4 September 2018
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1. Introduction Since the introduction of the euro, various initiatives have been launched to significantly reduce the cost of cross-border transactions within the euro area. The three most important of such initiatives are (1) the introduction of a set of single euro payments area (SEPA) standards for euro transactions, including single euro payments area credit transfers and single euro payments area direct debits. (2) the Payment Services Directives (Directive 2007/64/EC, replaced by Directive (EU) 2015/2366) that increased the transparency of fees and facilitated the entry of new players in the market, resulting to greater competition in payments, including cross-border payments, and that increased the transparency of fees. This also resulted in improvements in the payments infrastructure, which became capable of handling increased payment volumes in euro at lower costs; and (3) Regulation 2560/2001, later replaced by Regulation 924/2009, on cross-border payments, that also contributed by equalising fees for cross-border and national payments in euro within the EU. All these initiatives contributed to the further integration of the Single Market and the emergence of a more integrated payments market within the euro area.ESBG recognises these as important and successful steps towards building a deeper and fairer Single Market, which allows people, services, goods and capital to move freely in an economy and ESBG is supportive of the objective to strengthen the euro as a single currency. To that end, ESBG welcomes the European Commission's proposal for a Regulation of the European Parliament and of the Council (EC) No 924/2009 as regards certain charges on cross-border payments in the Union and currency conversion charges. ESBG has also taken note of the ongoing work of the European Parliament and the Council on this proposal, and this Position Paper is mainly addressed at these two Institutions.ESBG would like to provide some comments and concerns related to the measures proposed to achieve the European Commission's objectives. In the view of ESBG, regulatory interventions in market pricing are only justified in cases where market failures are clear and where these are to the detriment of consumers, and only where all other possible regulatory intervention mechanisms have failed.This paper will first provide backgrounds, observations and the ESBG position on the two key topics of the proposed regulation – cross border charges and currency conversion services. The reasoning on these topics is followed by eight proposed amendments. These amendments have been written taking the draft report of the Rapporteur of the ECON Committee into account. In the view of ESBG, these amendments deliver a more proportionate approach to the European Commission's ambitions to strengthen the position of the euro, and when it comes to transparency for currency conversion charges. The ESBG urges the Members of the European Parliament to take these into account, whilst ESBG also invites the Members of the Council to take note of these.
2. Cross-border payments in euro – Background and ESBG ObservationsPricing that reflects actual cost is well presented in the customer framework agreements required to meet PSD2 requirements. Besides, there are 19 Member States that are part of the euro area, there are two Member States that already “opted-in" (Romania and Sweden) so there remain 7 Member States that are not part of the euro area (and the largest one of those is in the process of leaving the Union). The total number of Credit Transfers in the EU, according to the European Central Bank (ECB) (their Payment Statistics over 2016, published 15 September 2017), were 30.638,6 million in 2016. If we subtract the UK share from that, 26.405,3 million transactions remain. Out of these, 20.576,4 million were within the Euro are plus Romania and Sweden, so a minority of Credit Transfers (21%) was processed in non-euro. This is summarised in table 1.
Table 1: Credit Transfers in the EU
It should be noted though that the figures mentioned so far are the total for domestic transactions plus cross border transactions. Looking at cross-border transactions only, the European Central Bank (in their Economic Bulletin, Issue 3 / 2017 – Articles Harmonised statistics on payment services in the Single Euro Payments Area, p71) states, that for the European Union as a whole, only 2,9% of all credit transfers are carried out cross border – and this figure includes the cross-border transactions within the euro area. Estimating the cross-border transactions origination from non-euro Member States by taking 2,9% of all non-euro transactions means that 162 million transactions are possibly in scope. This is only 0,78% of all transactions within the euro area.
Looking at the details of the non-euro Member States in more detail, the following – unfortunately not complete for all Member States – data is provided over 2016 by the ECB (the numbers represent millions of Credit Transfers):
Table 2: Credit Transfers in non-euro countries
Leaving out Romania, Sweden and the UK as per the reasoning above, and omitting the countries for which not all data is available, the information as in table 3 can be derived from the data in table 2.
Table 3: Cross-Border Credit Transfers in selected countries
On the one hand it can be observed that the share of cross-border transactions differs significantly between these countries, but more importantly, without having any better data, given that in most instances the number of SEPA Credit Transfers is higher than the number of Cross-Border Credit Transfers, ESBG believes that it is fair to assume that the bulk of the cross-border credit transactions in these countries are made in euro, herewith also confirming the Commission's observations as per their Impact Assessment.
Further, it could be questioned what incentives could remain, from a payments point of view, for countries that are willing to join the Euro area when their citizens are given the same advantages by harmonising their transaction fees. In fact (as per article 140 of the Treaty on the functioning of the European Union), all EU countries, except for Denmark and the exiting United Kingdom, need, at some point in time, to meet the conditions for adopting the single currency.
ESBG welcomes the fact that this proposal is targeted at transactions in euro only. On the one hand these are the bulk of all cross-border transactions within the Union and these transactions can be processed in a standardised and efficient way, whilst on the other hand the remaining transactions in other currencies involve low volumes and significant efforts to process. For banks, especially within the Euro area, all non-euro transactions attract higher costs than transactions in Euros within the Euro area. This is because banks within the Euro area can processes all cross-border transactions denominated in Euros in batch using common pan-European standards on efficient and bespoke Clearing and Settlement Mechanisms that have been designed to process Euro transactions in bulk.
The underlying payment systems within the Euro area and non-euro currencies differ significantly. In contrast to transactions within the Euro area, every non-Euro transaction must be individually processed using a plethora of different and separate payment systems that are required to fulfil the different legal and payment requirements globally. Furthermore, a bank processing such a transaction must individually check how the foreign currency amount may be transferred to the recipient bank. Moreover, the fluctuation of the currency values on a daily basis creates risks to the providers and these risks need to be covered. ESBG believes that any future consideration of expanding the scope of this Regulation to all Member State currencies should be properly justified by a thorough analysis that proofs the proportionality of the costs involved for the payment sector compared to the benefits received by consumers.
Pricing for cross-border transactions should be free of price regulation, as is the case for pricing for most items consumers or corporates buy and sell to each other in the world. Any regulation risks to distort the market and/or the service level and quality offered since regulations mostly aim at restricting the freedom to price or to put a cap on the price level. The payments market is provided for by commercial entities and the PSD2 opened up this market for new entrants. It is unlikely that new entrants' step into a market where pricing freely according to the actual cost level and customer value provided is not allowed. If the EU restricts the possibility to make an adequate profit from the payments market as a solid commercial enterprise in a market economy, it will over time be underserviced, less innovative, and will become of sub-standard, unless the public authorities take it over and finance such services with tax revenues.
A price regulation carries a number of risks:
The EU consists of 28 member states and conditions vary between the states and thus also the service levels offered, the quality, cost level and also the existing market pricing is different per PSP in the different member states. When regulated the one size fits all may benefit some users and disadvantage other users.
A maximum price cap regulation would most likely be implemented as the going price most providers charge – and then the price competition option has been eliminated but also the option of offering an improved service above the standard for a higher price. It may also drive pricing upwards in markets where pricing is below the intended cap level. In the case for the interchange fee cap – almost all international card schemes have implemented this cap pricing as a default price and thus it has become the floor level as well.
A long-standing price regulation will also cement the services and quality offered since nobody can recoup investment cost in improvements, risk handling or new services.
3. Cross-border payments in euro – ESBG PositionDespite ESBG's reservations related to regulatory intervention on pricing mechanisms, out of the four considered options within the European Commission's impact assessment, ESBG believes that the option 3 as chosen by the European Commission (equalising the costs of domestic transactions in the national currency with the costs of cross border intra-EU transactions in euro only) is by far preferred over option 4 (equalising those costs for transactions in any currency of the EU). Indeed, although the total number of cross-border transactions involved is limited, as pointed out in the analysis in section 2 of this Position Paper, the bulk of those transactions are in euro so any effort, if required, should be limited to those transactions in euro.
It is ESBG's understanding that the European Commission proposes to extend Regulation (EC) No 924/2009 in order to ensure that all cross-border transactions in euro are charged at the same price as a domestic transaction in the currency used within the Member State from which the transaction originates. Or, as per the European Commission's recital 4 in their proposal, in order to facilitate the functioning of the Single Market and end the barriers between payment service users in the euro area and non-euro area Member States in respect of cross-border payments in euro, it is necessary to ensure that charges for cross-border payments in euro within the Union are aligned with charges for domestic payments made in the official currency of a Member State.
If this is indeed the case, the current proposed wording in article 3.1 could be problematic and could have a significant possible unintended impact on banks: if a payment in euro is made by a PSU with British nationality from Spain to France through a PSP, and the charges levied for that payment “shall be the same as the charges levied by that PSP on PSUs for corresponding national payments of the same value and in the official currency of the PSU's Member State" (in this particular case pound sterling). As a consequence of that, even though the payment is made in euros, the pound sterling would act as a reference for the charges levied for that payment, and therefore the changes proposed to the Regulation would affected the charges on payments in euros too.
To this end, ESBG welcomes and supports the proposed amendments 2 and 9 of the ECON Committee as well as the text as proposed by the Council.
ESBG believes that the current proposal should be limited to retail consumers only. The current proposal is aimed at payment service users in general and hence includes all types of payment system users, ranging from retail consumers (who may make incidental and small cross border payments via a variety of products and channels aimed at these clients) on the one hand, and large multinationals (who may push billions of euros through dedicated systems such as real-time gross settlement systems or high-value payments systems) on the other hand. ESBG believes that the current proposal should mainly be beneficial to the first type of payment service user and therefore proposes to limit the scope to consumers only as per our proposed amendment 5.
4. Currency Conversion – Background and ESBG Observations
It is ESBG's understanding that in the proposed Article 3a in the Regulation, the European Commission aims at increasing transparency in currency conversion services provided in the context of cash withdrawals with cards at Automated Teller Machines (ATM) or card payments at Points of Sale (POS).
ESBG welcomes the European Commission's ambitions to increase transparency in this area, however, ESBG believes that the current proposal has been drafted without a proper understanding of the complexities that are involved in currency conversions, nor does the proposal address the issue properly.
Whenever a cardholder makes a transaction in a different currency than the currency his card is based upon, a currency conversion needs to take place. Two main methods exist on dealing with this currency conversion when cards are used. On the one hand there is the traditional method, and on the other hand, there is an optional service called Dynamic Currency Conversion (DCC).
In the traditional method, the actual currency conversion can only take place during the clearing and the settlement of the actual card transaction. For card transactions, at the earliest, this usually happens the first working day after the actual card transaction has been presented by the merchant PSP (the merchant acquirer) for clearing with the cardholder PSP (the card issuer), and is using an exchange rate that is being determined by the card scheme who arranges for the settlement to take place over sets of commercial bank accounts on that date. Card issuers have the option to apply a mark-up on this exchange rate when debiting the transaction from the cardholder's payment account, and this mark-up is clearly communicated in advance to the cardholders as per the requirements under PSD2, for example via the cardholder agreement (a framework contract). Due to the timing of the actual currency conversion – taking place at least one day later than the actual card payment transaction – it is impossible to communicate the exact exchange rate used to the cardholder at the moment or prior to the transaction. The actual mark-up that will be applied by the card-issuing bank when converting foreign currency transactions into the account currency has been communicated to the cardholder before and is documented in the framework agreement. The transaction in its original currency amount and in the converted currency amount is reported to the cardholder on the account statement for clarity to the cardholder.
Some merchant acquirers or ATM acquirers offer cardholders the second method in the form of an optional service to pay in their local currency. This service is also known as Dynamic Currency Conversion (DCC) and means that the transaction currency of the merchant is converted on the spot to the account currency of the cardholder. Via this optional service, the cardholder knows exactly the amount in the currency of the account that will be debited from his account. In this particular case, the exchange rate is being determined by a dedicated service provider (so this might be a different reference rate that the card schemes are using) and on top of this rate, a mark-up can be used.
Normally the merchant, the acquirer and the DCC technical service provider split this mark-up between themselves. With a DCC transaction, the issuer of the card does not have to convert any currency since the transaction arrives in the correct account currency from the merchant. Normally these DCC transactions do not incur any additional charges for the cardholder on top of the currency rate used and thus no charges are disclosed to the cardholder, who only sees the applied conversion rate from the merchant or ATM point of view. Occasionally, this rate is inverted for an EU non-euro area traveller. A Swedish cardholder shopping in Spain would see that the rate is 0.09 EUR. A typical consumer would understand better the info that the rate for 1 EUR is 11 SEK (Swedish krona), since this rate format is the one used on the card account statement and also when buying Euro banknotes in a bureau de change in Sweden. Such inverted rate used in DCC makes it more difficult for a consumer to compare if the rate is favourable or not.
This optional DCC service can only be provided after the initiation of the card payment (but before the actual execution of the card payment) as the steps involved in the transaction are usually as follows:
From these figures, it can be observed that, although the same trend is followed, the rates observed differ from each other, hence, there is no such thing as a single exchange rate. The ECB does not provide rates for weekends, whilst the card schemes provide the same rates for the weekends as the rate provided for the preceding Friday (which follows the logic as explained for the traditional way earlier in this paper). Apart from XE.com, the rates provided are static, updated only once a day which may not necessary fulfil expectations for consumers that want to make card transactions around the clock – however they can rest assured that whatever of the four exchange rates provided they tend to be aligned. In this context it is also worth noting that the rate of the Bulgarian lev (BGN) has been pegged to the euro since its launch, and prior to that was pegged on par to the German Mark. Generally speaking, mandating the use of a reference rate will not make sense given the rationale provided here.
5. Currency Conversion – ESBG PositionESBG believes that the transparency as envisioned by the European Commission as far as the traditional method outlined above is concerned is already covered by the requirements under PSD2, for example under articles 45, 52, 56, 57 and 59. PSD2 ensures that consumers receive sufficient transparency from their card issuing banks related to transactions they perform in other currencies using the traditional method outlined above. The requirements in PSD2 have been set with the traditional method in mind and are therefore sufficient – as such no additional transparency is required on the traditional method and as such the proposed changes in the regulation should be limited to those transactions that involve DCC and pricing in multiple currencies by the merchant. This is reflected in ESBG's proposed amendments 2 and 6.
The reasoning from ESBG as outlined before also calls for other changes to the proposed regulation than the amendments as proposed by the European Parliament and Council; in the view of ESBG the traditional method of performing card payments should not be in scope of this regulation. This is reflected in our proposed amendment 7.
In the opinion of ESBG, by limiting the transparency requirements to those card payment transactions only, there is no need for additional draft regulatory standards that specify how payment system users can compare the different options and as such, and fully supports the proposed removal of the second point of Article 3a.
ESBG believes that setting price caps is not the same as trying to achieve transparency, and moreover ESBG believes that setting price caps is de facto equal to setting market pricing. As observed by the ECON Committee in their draft report, the introduction of a cap on currency conversion costs, no matter if on a temporary or permanent basis, could have damaging effects on the market. It goes against the core Union principles of market economy and free competition as it constitutes in its nature a price regulation. Furthermore, currency conversion charges are by definition dynamic as they are directly linked to currency exchange rates, which could be impacted by events and circumstances that could hardly be predicted by the EBA or any other regulator setting a cap. And again, as argued in the introduction of this paper, a maximum price cap regulation would most likely be implemented as the going price most providers charge – and then the price competition option has been eliminated but also the option of offering an improved service above the standard for a higher price. An EU level price cap also risks an increase in consumer pricing in markets where competition has driven down currency conversion pricing already. This is the case for the interchange fee cap – almost all international card schemes charge this cap pricing and thus it has become the floor level as well.
ESBG believes however that consumers, when wanting to engage in a card payment transaction that involves a currency conversion, could be offered the option to use the value-added service in the form of DCC, but that this should be clearly presented as an option, and never should be offered as a default. This is also reflected in our proposed amendment 7. Furthermore, merchants, under the proposal, still retain the option of pricing in the multiple currencies of the various Member States.
As ESBG strongly opposes price caps ESBG also does not see any need to set a price cap during the transitional period and therefore agreed that the proposed Article 3b is obsolete and should be removed.
Following the reasoning in this Position Paper, ESBG is of the opinion that there is also a need to change some of the recitals to reflect these proposed changes. Recital 5 should be amended as per the proposal below, whilst Recitals 7 and 8 have become obsolete and should be removed.
6. Amendments as proposed by ESBG
Based on the rationales as explained in this Position Paper, the ESBG proposes the amendments as follows, based on the draft report of the ECON Rapporteur dated 26.7.2018. The amendments are presented in three columns: the first column contains the original text as proposed by the Commission; the second column contains the amendment as proposed by the Rapporteur; the third column contains the amendment as proposed by ESBG. In the new texts, deletions from the text to the column to the left are indicated by a strikethrough (strikethrough). Replacements or new text is indicated in bold (bold) in the new texts.
Proposal for a regulation
As explained in this Position Paper, the exchange rates used by the card schemes tend to follow other common exchange rates, and consumers are made aware of an eventual mark-up used by its card-issuing bank via the framework contract. So, any additional transparency requirements should be aimed at the alternative optional currency conversion service.
Recital 5 a (new)
As explained above, ESBG believes that these requirements should be limited to the alternative currency conversion options only.
(6) Transparency in alternative currency conversion charges requires adapting current payment infrastructures, software and processes, in particular for payments made online, at the point of sale POS or for ATM cash withdrawals. To that end, market players should be given sufficient time to adapt their infrastructures, software and processes in order to comply with the requirements as regards transparency in alternative currency conversion charges in this Regulation.
Payment systems are complex environments and consist of a combination of infrastructures, software and processes. Ignoring impact on the infrastructure would be harmful for payment systems and hence should be considered as well.
Recital 7 a (new)
(7a) The Commission should submit to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank a report on the application and impact of this Regulation. Where appropriate, this report could be accompanied with a proposal aiming to boost the Union Single Market by extending this Regulation to all cross-border transactions in currencies of Member States of the Union.
(7a) The Commission should submit to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank a report on the application and impact of this Regulation. This report should also contain a thorough analysis on the proportionality of cost for payment service providers compared to the actual benefits for payment service users if this Regulation was extended to all cross-border transactions in currencies of Member States of the Union. Where appropriate, this report could be accompanied with a proposal aiming to boost the Union Single Market by extending this Regulation to all cross-border transactions in currencies of Member States of the Union.
The current proposal already covers the majority of cross-border transactions within the Union. The remaining transactions have very low volumes and these transactions cannot be processed in a standardised way so any investments required to include these remaining low volumes should be properly justified. The proposal regarding which issues should be considered in a future revision of the regulation should not be part of the proposed regulation. As the scope of the regulation is based on the consultation replies it gives the impression that the regulation is incomplete.
Article 1 – paragraph 1 – point 2 – point e
Article 3 – new paragraph:
(e) The following paragraph is inserted:
“Under this proposal, the term 'payment service user' shall only refer to consumers."
As explained in this Position Paper, ESBG believes that the current proposal should be limited to retail consumers only.
Article 1 – paragraph 1 – point 1
(b) in paragraph 2, the following second subparagraph is added:
“However Articles 3a and 3b shall apply to all cross-border payments, irrespective of whether those payments are denominated in euro or in a national currency of a Member State other than the euro.";
“However Articles 3a and 3b shall apply to all cross-border card payments, irrespective of whether those payments are denominated in euro or in a national currency of a Member State other than the euro and involving a currency conversion service offered by another party than the account servicing payment service provider of the payer.";
On the one hand, ESBG believes that it is the intention to limit the transparency requirements to card transactions only, and on the other hand, as argued in this Position Paper, only the information related to the practice of DCC can realistically be provided real-time – the traditional method as explained above should be excluded as PSD2 caters already sufficiently for transparency for transactions performed under the traditional method, and including the traditional method here would ultimately be at the detriment of consumers. It is ESBG's understanding that any currency conversion provided by the ASPSP is already part of the existing contractual arrangements with the payer (account holder), and that this can be considered as the default, and not as an option. This means that any details on the currency conversion as applied by the ASPSP does not have to be displayed again at the various devices in contrast to the alternative optional currency conversion offer.
Article 1 – paragraph 1 – point 3
The reduced implementation period of 12 month (instead of 36 month) is too short and could have a negative impact on existing services or on conversion services of new market entrants. Furthermore, there is a risk that appropriate software and infrastructure adjustments could not have been completed or released. Therefore, the implementation period of 36 month should be kept. The transparency requirements under this new proposal should apply to the providers of optional DCC services for card transactions only, after the card payment has been initiated but before the card payment has been executed.
Entry into force:
This Regulation shall enter into force on the 20th day following that of its publication in the Official Journal of the European Union.
It shall apply from ... [3 months after entry into force of this Regulation].
The suggested change above disconnects the entry into force from the legislative process and allows market participants to adapt to the final text after its entry into force.
7. Closing remarks
ESBG believes that the proposed amendments are a more proportionate, realistic and a doable approach to the European Commission's ambitions to strengthen the position of the consumer and the euro, and when it comes to transparency for currency conversion charges, and ESBG urges the Members of the European Parliament and the European Council to take these into account.
ESBG welcomes a further dialogue on this Position Paper, especially in those instances where the Members of the European Parliament and the European Council want to divert from the proposals as made by ESBG in this Position Paper.
For further information, questions on this paper or a further dialogue please contact:
Diederik Bruggink, Senior Adviser Payments, firstname.lastname@example.org.
About ESBG (European Savings and Retail Banking Group)
ESBG represents the locally focused European banking sector, helping savings and retail banks in 20 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 1,000 banks, which together employ 780,000 people driven to innovate at 56,000 outlets. ESBG members have total assets of €6.2 trillion, provide €500 billion in SME loans, and serve 150 million Europeans seeking retail banking services. ESBG members are committed to further unleash the promise of sustainable, responsible 21st century banking.
Learn more about ESBG at www.wsbi-esbg.org.
European Savings and Retail Banking Group – aisbl
Rue Marie-Thérèse, 11 ￭ B-1000 Brussels ￭ Tel: +32 2 211 11 11 ￭ Fax: +32 2 211 11 99
Info@wsbi-esbg.org ￭ www.wsbi-esbg.org
Published by ESBG. September 2018.
 As can be found on http://www.europarl.europa.eu/sides/getDoc.do?type=COMPARL&reference=PE-626.669&format=PDF&language=EN&secondRef=01.
 As per information provided by the European Commission on https://ec.europa.eu/info/business-economy-euro/banking-and-finance/consumer-finance-and-payments/payment-services/single-euro-payments-area-sepa_en.
 As can be found in their Statistical Data Warehouse, accessible via http://sdw.ecb.europa.eu/.
 The publication can be accessed via https://www.ecb.europa.eu/pub/pdf/ecbu/eb201703.en.pdf.
 As published on http://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/index.en.html.
 As published on https://www.visaeurope.com/making-payments/exchange-rates.
 As published on https://www.mastercard.us/en-us/consumers/get-support/convert-currency.html.
 As published on https://www.xe.com/currencytables/.
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