Payment systems within the European Union naturally grew up on national lines. Many EU countries have highly efficient and effective systems of domestic electronic payment but this is not sufficient for the growing number of cross-border payments made within an integrated Union. The introduction of the euro, finally realised in January 2002, highlighted the fact that cross-border payments were inefficient, and that costs varied widely. This led to the Regulation on cross-border payments which came into effect in December 2001. The effectiveness of this regulation is currently under review.
The Commission is now in the process of constructing a new legal framework for payments across the EU through the establishment of a single European payments area (SEPA). The banking industry has committed itself to a fundamental overhaul of payment infrastructures across Europe to allow payments to be made across borders as quickly and as easily as within the domestic field.
The Commission is also conducting enquiries into payment cards and retail banking services to establish the problems and the barriers to competition in these sectors.
The SEPA (single European payments area) initiative aims to establish one coherent system and technological infrastructure for the making of electronic payments across the EU-25 countries. The legal basis for this is contained in the Commission’s proposal for a New Legal Framework for Payments.(See separate links dossier Single Payments Area)
The banking industry’s reforms of the infrastructure, led by the European Payments Council (EPC), are to be introduced on a rolling basis with a full implementation date set for as soon as practicable after 2010. They are also establishing a Pan-European direct-debit scheme, to be introduced through pilot schemes at the end of 2006.
A large component of the SEPA project is to make payment cards – debit and credit – useable throughout the EU as they are domestically. The Commission also wants to ensure their use is as efficient and as cheap as possible both for consumers and businesses. To this end it carried out a sectoral enquiry and an interim report was issued in April 2006. The enquiry identified two main problems:
lack of competition. The report found high barriers for entry to competitors. In some countries card providers operated virtual monopolies, often aided by joint ventures between local banks. Also, systems in some countries are highly vertically integrated, with one operator owning the card system and the technical services – the terminals etc.
costs which were high and variable throughout the EU. These involved:
- The “interchange fee”: fee paid on each card transaction by the consumer’s own bank (acquiring bank) to the bank that issued the card (issuing bank).
- The merchants fee: price paid by the retailer to the acquiring bank for being allowed to accept payment with the card.
At a public hearing held on 17 July (see EURACTIV 19 July), Competition Commissioner Neelie Kroes, said that these fees amounted to a “tax” on business and that a fundamental rethink was needed. The credit card companies disputed this, making the point that fees may vary from country to country due to costs involved in regulatory and consumer protection requirements. It also stressed that interchange fees were essential for the profitability and therefore the innovative potential of the business.
The Commission launched a sectoral enquiry into current accounts and related services at the same time as its payment cards enquiry. An interim report was published on 17 July 2006 and consultation on its findings will continue to October 2006. The report showed that both retail banking and clearing systems were fragmented. Unnecessary costs were incurred through banks having to join various systems in order to operate throughout the EU. It also showed that costs to consumers varied greatly.
Given the increase in the use and means of electronic payments and the ingenuity of fraudsters, the issue of security is high on the agenda for consumers and industry alike. The use of chip and pin number verification methods in shops is therefore rapidly replacing signatures across the EU.
Cash as a means of payment still accounts for the highest costs of the banking industry through the logistics and manpower required to service it. However, the use of cash is not likely to die out in the near future. Cheques, on the other hand, are used less and less frequently. Electronic payments are the future and the banking industry is keen to promote existing and new methods of electronic payment.
One new technology is smart cards - ‘electronic wallets’ with built-in microchips to store credit. Other new methods include schemes using fingerprint recognition and schemes where the card is used but is simply tapped on a reader, with no PIN or swiping necessary. In addition, payment via mobile phone, usually through prepay systems is being introduced particularly for small transactions.
Competition Commissioner, Neelie Kroes, commenting on the sector enquiry on payment cards, said, “Payment card markets are still fragmented along national lines - very few banks offer payment card services to cardholders and businesses outside their home country. Moreover, there are indications that some operators are preventing more competition from developing. These problems are not only penalising businesses and consumers but also damaging Europe’s competitiveness. Moreover, the fees paid by small firms such as retailers for accepting payment cards in one country can be up to six times more expensive than in another country.”
Internal Market Commissioner McCreevy is determined to implement a true single financial services market and has repeatedly chivvied the banking industry on the need to make changes. His view is that “a truly functioning European Payments area will be immediately beneficial to corporates and merchants who will be able to rationalise their payment processes and gain a better bargaining position vis-à-vis banks in the wider payment market. For consumers, competition and improved choice will contribute to reducing prices and improving service levels.”
The credit card industry argues that the increased use of payment cards has contributed greatly to cross border trade and that the use of electronic payments is a third as costly as using cash. Visa Europe comments, “The level of investment and innovation across the European payment card sector should not be underestimated. Amongst its many achievements, Europe has led the world in the authentication of e-commerce transactions, the implementation of EMV chip technology, and the introduction of new card-based lending propositions. If banks were unable to realise an acceptable return, this level of innovation would surely stall.”
The European Payments Council stresses the economic advantages of using electronic payments over cash, argues that the true cost of cash cannot, because of regulatory barriers be passed on to consumers and urges the Commission to promote electronic means of payment. It says, “Studies clearly show that non-cash payment instruments are more economical for society...(and)…that cash is definitely the most expensive payment instrument to operate (total costs consistently estimated around 0.4 to 0.6% GDP). As the cost of cash is being imperfectly externalized to actual users, de facto usage of cash is therefore cross-subsidized by other bank revenues.”
The EFR (European Financial Services Round Table) argues that the wide divergence in consumer protection rules across Europe, particularly for consumer credit, greatly hinders the efficiency of payment systems.