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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT RETAIL PAYMENTS IN THE INTERNAL MARKET

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT RETAIL PAYMENTS IN THE INTERNAL MARKET

EXECUTIVE SUMMARY

The European Union has an internal market and the euro. It does not yet have a "single payments area". Large value (wholesale) payments can now be made across borders nearly as quickly and cheaply as they can domestically, yet small value (retail) cross-border payments are less reliable, usually take longer and cost significantly more than domestic payments. There needs to be a significant improvement in the efficiency of small value cross-border payments, and substantial reductions in cross-border charges to customers, by 1 January 2002.

This Communication urges the need for efficient, secure and inexpensive retail payment services in the internal market accompanied by the introduction of the Euro. The Commission acknowledges that retail payment services and the conditions governing them are important in assuring consumer confidence in e-commerce. Some issues addressed in this Communication are relevant in that context. However, the role of payment services for the development of e-commerce is not covered by this Communication but will be dealt with separately.

The main focus needs to be on small value credit transfers. The implementation of the Cross-Border Credit Transfers Directive is a major first step. Common technical standards will also help and banks should commit themselves fully to implement the existing standards on international account numbering and payment instructions by 1 January 2002. The Commission will also propose the introduction of a common minimum exemption threshold for balance of payments statistics, below which cross-border payments need not be reported, to take effect no later than 1 January 2002.

But an improvement in the efficiency of cross-border retail credit transfers ultimately depends on establishing efficient cross-border transfer linkages. Banks or groups of banks are invited to put forward proposals by the end of September 2000. The Commission will examine them, in co-operation with the ESCB, and will hold a Round Table in the autumn of 2000 to consider the various options. The Commission may also reconsider to reduce further the maximum execution time for cross-border transfers to bring it more into line with domestic transfers.

The difference between the charges for the cross-border and domestic use of payments cards is much less marked than for credit transfers. But banks are strongly encouraged to phase out the differences that remain. Banks also need to improve the information that they give to customers on general conditions, fees, charges and (non euro) exchange rates. The Commission intends to issue a competition notice outlining the scope for, and limits to, co-operation among banks on payment cards. Banks are also strongly encouraged to ensure interoperability for electronic means of payment, and in particular that electronic purses can be used across borders by 1 January 2002.

The difference between the charges for the cross-border use of cheques as opposed to domestic transactions is more marked than those for any other payment instrument. Banks are urged to consider how to meet the needs of the public for the type of cross-border distance payment facility currently met by the eurocheque system.

The Commission continues to be concerned about the level of charges levied on the exchange of euro area national banknotes across borders, and has asked banks and bureaux de change to publicly display information about the level of their charges. The Commission repeats its call to banks to re-examine their charges, particularly for small value transactions. To encourage a positive response, the Commission intends to highlight instances of excessive charging. It will also pursue its investigation into possible anti-competitive practices.

A new Communication on fraud prevention is under preparation. The Commission will monitor the payment industry's efforts to achieve a secure environment, and the Communication will also focus on other preventive actions, notably the exchange of information, training programmes and educational material.

INTRODUCTION

The European Union has an internal market and the euro. It does not yet have a "single payments area". Large value (wholesale) payments can now be made across borders nearly as quickly and cheaply as they can domestically, yet small value (retail) cross-border payments are less reliable, usually take longer and cost significantly more than domestic payments.

The Framework for Financial Markets Action Plan [1], endorsed by the Council and the European Parliament, calls for integrated retail payment systems that provide for secure and competitive small-value cross-border transfers comparable with the service provided within domestic payments systems. In this context the Commission builds largely on a market-led approach requiring voluntary co-operation by the banking sector and investments which should become a business case in the long run. These should be put in place before the end of the euro transitional period (i.e. by the beginning of 2002).

[1] "Financial Services: Implementing the Framework for Financial Markets: Action Plan." COM(1999)232, 11.05.99.

The Commission objectives are shared by the European Central Bank in its statement [2]. Nevertheless, while the ECB statement focuses on cross-border credit transfers, this Communication deals with this essential issue and considers other electronic means of payments, cheques and cash as well. It addressed also the problems in the wider context of the European Union rather than in the euro-zone only and discusses other policy issues as competition, fraud prevention and the enlargement. The Commission believes that, together with the ESCB, the other EU institutions and the private sector, a concerted effort is necessary to achieve the objectives set in the Action Plan. This Communication maps out a strategy to meet them with a series of identified actions to be undertaken by various (private and public) actors concerned.

[2] The ECB issued a statement on 13.9.1999: "Improving cross-border retail payment services in the euro area: the Eurosystem's view"

1. OBJECTIVES

There needs to be a significant improvement in the efficiency of small value cross-border payments, and substantial reductions in cross-border charges to customers, by 1 January 2002. This requires a market-based approach which can achieve early results. Public authorities should complement it by tackling administrative obstacles and ensuring the reliability and security of the systems. There should be seven objectives [3]:

[3] The objectives are identical with those in the ECB statement resulting from a close co-operation of both institutions.

1. The efficiency and cost-effectiveness of payments, notably credit transfers, must be improved. Ameliorating the basic infrastructure for credit transfers may also be of central importance in improving other areas such as direct and other debit transfer based payments.

2. The charges for cross-border credit transfers should be cut substantially towards the levels charged for equivalent domestic credit transfers.

3. Settlement times for cross-border payments should, where possible, not exceed the time taken for domestic payments. The end-to-end execution of a cross-border payment should not exceed the time taken for a domestic payment by more than one day.

4. The fees for a cross-border transfer in a system should normally be borne entirely by the originator and not charged to the beneficiary, in line with domestic practice in most EU credit transfer systems.

5. There should be no proliferation of standards. Existing standards should be implemented as soon as possible.

6. Cross-border payment systems should have open access.

7. These improvements leading to efficient systems should be in place by 1 January 2002.

It is important that these objectives are also met in view of the enlargement of the EU. A modern retail payment infrastructure would provide a model for accession countries.

2. CREDIT TRANSFERS

Credit transfers are used to transfer funds from the account of a sender to the account of a beneficiary. Charges for cross-border retail credit transfers are still several orders of magnitude greater than corresponding charges for domestic transfers. Although charges for cross-border transfers have tended to decline over the past five years, typical charges [4] for a very low value transfer of EUR100 are currently of the order of EUR12, although in some instances they may be as low as EUR5 or as high as EUR20 (exceptionally they can exceed that amount). The charge for a comparable domestic retail transfer is considerably less than EUR1 in all Member States, being usually measured in cents. While charges for domestic transfers are made on a transaction basis, irrespective of the value transferred, cross-border transfer charges are commonly based on a percentage of the value or a combination of flat fees and value based fees.

[4] Estimates based on partial and provisional data provided by some of the EU banking associations together with results of complaints received by the Commission during the first months of 1999.

The cost and performance of cross-border credit transfers has been a concern for the Commission since many years. Already in 1990, the Commission gave an in-depth analysis of the problem in 1990 (COM(90)447 - "Payments in the European Single Market") emphasising that in the 90s structures were established to ensure payment services between Member States which are as inexpensive, quick and reliable as domestic systems. In 1992, the Commission established a work programme (SEC(92)621 - "Easier cross-border payments: breaking down the barriers"), indicating that there was a need to improve retail cross-border payment services before the completion of the EMU. In 1994, COM(94)436 - "Fund transfers in the EU: transparency, performance and stability" was published which included the proposal for a Directive on cross-border credit transfers. The latter was adopted in 1997.

In order to meet the Commission's long-standing objective, four target actions have been identified: implementation of the Cross-Border Credit Transfers Directive (97/5/EC) [5], technical standards, reporting and, above all, the payment systems infrastructure.

[5] OJ L 43, 14.2.1997, p. 25.

Implementation of the Cross-Border Credit Transfers Directive

The date of implementation of the Cross-Border Credit Transfers Directive, which covers transfers up to EUR50,000, is 14 August 1999. It provides that:

- a customer be given, in advance, a tariff that s/he can understand clearly for any type of credit transfer;

- a transfer should be credited to the beneficiary's account within a clearly defined timescale;

- transfers for which the originator pays all the costs ("OUR" mode) will be the rule, unless otherwise stipulated. An intermediary or receiving bank may not make any further charges, in particular not to the beneficiary; and

- when a transfer goes astray, a "money-back" guarantee up to EUR12,500 is provided.

The implementation of the Cross-Border Credit Transfers Directive will help to improve the efficiency of retail transfers. The implementation of the "OUR" mode, coupled with the money-back-guarantee, makes it necessary for banks to establish more systematic arrangements for sending retail cross-border transfers. The Directive's transparency provisions require banks to improve their processing of transfers so that they effectively fulfil the conditions offered to customers, and will stimulate competition by allowing comparisons of fees, timing and other conditions. Customers should take advantage of increased transparency by comparing conditions of various banks in order to get the best possible deal.

Action point:

The Directive must now be implemented in all Member States, correctly transposed and complied with by all banks. Banks must inform customers in advance of the charges, the timescale and all other relevant conditions. Immediate improvements in the organisation of retail cross-border transfer procedures by many banks are the operational consequence. The Commission will monitor progress.

Technical standards

Technical standards need to be implemented in order to create better conditions for a single retail payments area. This is especially true for bank identifiers and account numbering systems, where it is extremely difficult to route a payment order directly and automatically from the originator's bank in one country to the beneficiary's institution in another. Standards have already been developed by the European Committee for Banking Standards (ECBS), of particular importance in this context are the IBAN (International Bank Account Number) [6] and IPI (International Payment Instruction) [7]. They need to be implemented as soon as possible by all parties involved.

[6] The IBAN invites banks to add a country code and two control digits to existing numbers. This code helps banks to route cross-border transactions automatically.

[7] The IPI is a standard form for transfer orders. It would help to expand the practical usage of the IBAN.

Action point:

Banks should commit themselves fully to implement IBAN and IPI as early as possible and by 1 January 2002 at the latest and should therefore agree a timetable for doing so at national and EU level. Bank customers should be informed about the speed and cost advantages of such standards. They should be encouraged to use them immediately after their introduction. The national central banks, through the ESCB, could play a coordinating role both in speeding up decisions on standards and by encouraging banks to implement them.

Reporting requirements

Banks are required for balance of payment statistics purposes to report cross-border transfers in both the incoming and outgoing Member States. These reporting requirements involve additional work in processing transfers, thereby increasing the cost and processing time. Reporting requirements and statistical methods vary from one Member State to another. Efforts to review and harmonise the methods of compiling balance of payments statistics have been under way for a very long time. [8] The reporting of cross-border transfers needs to be streamlined in order to render the process easier and less costly for the banks and, ultimately, customers. It is politically unacceptable to leave the implementation of streamlined reporting requirements beyond 2002.

[8] Currently some Member States have exemption thresholds, below which reporting is not required, while there are no settlement based reporting requirements in the UK, Finland and Ireland (their data is based on sample surveys). In the other Member States, settlement-based reporting systems apply simplification thresholds.

Action point:

The Commission, together with the ECB and other competent authorities, will continue to work towards reaching agreement on the approach to be followed for streamlining reporting requirements and on a timetable for implementation. Pending a definitive reform of statistical reporting, the Commission will propose the introduction, at latest by 1 January 2002, of a common minimum exemption threshold of an appropriate high fixed amount, below which cross-border payments need not be reported for balance of payments statistics.

Developing the payment infrastructure

Even when all these improvements are fully implemented, they will not on their own be sufficient to achieve the objectives set out in this Communication. The principal reason why cross-border retail transfers are more expensive and less efficient than domestic retail transfers is that the development of cross-border payment channels has lagged behind domestic development of electronic transfer systems. While retail credit transfers within Member States have become automated and more efficient, manual intervention is still required at nearly every stage in the banks' internal processing of cross-border transfers. In addition, comprehensive automated linkages between domestic systems or cross-border systems are currently lacking.

Lower charges by individual banks to their retail customers largely depend on an improvement in the efficiency of cross-border retail credit transfers. This would require the enhancement of both banks' internal processes and development of more efficient cross-border transfer linkages. The internal process could be improved by developing straight-through-processing (STP) capable internal systems and implementing STP-capable message formats, such as SWIFT's MT102/103. The main options for enhancing the efficiency of the cross-border linkages fall broadly into two categories: overarching solution; and combined network solutions.

The Financial Services Action Plan already states in this context that remedying the infrastructural gaps requires a concerted strategy, supported at the highest political level and including the EU institutions, the ECBS and the private sector to surmount the technical and commercial hurdles. A concerted effort should be launched to deliver a technically secure and operational solution as a matter of utmost urgency.

Overarching solutions

Overarching solutions are those which would connect the vast majority of all payment systems participants, across borders. These are solutions which link national systems to which all or most banks belong, or alternatively which set up a new EU-wide cross-border clearing system for transfers, in which most EU banks would participate.

The TARGET [9] system of the ESCB delivers, with complete finality across borders payments in a matter of minutes from sending bank to beneficiary bank. TARGET can be used for payments of all values but as it is designed to process primarily large value payments, it may not provide an adequate solution for the processing of cross-border retail payments. This would be the case because i) for the banks, the direct and indirect cost of real-time, non-batch processing may be too high to provide an economical solution for the processing of retail payments, and ii) the potential number of such payments could be higher than the capacity of TARGET. However, TARGET it could play a complementary role as a settlement channel for retail transfers (e.g. for urgent payments)

[9] Trans-European Automated Real-time Gross settlement Express Transfer system.

Automated Clearing Houses (ACHs) are bodies through which automated payments are directed, cleared and settled domestically in most Member States. The efficiency of cross-border transfers could be considerably improved, either by linkages between ACHs at EU level or by a new and separate European ACH. Such ACH-based solutions would have to be driven mainly by the EU banking industry, with support from public authorities, e.g. on standards, legal and reporting requirements.

Combined network solutions

Combined network solutions, although less universal than such overarching solutions as TARGET or EU ACHs, might also offer promising solutions in view of the experience which the industry has already gained with regard to some existing schemes based on cross-border co-operation. Combined network solutions might also be a preliminary step towards the ultimate provision of an overarching solution. Among the possibilities are the following:

The Euro 1 system of the Euro Banking Association (EBA) currently processes medium to large value credit transfers in euro. The EBA is proposing to proceed in two stages:

- The first stage is to expand the existing Euro 1 system to euro retail payments. The EBA considers that this stage could be implemented quickly.

- The second stage may create an ACH.

The international credit card systems (i.e. VISA, Mastercard, Eurocard) have the advantage of having been specifically designed for end to end processing over the complete payment cycle and of internationally uniform technical standards which they used from the outset. These payment cards have a unique identification system recognisable and functional in every jurisdiction without adaptations. If this efficient infrastructure were adapted to carrying credit transfers then anyone who has an international payment card could receive or send funds to any other cardholder. Substantial modifications in operating procedures would be required to achieve this, but the basic networks exist.

Several groups of banks (eg Eurogiro, TIPANET, Unico, S-Interpay), have already in recent years made the move from "traditional" to "enhanced" correspondent banking by entering into more systematic cross-border transfer arrangements. While the overarching solutions addressed earlier would give access to cross-border clearing possibilities to all credit institutions within the Community, initiatives which are limited to certain groups of institutions may also be useful if they work efficiently and at low cost for the customer. Automation of the payment means and infrastructure should, however, be combined with efficient linkages (gateways) to other networks.

Action points:

Banks are invited to put forward specific proposals to the Commission and the ECB no later than end September 2000 for improving the efficiency of cross-border retail transfers, to achieve the objectives of this Communication and, in particular, in such a way as to permit significant reductions in charges to customers by the end of the transitional period (1 January 2002).

The Commission, in co-operation with the ESCB, will consider whether the banks' proposals for improving the efficiency of cross-border retail transfers meet the objectives of this Communication.

The Commission will promote a wide debate and will hold a Round Table in the autumn of 2000 to consider various options set out in this Communication or proposed in the meantime by industry.

The Commission may reconsider in the Cross-Border Credit Transfer Directive the maximum execution time for cross-border credit/debit transfers (which by default is now 5+1 days) to bring it more in line with domestic transfers.

The Commission will evaluate on a regular basis the level of charges for cross-border transfers and the implementation of standards, and publish the findings in the Single Market Scoreboard.

3. OTHER ELECTRONIC MEANS OF PAYMENT

Apart from credit transfers, electronic means of payment embrace a variety of instruments, including those involving a plastic card and a magnetic stripe and/or a micro-processor chip. Differences in charges between cross-border and domestic use of payment cards are much less marked than for credit transfers (eg the extra price payable by a credit cardholder for cross-border use is often of the order of 2%). The Commission welcomes certain banks' decision not to make a specific charge for cross-border credit card use.

Domestically, direct debiting is a convenient and increasingly used means of making recurrent payments (eg subscriptions, policy premiums etc.), but the payer needs to trust that his/her account will not be debited incorrectly by the party which is to receive the payment. This guarantee is harder to provide for cross-border payments. Direct debiting requires the same basic infrastructure as credit transfers, so it may be possible to combine work on these systems and instruments. There may also be legal issues to resolve.

Electronic purses are being intensively developed in some Member States. However, in the absence of common technical standards and systems agreements an electronic purse is of less practical use for cross-border payments than a foreign banknote (which can be exchanged into legal tender). The recent Common Electronic Purse Specifications (CEPS) may be a promising way to develop common standards.

The proposed Directive on e-money providers [10] will clarify the prudential rules under which licensed institutions can provide e-money services and thus will provide the necessary legal framework for these activities both domestically and cross-border. The Commission invites the Council and the Parliament to ensure its rapid adoption.

[10] COM(1998) 461 final, "Proposal for a European Parliament and Council Directive on the taking up, the pursuit and the prudential supervision of the business of electronic money institutions".

Three elements are key to achieving the objective of a single payment area for all electronic means of payment:- a high degree of transparency, a new approach to competition policy and enhanced interoperability.

Transparency - implementing Recommendation 97/489/EC

The Commission's Recommendation of 1997 on electronic payment instruments [11] introduces increased transparency of payment card conditions and of transaction prices. It also contains rules to determine the mutual responsibilities of issuers and holders of electronic means of payment. The implementation of the Recommendation may be uneven: a study will be launched to check compliance.

[11] OJ L 208, 2.8.1997, p. 52.

Competition policy

Transactions carried out by means of payment cards often require co-operation between banks. This is especially the case where an issuing bank provides its customers with the instrument and settles transactions on their accounts while an "acquiring bank" processes card payment transactions, typically from retailers receiving such payments. Arrangements of this kind have to comply with the competition rules enshrined in the EC Treaty and in secondary legislation. The Commission is currently reviewing various competition issues, both price issues and non-price issues, in the context of some notified national and international payment card schemes. When these cases are completed the Commission will be able to issue a general notice on competition in the field of payment cards.

Achieving interoperability

Cross-border interoperability should be the general the rule for all functions provided through existing electronic means of payments including payment cards. Interoperability of electronic purses across borders is essential to allow for the development of this new instrument and technology.

Action points:

Following the introduction of the euro, banks and other providers of payment means are strongly encouraged to review the functioning of the existing electronic means of payment to ensure cross-border interoperability for all functions provided through such instruments. They should also examine possible synergies with the developments in the transfer infrastructure.

Banks and industry suppliers are strongly encouraged to ensure- in particular through implementing common standards and developing open and interoperable cross-border clearing and settlement - that electronic purses can be used across borders as soon as possible, and no later than 1 January 2002.

The Commission will issue a competition notice to outline in general terms the possibilities and limits of co-operation in the area of payment cards.

Banks are strongly encouraged to phase out remaining discrimination in fees between cross-border card use and domestic card use. The Commission will monitor these developments.

Banks should improve the information given to customers with respect to general conditions, fees, charges and (for non euro currencies) exchange rates. If serious problems emerge with the implementation of Recommendation 97/489/EC, the Commission will propose transforming it into a binding instrument.

4. CHEQUES

Cheques are the oldest form of "book money" instrument in use today. Their use varies greatly between Member States ( 30% of all retail payments in the UK and 46% in France, against only 5 to 10 % in Germany and Belgium). However, in all countries, cheques represent a paper based payments technology, which banks aim to phase out, or at least scale down, as soon as practicable.

The difference in charges between domestic and cross-border use in the case of cheques is more marked than for any other payment instrument. Charges for the cross-border collection of a domestic cheque can be as high as 40 euro, even for a low value cheque. The eurocheque system establishes charges for clearing which are substantially lower than those for cross-border use of domestic cheques. If the eurocheque system is to be severely curtailed in 2001 (its guarantee function may no longer be available) [12], then a replacement instrument is likely to be needed.

[12] The Commission considers that the benefits of the existing eurocheque system, in particular its standardised cheque format and its clearing facilities in all European countries should not be lost.

Action point:

Banks are urged to consider how to meet the needs of the public for the type of cross-border distance payment facility currently met by the eurocheque system. The Commission will monitor and assess the extend to which public's need for an alternative to the eurocheque system is being met. Should significant problems be encountered, the Commission will make proposals to address this issue.

5. CASH

The charges levied for the exchange of euro area national banknotes are currently strongly criticised by citizens in the whole of the EU. Until recently, charges have (wholly or partially) been hidden in the exchange rate spread between bank buying and selling rates. Since the introduction of the euro, banks have been obliged to use a single fixed conversion rate when converting between participating currencies, and thus to identify, clearly and separately, all charges. The problem in the euro area will disappear from 1 January 2002, when national banknotes will be replaced by euro banknotes. But in the meantime, the public perception is that charges have increased, when the removal of exchange risk should have reduced them. Complaints are notably frequent when low amounts are exchanged, since the relative effect of a flat fee is proportionately greater for lower amounts.

The Commission has already addressed to banks the concerns of citizens about the level of charges levied for banknote exchange, in addition to other cross-border transactions. It has called on them to provide public information showing the changes in the level of charges following the introduction of the euro. While information provided by banks tends to show a general decrease in the level of charges consistent with the removal of exchange rate risk, the level of charges for very small transactions has not decreased and has, in many instances, increased. Before exchanging currencies customers should of course inform themselves of the charges which will be applied. But the Commission repeats its call to banks to re-examine their charging structures, particularly for small value transactions. Failure by banks to heed such calls may adversely affect the acceptance of the euro by the public, and the Commission will combat abuses which it discovers.

The Commission has begun an investigation to determine whether banks and banking associations may have acted in collusion to fix either the form of charges (flat fee, percentage etc.) or their amount, for euro area currency conversion charges.

Action points:

Banks are strongly urged to re-examine their charging structures and pursue a transparent, customer friendly, pricing policy, with particular attention to the charges for small value transactions.

To encourage a positive response, the Commission intends to highlight instances of excessive charging, and to pursue its investigation into possible anti competitive practices

6. ACTION AGAINST FRAUD

Work on fraud prevention at EU level is currently focused largely on payment cards. On average, the incidence of card fraud is some 50% higher for cross-border card transactions than for domestic transactions. Overall card fraud losses in the EU in 1998 were approximately EUR440 million out of a total volume of EUR1,100 billion. Reducing such cross-border fraud costs should permit cross-border card costs and fees to fall somewhat (although the overall part in costs represented by such fraud should not be overestimated). In 1998 the Commission issued a Communication which provides an initial assessment of these problems. It was the first step to create a secure environment for payment instruments. One further action is already under way: a legislative proposal aimed at harmonising criminal law provisions in all Member States ("Framework Decision") is under discussion in the Council. To complement these, the Commission will undertake the following:

Action point:

A new Communication on fraud prevention is under preparation. The Commission intends to monitor the payment industry's efforts to achieve a secure environment. The Communication will also focus on preventive actions, such as the exchange of information (both within payment systems and between industry and public authorities), training programmes (for bank staff, retailers, police officers) and educational material.

These initiatives are in conformity with the conclusions of the European Council recently held in Tampere, which underlined the importance of preventive actions, cooperation and the exchange of best practice in fighting financial crime.

CONCLUSIONS

Improvements in the efficiency of small value cross-border payments are required. The Council and the European Parliament have endorsed the Framework for Financial Markets Action Plan. This Communication has indicated the actions to be undertaken, within the area of retail payments, in order to meet the needs - and expectations - of citizens and SMEs for a "single payments area": i.e. so they can make small-value payments across borders nearly as easily and cheaply as they can within their own countries. Both the private and public sector have their respective roles to play. The Commission will keep the Parliament and the Council regularly informed of progress on the issues discussed in this Communication.