border transactions including Target, run by the European Central Bank, Euro1, operated by the Euro Banking Association, and the EBA’s Step1, launched last year for amounts less than E50,000. However, the cost of using these systems means most smaller transactions are still settled through correspondent relationships between individual banks.

"In wholesale banking, the banks are already operating with the euro and institutions are working out pan-European strategies," says Nick Viner of Boston Consulting Group, the management consultancy. "Producers of retail financial services have yet to think through the change that will happen when consumers start to think in euro terms."

Mr Viner believes there is an opportunity to create clearing mechanisms for lower value payments that would operate across the eurozone "inside national borders and across them. "The existing technology of the 1970s is old and needs to be replaced," he says. "There will be a push to bring together the different payments sytems, perhaps by migrating them on to a new system."

One incentive to take such a step has been provided by the European Commission, concerned about the discrepancy between the cost of domestic transfers and those across borders. A Commission study found the average fee for transferring E100 between member states was E17.10 and that 5 per cent of payments took longer than the six-day deadline set in an EU directive.

The Commission has proposed legislation to reduce bank charges for transfers between EU countries to the level of charges for domestic transfers from 2003. The banks, for their part, have argued that the absence of common information technology systems and technical standards make this deadline unrealistic and have proposed an alternative phased reduction of the differential over five years.

Most observers believe Frits Bolkestein, the internal market commissioner, is unlikely to back down - he believes consumers will find it incomprehensible that they should pay more to make payments in the single currency outside their own country. If he sticks to this position, the banks will face an immediate loss of income by being forced to reduce sharply charges that currently reflect the extra cost of such payments.

"Some banks are already preparing to replace the income," says Rob Hetherington, a financial services partner at Accenture, the management consultancy. "Domestic payments may get dearer, but there are other levers they can pull, such as attacking their cost bases."

One way to attack costs would be through mergers and acquisitions to achieve greater economies of scale. These have been happening steadily within European national markets and also across borders between the EU’s smaller member states in Scandinavia, the Benelux countries and the Iberian peninsula.

However, there has yet to be a significant cross-border merger involving banks in the larger EU countries that could begin to create a pan-European cost base for processing bank transactions. With taxation, the law and retail financial markets varying from country to country, there are few immediate synergies in cross-border deals and little scope for the branch closures that make domestic consolidation attractive financially. Worse, there are plenty of obstacles to such deals - in the form of governments keen to retain national banking champions and managements unwilling to take the junior role in mergers.

Hartmuth Jung, chairman in Germany of UBS Warburg, the investment banking arm of Switzerland’s largest bank, says the arrival of the euro notes and coins could provide the catalyst for change. With domestic consolidation reaching the limits permitted by competition regulators, the attractions of cross-border mergers will be strengthened by the symbolism of the new currency - the EU’s commitment to creating a single financial market.

"The physical introduction of the euro will bring a big change in the hearts and minds of consumers and bankers," he says. "My bet is that over the next few years we’ll see at least half a dozen cross-border transactions in the financial services industry."