At the end of March 2018, the European Commission published a proposal to amend Pricing Regulation 924/2009 regarding cross-border payment charges (Regulation 924). Christian Walz has already discussed the proposals contained therein for the regulation of dynamic currency conversions (DCC) as part of this blog.
Regulation 924: Not just dynamic currency conversion
The Commission’s proposal focuses on another key issue: extending price equality for cross-border payments initiated by payment service providers (PSPs) in member states outside the eurozone. In 2009, Regulation 924 replaced Regulation 2560/2001, which already prohibited payment service providers from differentiating between fees for payments in euros for domestic and cross-border transactions from January 2002 onwards. This regulation, which is relevant for the eurozone, applies to transfers, direct debits and card payments at POS and ATMs. This means that – according to the Commission – price equality already exists for approximately 44% of all cross-border transactions initiated in the EU. Non-euro countries were able to join voluntarily via an opt-in clause. Only Sweden took this step in 2002.
Unfortunately, just like when bringing up children, voluntary acceptance does not always work and some obligations need to be introduced. Regulation 924 is now to be extended to PSPs in the non-euro member states, with the effect that the price for cross-border (XB) payments in euros has to be reduced to the price of a domestic transaction in the respective local currency. The reason for the pricing regulation are the prices for XB transfers. In the remaining 8 countries (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania and the UK), the standard prices of banks for XB transfers in euros are relatively high (on average around €8, according to the Commission) but still comparable to the prices that banks here in Germany charge for XB transfers in foreign currencies. According to the Commission, the prices are far higher than the costs, which would result in unreasonable profits being generated for banks in this segment. The proposal now aims to subject a further 28% of XB payments in the EU to the mandatory pricing rules.
A farewell present for British card payers
As usual, the proposal is accompanied by an impact assessment analysis. Two peculiarities become apparent here.
- Firstly, only 1% of the XB transactions affected are credit transfers with excessive prices which the Commission is concerned about. Therefore, the proposal will almost exclusively affect card payments and card-based ATM withdrawals. This means that the usual foreign currency charges for card payments and withdrawals are affected, the amount of which is not being criticised. My former teacher at school would have said at this point: interesting suggestion, but unfortunately you missed the point of the exercise. The Commission estimates the total savings potential (from a user perspective) or the loss of revenue (from a PSP perspective) to be €900 million. Of this amount, almost €800 million resulted from forced fee reductions in the card sector. Whether or not the Commission’s calculation is sound is considered in more detail elsewhere. For a detailed criticism of the impact assessment, see.
- Secondly, the amendment to Regulation 924 mainly concerns the United Kingdom, which will very soon be out of the Commission’s regulatory reach and where at least 62% of the transactions affected by the regulation are triggered. The Commission even estimates this figure to be around 80%. Is this a final attempt to convince the stubborn islanders of the advantages of the EU? Or, if you look at it from the other side: Are the English PSPs being punished with a heavy loss of income shortly before Brexit?
A surge in demand without delay
From this perspective, it is also understandable why the Commission is in such a hurry to implement the amendment from as early as 1 January 2019. This time frame is not unrealistic, as of the 28 Member States, only 8 are affected. The majority will accept the proposal without any amendments. The time allocated to the consultation procedure on Regulation 924 (4 days) initiated by the German Federal Ministry of Finance in April 2018 shows the extreme urgency. The eurozone countries would only benefit from it, since according to the Commission SMEs (note: why only SMEs?)
SMEs in the euro area can expect higher demand from non-euro area Member States where high fees for cross-border payments are a significant barrier” (Executive summary of the impact assessment, SWD (2018) 85 final, p. 2.).
This argument may hold for bank transfers (although the savings potential is only €0.71 per inhabitant p.a. in the 8 countries). However, whether a Bulgarian tourist in Germany spends any more money simply because there are no foreign currency fees charged by his bank for card payments or withdrawals is more than questionable.
Even if the planned EU pricing regulation does not affect us here in the eurozone, we can still question the move from a regulatory point of view. Price regulation is literally the last item that is drawn from the economics bag of tricks, in case all else fails. As an alternative, one could try good old market competition, for example. Granted, that sounds very much like “old-school economics” but it should still work. PSD2 has just expressly invited all FinTechs to become new competitors of the conventional banks. Some of them have even specialised in the market segment of XB transfers, which has been neglected by banks. Banks are now forced to offer this service more or less for nothing and will try to make up for the loss of revenue by increasing prices for other services (e.g. higher prices for exchange rate conversions, domestic transfers or for payment accounts).
The Commission is aware of this market reaction and wants to “ensure” that this does not happen by involving the competition authorities (however, the proposal leaves open how this is to be achieved). This way, price regulation automatically entails further regulation. However, for FinTechs wanting to establish themselves in this market niche, finding the right business model is difficult. They now have to deal with the banks offering these services for free, which is in line with what has been decreed but not in line with the market.
The Commission rejects the instrument of competition as a solution to the problem. The following arguments are made: Despite their market presence, FinTechs have not caused established banks to significantly reduce their prices in the respective markets (the price range for an XB transfer in Bulgaria varies from €24.03 charged by a bank to €0.72 charged by a non-bank PSP). There are obviously many bank customers in Bulgaria who appreciate a certain level of convenience and who are willing to pay for this. Alternatively, FinTechs are not used enough by regular people conducting bank transfers because they are allegedly – according to the Commission – “not financially and IT literate”, i.e. somewhat dim-witted. In addition, the Commission believes it will take too long for FinTechs to become proper competitors of the banks. According to the Commission, competition is made even more difficult due to the fact that non-bank PSPs (such as PayPal) do not offer the full range of services that banks provide (bank transfers, card payments, etc.) and also do not provide ubiquitous reachability.
Furthermore, as a result of the Interchange Fee Regulation, the Commission is standing in its own way for effective competition between a bank transfer and a card payment. I recently had to pay a business partner in the UK an amount of a few pounds. He wanted a bank transfer to his English bank account. My bank in Germany (a large direct bank) charges 10 euros for this service. I asked my business partner whether he would accept a credit card payment instead. He immediately responded that this was not an option as he would be charged a fee for this. My answer was: No problem, I’m happy to pay the fees and he can then “surcharge” the amount owed. Therefore, with a 50 pence surcharge I saved €10 and made a contribution towards better competition in the market, but caused my business partner (even knowingly!) to commit an illegal act as PSD2 prohibits surcharging for my credit card transaction, which is subject to the IF upper limits. My actions would no doubt be considered as aiding and abetting, or what do the lawyers among you think?
Popularity or populism?
Price regulation restricts competition, leads to imbalances between supply and demand, to a lack of transparency and to evasive reactions and thus to further regulation. For an economist believing in the market such as myself, it is an absolute no-go. So why is this poisonous product gaining ever more popularity? Popularity is the right keyword. As a final argument for not supporting competition in this case, the Commission states that the consumers were in favour of price regulation in the consultation on amending Regulation 924. It is probably the same naïve consumers who are pleased while on holiday abroad that the EU has regulated roaming charges, unaware that they will be charged in other ways by their telecommunications provider. However, the Commission boasts that this price regulation was
one of the most popular achievements over recent years
true European success story.
The Commission also expects Regulation 924 to have a reputational effect,
as this initiative would be citizen-friendly in a similar way as the roaming regulation in telecoms (Executive summary of the impact assessment, SWD (2018) 85 final, p. 2.).
EU populism as a response to populist concerns about the EU?
When the fall of the Roman Empire was already foreseeable, Emperor Diocletian introduced a price control law (known as Edictum Diocletiani) in 301 AD. The law applied to the entire Imperium Romanum and to a large number of products and services. In its preface, the edict contained the reasons as well as the purpose of the measures (“recitals”), a table of rates for price-limited products and services, and finally the penalties for non-compliance with the law (death penalty!). The penalties are a little bit more humane today, but apart from that, it appears we are seeing history repeat itself. The introduction of price caps for bread and games will win you the votes of the masses.
Titelbild / Cover picture: Copyright © fotolia