COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features

Table of Contents

1........... Introduction. 5

2........... Context 7

2.1........ Policy background. 7

2.2........ Stakeholder consultation. 7

2.3........ Market overview.. 10

2.3.1..... Size of EU payment accounts market 10

2.3.2..... Payment accounts. 10

2.3.3..... Cross-border activity. 11

2.4........ Existing policy and legislative framework. 11

2.4.1..... EU level 11

2.4.2..... Member State level 13

2.5........ Procedural aspects. 15

2.5.1..... The Impact Assessment Steering Group. 15

2.5.2..... The Impact Assessment Board. 15

2.5.3..... Opinion of the IAB.. 15

3........... Problem definition. 16

3.1........ Drivers. 16

3.2........ Problems. 23

3.2.1..... Access to basic account services. 23

3.2.2..... Presentation and ease of comparison of bank fees. 33

3.2.3..... Payment account switching. 38

3.3........ Interlinks. 45

3.4........ Summary of consequences. 46

3.4.1..... Consumers. 46

3.4.2..... Effects on financial industry. 48

3.4.3..... Non-financial services/products providers. 49

3.4.4..... Public administrations. 49

3.4.5..... Wider economy. 50

4........... Objectives. 51

5........... Need for EU action. 51

5.1........ To improve the proper functioning of the internal market and avoid the distortion of competition in the field of retail banking. 52

5.2........ To empower consumers by enabling them to make informed choices and enable them to take advantage of the single market 53

5.3........ Allow all European citizens access to essential services and the opportunity to benefit from the single market by promoting economic and financial inclusion. 54

6........... Policy options. 55

6.1........ Options for access to basic account services. 55

6.2........ Options for presentation and ease of comparison of bank fees. 57

6.3........ Options for payment account switching. 60

6.4 ....... Choosing the most appropriate policy instrument 61

6.4.1..... Self-regulation. 61

6.4.2..... Non-binding measures. 61

6.4.3..... Binding measures. 62

7........... Impact analysis and comparison of policy options. 62

7.1........ Methodology. 63

7.1.1..... Access. 63

7.1.2..... Transparency of fees and switching. 64

7.2........ Costs. 64

7.3........ Benefits. 65

7.4........ Comparison of options and assessment of their impact: access to basic account services. 66

7.5........ Comparison of options and assessment of their impact: presentation and ease of comparison of bank fees 73

7.6........ Comparison of options and assessment of their impact: payment account switching. 81

8........... The preferred policy option and its impact 86

8.1........ Cumulative impacts and impacts on stakeholders. 87

8.1.1..... Impacts on stakeholders. 90

8.1.2..... Geographical impacts. 91

8.1.3..... Social impacts. 93

8.1.4..... Administrative burden. 93

8.1.5..... Impact on small and medium-sized enterprises. 94

8.1.6..... Other impacts. 95

8.2........ Proportionality of the preferred options. 95

9........... Monitoring and Evaluation. 96

Annex I Policy Background. 97

Annex II Access to basic account services. 106

Annex III Presentation and ease of comparison of bank fees. 161

Annex IV Payment account switching. 193

Annex V Glossary. 217

Annex VI Assumptions and calculation bases used in determining costs and benefits. 218

1. Introduction

Every citizen of the European Union should have the right of access to basic banking services throughout the EU, irrespective of their nationality and/or place of residence since access has become an essential condition for participation in economic and social life. Such access is not available to all. Improved access to basic banking services would enable every consumer to fully benefit from the internal market, by for example, encouraging the free movement of persons and facilitating the purchase of goods cross-border.

Furthermore, unclear bank fee information makes it difficult for consumers to make informed choices about which account is best-value for them. Since offers are difficult to compare, EU consumers tend to refrain from switching payment accounts, potentially to an account better suited to their needs. Finally, EU consumers who seek to acquire banking services across borders are often hindered by requirements or practices in domestic markets that place non-residents at a disadvantage. As a consequence, competition in the retail banking sector is hindered. Clearly, these issues and their effects are interrelated, both for the individual and the wider economy. This impact assessment aims to address these problems and thereby:

· Improve the proper functioning of the internal market and avoid the distortion of competition in retail banking. The uneven playing field between market actors results in reduced competitive rivalry and missed opportunities within the internal market. Without intervention, there is a risk of further fragmentation in the provision of payment accounts, threatening long-term market integration.

· Empower consumers by enabling them to make informed choices. In a competitive and efficiently functioning single market with a high level of consumer protection, EU citizens would have all the tools necessary, and thus be empowered to search for the best product for their needs, whether in their own or in another Member State.

· Allow all European citizens the opportunity to benefit from the single market by promoting economic and financial inclusion and through EU-wide access to basic banking services. Access to basic account services will facilitate financial inclusion enabling all consumers to participate in and benefit from the internal market (including its digital environment). Improving access to this key service constitutes an action of the European Platform against Poverty and Social Exclusion (a flagship initiative of Europe 2020), which is designed to combat social exclusion.[1]

A payment account is one of the most popular and common retail financial services. Through it, consumers conduct many everyday functions, such as receiving salaries or social security benefits, shopping, and paying bills. Consequently, payment accounts are generally known as 'bank accounts' or 'current accounts'. A 'payment account' is defined in the Payment Services Directive[2] and in the Recommendation on access to a basic payment account.[3]

On 28 June 2012, as part of the concept of the 'banking union', EU leaders at the European Council agreed to establish a single supervisory structure for banks in the euro area. The move towards a European 'banking union' aims to provide a clear longer term perspective on the future of the EU's Economic and Monetary Union. Relevant proposals were adopted in September 2012. Furthermore, the letter from President Barroso to the President of the European Parliament dated 12 September 2012, in relation to the 2012 State of the Union Address, announced proposals in the area of transparency and comparability of bank fees and bank account switching as part of the Commission Work Programme for 2013.[4] Further, the Single Market Act (SMA) II adopted in October 2012 identified a legislative initiative on bank accounts in the EU as one of the 12 priority actions to make citizens and businesses confident in using the Single Market to their advantage. Its aim is to "give all EU citizens access to a basic payment account, ensure bank account fees are transparent and comparable, and make switching bank accounts easier."[5]

This impact assessment complements the move towards a banking union in the area of retail banking by:

· Enhancing the functioning of the internal market and strengthening the conduct of banking regime by removing the remaining barriers to the internal market.

· Laying the foundation for a more integrated EU-level treatment of banks and consumers and thus creating a level playing field for all stakeholders in relation to transparency of bank fees, switching and access, while empowering consumers.

Accordingly, this Impact Assessment identifies specific problems in the retail banking sector, (in particular those relating to the restricted access to a payment account, the lack of transparent and comparable fee information and barriers to switching of payment accounts), considers their consequences and analyses the different options for addressing them. Other problems which may also impact on the accessibility, transparency and mobility of payment accounts such as the tying and bundling of payment accounts to other products, social and economic factors (e.g. labour market changes, technological gaps, demographic changes, income inequalities, physical disabilities), the level of banking sector development and the structure of the EU banking industry (e.g. branch penetration) are outside the scope of this initiative.

The focus of this impact assessment is on payment accounts held by consumers. Consequently, accounts held by businesses, even small or micro enterprises, unless held in a personal capacity, are outside the scope of this impact assessment. Furthermore, this impact assessment does not cover savings accounts, which may have more limited payments functions.

In line with the Commission's better regulation approach, policy options need to be considered carefully and their potential impact thoroughly assessed. Comprehensive and comparable pan-EU statistical data in the field of retail financial services is scarce, particularly in relation to payment accounts. Consequently, in order to analyse the problems and the impacts of different options, this report draws on information from a wide range of sources, including academic literature; pan-EU studies (including mystery shopping exercises and the Eurobarometer survey) undertaken on behalf of the Commission; national research by public authorities; mystery shopping exercises and studies at the national level; and reports by the financial services industry and consumer groups. The information from these different sources is generally consistent; where divergences exist, they are noted. The views on the available evidence expressed by stakeholders are taken into account within the assessment. Difficulties in collecting and comparing data would be addressed under the foreseen monitoring exercise (see Chapter 9).

2. Context

2.1. Policy background

European Commission Studies and Research

The Commission has undertaken a thorough review of EU payment account markets over several years. Since the 2007 report of the Sector Inquiry into retail banking, a number of studies have been undertaken. Please see Annex I for further information.

Statements from EU Institutions

There is broad consensus that legislative measures on payment accounts are required in order to open up and improve the functioning of the single market for all citizens. In particular, in its Resolution on a single market for Europeans,[6] the European Parliament called "on the Commission to submit by June 2011 a legislative proposal on guaranteeing access to certain basic banking services and to improve the transparency and comparability of bank charges by the end of 2011." This was reiterated in a recent European Parliament resolution with recommendations to the Commission on Access to Basic Banking Services[7] which asks the Commission to put forward a legal proposal addressing access to basic banking services by January 2013. The report underlines that access to basic payment services is a precondition for consumers to benefit from the internal market, reap the opportunities of e-commerce, and it will also improve social inclusion across the EU. The March 2012 European Council similarly welcomed the Commission's intention to propose a new round of measures on payment accounts designed to open up new growth areas in the Single Market. Finally, the European Economic and Social Committee (EESC) has issued several reports relating to payment accounts[8] which state that retail financial services markets are one of the areas where the greatest shortcomings in the operation of the Single Market have been observed.[9] See Annex I for further details.

2.2. Stakeholder consultation

Since 2007, the Commission has organised several public consultations on account services.[10] There is unanimous agreement that customer mobility and consumer confidence in the area of payment accounts is crucial and that the accessibility of payment accounts and means of payment are vital for fully participating in the economy and society. In the areas covered by this impact assessment, a specific public consultation was held in 2012.[11]

More than 120 replies were received. From consumers and financial services industry, their representative associations at both national and European level, and authorities from half of the EU Member States[12] and from a State of the EEA. In general, all stakeholder groups are aware of the problems in the retail banking sector. More diverging positions emerged on further measures and the level at which these should be positioned, with further nuances across the three areas covered by the consultation, as summarised below.

Access to basic account services

In general, the financial services industry and a number of Member States participating in the public consultation argue that there are no major obstacles for consumers in accessing a basic account. They state that the financial services industry adheres to either the EU Recommendation or similar national provisions to ensure access, concluding that no action should be taken in this area. The financial services industry further emphasises that if any measure were to be taken, it should be at national level to accommodate the different legal and regulatory landscapes across the EU. Any extension of access to basic account services to non-residents is particularly opposed by the banking industry.

On the contrary, consumers, representatives of civil society and some Member States contend that the current situation is unsatisfactory and that difficulties exist in accessing basic account services. Consumers in particular would support a legislative initiative that will ensure access to an account with a range of functionalities likely to enable them to live a normal life. Accordingly, they argue in favour of legislative measures at EU level, to establish an obligation for account providers to guarantee access to a basic payment account to all consumers, albeit with some flexibility for national circumstances. This flexibility is necessary due to different characteristics of national markets and different levels of unbanked consumers in the Member States.[13] Consumer representatives have previously argued that self-regulation or a Recommendation would be ineffective since ensuring access to a payment account is neither a priority for the financial services industry nor for Member States.[14] In terms of concrete impediments to access the following are cited: consumers' financial situations (i.e. low income); high costs of account services; consumers' lack of confidence in the banking system; unsuitability of the products offered by banks; and insufficient financial education.

Presentation and ease of comparison of bank fees

All stakeholder groups recognise the difficulties that exist in relation to transparency and comparability of fees. Specific causes identified by consumer groups and several Member States include: complex and diverse business models of banks across countries; issues linked to the offer of packaged services; charging structures; varying terminology across banks; the speed with which new and innovative products enter the market; cross-subsidisation within retail banking, and lack of clear legislation in this area.

All citizens and consumer groups and a number of Member States participating in the public consultation highlight the importance of coordination across the border and support EU level initiatives. Others, such as the majority of financial industry respondents and other Member States, consider action should be conducted at national level initially. One Member State does not see any grounds for intervention at EU level at this stage.

The majority of Member States and financial services industry respondents consider that any measures implemented at EU level should take into account existing national initiatives and the need for flexibility. For one bank, while there is no need for EU action, the real issue is the lack of a European retail financial market. Some banks are open to considering a coordinated EU approach in specific areas (e.g. glossaries), but stress the difficulties that such an approach would entail. Most respondents from the financial services industry stress the need for a balance between ease of comparison and excessive standardisation affecting differentiation, qualitative aspects and particularities of national markets.

Payment account switching

Consumers and representatives of civil society argue that banks do not always offer services aimed at facilitating switching. Even where such services are provided, they do not fully comply with the provisions of the Common Principles on bank account switching ("Common Principles").[15] However, the financial services industry considers that most providers offer a switching service in line with the Common Principles. Public authorities tend to fall between these two groups, stating that while most banks across the EU offer a switching service, this service is not always entirely compliant with the Common Principles. Several respondents highlight at least one remaining obstacle to switching; these include the risk of direct debits being redirected, and the possibility of mistakes occurring due to insufficient cooperation between banks and third parties. Public authorities note that bank staff lack awareness of switching services, often due to insufficient training, and that consumers are provided with insufficient information. One public authority considers the Common Principles to be a half-way measure.

Consumers, civil society and Member States consider that the ineffective application of the Common Principles cause delays in the switching procedure, problems with transferring direct debits, a lack of cooperation from and charges imposed by the old bank, a lack of information on the switching process and a lack of preparation of the bank staff. Conversely, the financial services industry argues that the Common Principles solve most of consumers’ problems, though it splits on whether misdirection of payments remains an issue. The industry adds that issues with switching facilities are not a key factor in impeding access to the market for smaller financial services providers.

There are mixed views as to whether the Common Principles should be made compulsory. Several Member States and the financial services industry believe that the Common Principles should remain voluntary. Other Member States are more receptive to making the Common Principles compulsory, as this would guarantee more effective enforcement of the provisions. Consumers and representatives of civil society strongly believe that the Common Principles should be made binding.

Consumers are also favourable to measures on the portability of payment account numbers and the automatic redirection of payments. Stakeholders are split as to whether any initiative should also cover cross-border switching. Some public authorities and consumers appear favourable to the introduction of measures covering cross-border switching; others, in addition to the financial services industry, do not.

2.3. Market overview

Payment accounts are provided by payment services providers. While in theory, this can cover both payments institutions (i.e. those that are not credit institutions) and credit institutions, in practice, the majority of bank or payment accounts are provided by credit institutions. Data on accounts provided by payment services providers that are not credit institutions is not available; consequently, in this analysis, the focus of the data, where available, is on accounts provided by credit institutions.

2.3.1. Size of EU payment accounts market

There are at least 368 million payment accounts in the EU.[16] The precise figure is likely to be considerably higher; first, the data excludes those under the age of 15 with payment accounts (though this is a relatively small group); second, the data excludes the possibility that consumers may have multiple payment accounts (multi-banking), which is prevalent in, for example, the UK; third, the figures do not include many dormant accounts. Conversely, the figure may be slightly inflated due to a small number of jointly-held payment accounts. While there is limited data on individuals' access, there is even less data on household access, creating a risk that this data lacks reliability.[17]

Retail banking represents over 50% of total banking activity in the EU.[18] It remained the most important sub-sector of banking which accounted for more than 50% of its total gross income in the EU.

2.3.2. Payment accounts

A payment account usually has a range of different services attached to it, such as the ability to place money in an account, to withdraw cash, to execute payment transactions, to conduct direct debits and credit transfers as well as the provision of a payment card (see Graph I below). Consequently, a payment account plays an important role in the integration of consumers into the wider economy. While there has been a steady growth of the use of card payments, credit transfers and direct debits over the period 2000-2010, the use of cheques has fallen.

Graph I: Payment transactions in the EU (% of the number of transactions in 2010)

Source: ECB data, Statistical Data Warehouse, 2010, http://sdw.ecb.europa.eu/

2.3.3. Cross-border activity

In general terms, it is unusual for consumers to purchase retail financial services directly cross-border; 94% of consumers stated that they have never bought a financial product outside their home country[19] although e-commerce means that often consumers buy abroad without even realising it. Payment accounts are, however, the financial services product most likely to be purchased cross-border, with 3% of EU consumers stating that they have opened a payment account in another Member State.[20]

The number of consumers who have opened a payment account cross-border varies considerably from around 8% in Estonia and Luxembourg to 1% in Romania, Bulgaria, Greece, Malta and France.[21] Despite generally low levels of cross-border activity, the potential interest in opening a payment account cross-border is generally higher across the EU. (See Graph II).

Graph II: % of consumers that have opened a payment account cross-border (actual) and

who would consider opening an account cross-border (potential)

Source: Special Eurobarometer on Retail Financial Services, European Commission, February 2012, p.30 and 35

At present, direct cross-border provision of payment accounts is driven by the supply side rather than the demand side. Financial services providers can supply payment accounts cross-border in two ways: through local presence (e.g. branches, subsidiaries, mergers and acquisitions) or through direct distribution channels (e.g. via telephone or the internet).

2.4. Existing policy and legislative framework

2.4.1. EU level

In July 2011, the Commission adopted a Recommendation on access to a basic payment account[22] which set out principles to guarantee consumers access throughout the EU. The Recommendation also affirmed the right of any consumer, irrespective of his/her financial circumstances, to open and use a basic payment account even in a Member State where s/he does not permanently reside, provided that the consumer does not already hold a payment account in that country. A basic account should be offered free or at a reasonable charge. Member States were to ensure that at least one provider is in charge of offering basic payment accounts in their jurisdiction and to guarantee that providers use transparent, fair and reliable systems to verify whether consumers already hold an account. They must, when refusing an application, immediately inform the consumer of the grounds in writing and free of charge.

The Commission invited Member States to ensure that basic payment accounts include a number of services. These comprise the provision of a debit card, the ability to make deposits and cash withdrawals, and the possibility of execution of payment transactions – including direct debits and credit transfers.

In addition, access to a basic payment account should not be made conditional on the purchase of additional services, and the provider should not offer, explicitly or otherwise, any overdraft facilities in conjunction with a basic payment account. Providers should make information available to consumers about the specific features of the basic payment accounts on offer, their associated charges and their conditions of use.

Member States were also to launch public campaigns to raise consumer awareness about the availability of basic payment accounts and ensure that payment service providers make information available about the specific features of the basic payment accounts on offer, their associated charges and their conditions of use. Finally, Member States were to designate competent authorities to monitor effective compliance with the principles set out in the Recommendation and to ensure that appropriate and effective complaints and redress procedures were established for the out-of-court settlement of disputes concerning the rights and obligations established under the principles set out in the Recommendation. The Commission set 21 January 2012 as a deadline for Member States to implement the Recommendation after which the Commission committed to conduct a review.[23] Based on the information provided by Member States, the Commission in August 2012 published a follow-up report presenting the state of implementation of the Recommendation in each Member State.[24] The data presented in the report proved that the implementation of the Recommendation was largely inadequate, as only three Member States broadly complied with it and more than half the Member States had no framework in place at all to promote the right of access.

The Payment Services Directive (2007/64/EC) introduced certain transparency obligations for EU payment service providers, which would complement the proposed initiative. Payment service providers have to provide certain information before a payment service is undertaken. This includes terms and conditions; information on the payment service provider itself; features of the payment service and its associated charges, and additional information once the payment has been completed. The Payment Services Directive does not, however, contain any obligations on the format of the disclosures nor does it address non-payment related information. The Payment Services Directive is currently subject to a formal evaluation by the Commission and a report will be published shortly in line with Article 87 of the Payment Services Directive.[25]

In August 2010, the Commission asked the European Banking Industry Committee (EBIC) to improve the clarity, comparability and transparency of account fees and to ensure that account fee information is easily available to consumers. Despite significant efforts until the end of 2011 to establish a principles-based industry self-regulatory code, the initiative failed miserably, producing no results whatsoever.

In 2007, following the sector inquiry into retail banking[26] and as announced in the Single Market Review,[27] the Commission asked EBIC to make it easier for consumers to move their accounts from one bank to another. An in-depth analysis of the problems and potential solutions, alongside a preliminary involvement of the Impact Assessment Board on this issue, underpinned the launch of a self-regulatory initiative and in 2008, EBIC developed the Common Principles for Bank Account Switching.[28] These apply to the switching of current accounts within a Member State. Implementation by national banking associations was to be completed by the end of 2009. EBIC has stated that they have been implemented by all Member States.[29] However, research has shown that self-regulation has not achieved the necessary results; implementation of the Common Principles is incomplete and inadequate[30] and customer mobility and competition remain impeded.[31]

2.4.2. Member State level

Access to basic account services has not improved since the adoption of the Recommendation. Only three Member States (Belgium, France and Italy) have a framework in place that is broadly in line with the Recommendation and in Belgium and France it already existed prior to the adoption of the Recommendation. While some countries have a general legal framework[32] or self-regulatory rules,[33] these frameworks hardly comply with the Recommendation, and in almost half of Member States,[34] there are no rules in place and few plans to introduce them.

Research on account information at national level[35] showed a range of initiatives directed at improving transparency and comparability of bank fees related to payment accounts (Table 1).

Table 1: Types of initiatives to improve transparency and comparability of bank fees

Tools for consumers || A) Glossaries B) Disclosure of information on fees C) Comparison tools D) Financial education and informative initiatives

Tools for public Authorities || E) Enforcement actions F) Market studies allow identifying the need to intervene in some circumstances;

|| G) Combined initiatives

In the public consultation on bank accounts, several Member States referred to internal reports, studies and surveys aimed at analysing the persisting difficulties as regards presentation and comparability of bank account fees.[36] Despite the variety of initiatives, their application (e.g. 58% of the initiatives on disclosure of information on fees were backed by legislation whilst 42% were through self-regulation) and relevance to payment accounts (e.g. none of the glossaries identified were specific to current accounts) differ widely. Please see Annex III for further information.

The Common Principles have been implemented by national banking communities through industry codes, recommendations, guidelines or interbank agreements. Legislative measures have only been taken in Ireland, where a statutory Switching Code replaced the Voluntary Switching Code on 1 October 2010.[37] Some national banking communities have applied the switching provisions to other products or services.[38] In order to assess how banks assist consumers with payment account switching – and to what extent banks offer the switching service as defined in the Common Principles – the Commission contracted a mystery shopping study[39] in 2011 which found that the large majority of consumers (80%) faced difficulties in switching.[40] In their response to the public consultation a number of industry representatives have questioned the validity of the conclusions reached by this mystery shopping exercise. The main criticisms related to the limited sample of mystery shoppers relative to the number of holders of a payment account and its seemingly divergent results when compared to the Eurobarometer[41] survey. The Commission has acknowledged these criticisms. However, while the technique of mystery shopping can provide for first hand insights into consumer experiences, it may not be feasible nor reasonable/(cost-effective) to carry out large scale mystery shopping exercises to achieve a statistically representative population sample.[42] This study comprised a sample of nearly 1400 enquiries across all 27 Member States and targeted mainly large market players so as to cover at least 80% of the current account market share of each Member State. It is therefore the single most recent assessment of the situation across Member States on a comparable basis. Moreover, all studies providing for an assessment of the functioning and effectiveness of the switching process performed at national level, broadly confirm the results of the EU-wide mystery shopping study.[43]

Regarding the seeming discrepancies of results of the mystery shopping study and the recent Eurobarometer, we would like to clarify that even though both studies provide for valid data based on representative EU-wide samples, the two studies assessed different issues. Whereas the mystery shopping study aimed at a detailed assessment of the functioning and effectiveness of the switching process and of the Common Principles in practice, the Eurobarometer was geared at assessing the number of consumers that would be a priori interested in switching providers (without making any reference to the industry switching mechanism). Therefore, the results of the two exercises are not directly comparable.

2.5. Procedural aspects

2.5.1. The Impact Assessment Steering Group

An Inter-Service Impact Assessment Steering Group (IASG) was established in February 2012. It was jointly chaired by DG Health and Consumers and DG Internal Market and Services and included representatives from DG Competition, DG Economic and Financial Affairs, DG Employment, Social Affairs and Inclusion, DG Enterprise and Industry, Joint Research Centre, DG Justice, DG Taxation and Customs Union, the Secretariat General and the Legal Service. It met on 2 March, 27 April, 5 July and 16 July 2012. The minutes of the last IASG meeting were sent to the Impact Assessment Board.

2.5.2. The Impact Assessment Board

The report was submitted to the Impact Assessment Board (IAB) on 27 July 2012 and discussed at the meeting of 5 September 2012.

2.5.3. Opinion of the IAB

In its first opinion, the IAB asked for a revision of the document, taking into account its main recommendations for improvement. The following modifications were made:

· The problem definition is improved through: a reinforced presentation of the interlinks (Sections 3.3 and 3.4); a more detailed and precise description of the scope of evidence generally available in the Introduction Chapter and throughout the text; arguments demonstrating that the problem drivers omitted from the analysis are not critical for the envisaged outcome in Chapters 3 ("Problem definition") and 6 ("Policy options"); aspects related to the transnational dimension of the identified problems in Chapter 3, including a better description of the baseline scenario on 'access', and a more comprehensive analysis of the follow-up given to the Recommendation on access.

· Better explanation of the subsidiarity and proportionality questions is provided in the problem definition section and in Chapter 5 ("Need for EU action"). These now cover, specifically, the reasons why the envisaged actions must be taken at EU level in order to achieve the general objectives; the proportionality analysis has been strengthened in the description of policy options for each area in Chapter 6, their assessment against criteria related to costs and benefits in Chapter 7 ("Impact analysis and comparison of policy options") and, in particular, in Section 8.2 of Chapter 8 ("The preferred policy option and its impact"), which is now devoted to the proportionality of the preferred set of policy options.

· In terms of the improved presentation of options and expected impacts, a new Chapter 6 is fully devoted to the presentation of the policy options; a new Chapter 7 provides a comparative analysis of the policy options under each individual area, which determines the best approach for the three issues covered by this report; the content of the preferred package is now described in more detail in the introduction and the first paragraph of the new Chapter 8, including a comparison of different combinations of options; finally, Chapter 9 deals with the evaluation and monitoring aspects of the preferred option.

· References to views expressed by stakeholder groups have been moved from Annexes (II, III and IV) to the main report, notably in Chapter 6 and 7. New references from the public consultation have been added, where relevant, providing a more concrete account of the stakeholder views (e.g. magnitude of the problem).

· Finally, the revised Impact Assessment report includes a number of more technical comments, including a more careful and transparent presentation of the evidence base.

In its second opinion, the IAB raised the following main points for review: i) provision of more robust evidence of the problems in the three areas, a more in-depth analysis of their cross-border dimension and a clearer explanation of the interlinks between them; ii) better demonstration of subsidiarity and proportionality of the options involving binding measures on access, fee transparency and switching; iii) improved presentation of the elements retained in the preferred package of options and its assessment against the baseline scenario; iv) more explicit references to stakeholder critical views. A number of changes were made to the Impact Assessment in response to the IAB's comments. In particular, data and analysis of problems in the area of access (relating to table 3 in paragraph 3.2.1) was improved to better indicate the existing regulatory framework in this area. Cross border aspects in the problem definition for transparency and switching were strengthened with additional examples and references to data (paragraphs 3.2.2 and 3.2.3). A number of examples were added in the description of the links between the problems in the three different areas in Section 3.3. Complementary information was provided in the subsidiarity assessment in the areas of fee comparison and switching (Chapter 5). A new Section (8.1) was introduced to improve the presentation of the elements of the preferred package of options, including a comparison with alternative packages assessed against the 'no action' scenario. Where relevant the critical views expressed by stakeholders during the public consultation were set out more clearly throughout the text, notably with respect to the methodology used to gather evidence (mystery shopping exercises).

3. Problem definition

This chapter identifies the problems and their drivers that create barriers to the creation of a well-functioning internal market for payment accounts, with effects upon both consumers and businesses.

3.1. Drivers

Market failures

Market failures occur when market forces fail to lead to an optimal outcome. The two main sources of market failure in relation to the issues covered in this report are information asymmetries and misaligned incentives (e.g. conflicts of interest).

With information asymmetries, market actors may fail to take decisions that are in their best interests because they lack information. An account provider is better informed than a consumer about the account features, whereas the consumer is better informed about his own personal and financial situation. The role of payment accounts as gateway products also creates information asymmetries between incumbent providers and potential new entrants.

As regards misaligned incentives, providers may seek to sell the most expensive payment account, whether or not its features or attached services respond to a consumer's needs. A consumer may wish to open an inexpensive account, but providers may consider them as risky or non-profitable, and refuse them that account. Furthermore, the role of accounts as gateway products may add to these issues: while consumers search for a product meeting their needs, providers aim to attract consumers whom they can sell additional products to. In some cases consumers may be prevented from participating in the market as a consequence. The European Consumer Organisation (BEUC) notes this problem, indicating that low income is a reason why banks refuse consumers an account.[44]

Varying regulatory framework and limitations of self-regulation

Regulation is designed to address market failures, but ill-designed, inconsistent, or ineffective regulation will not do so. In relation to switching and fee transparency, the current regulatory differences across Member States are exacerbated by the failure of self-regulatory initiatives; and with regard to access, by Member States' reluctance to implement the Recommendation.

Other factors

Other factors, described below, may impact upon payment account mobility and consumer choice, but these factors are beyond the scope of this initiative.

First, low levels of financial literacy may worsen the information asymmetries described above.[45] Even if enhanced financial education could help in improving financial knowledge and confidence of consumers, it nevertheless has certain limits and is not sufficient in increasing accessibility to financial services. It usually offers very basic knowledge which has limited use when a consumer is confronted with relatively complex aspects of financial products (e.g. compound interest rate) or when, as this often is the case, there is a significant time lag between the moment the person benefits from financial education and the time when s/he needs to apply the taught concept when buying a financial product, or opening a bank account. Therefore, financial education should not substitute but rather complement simple and objective information offered by providers. Also, these initiatives rarely reach general public focusing instead on a small group of consumers whereas a broad lack of awareness of payment account facilities and their conditions may in fact cause self-exclusion, particularly among vulnerable consumers. For instance, in Belgium despite there being a legal right to a basic account, 63% of those without an account surveyed in 2011 thought a bank would reject their application.[46] Therefore – as stressed by users' representatives – it is essential that consumers understand their right to access a basic payment account.[47]

It is thought that improved financial literacy is unlikely to significantly impact upon the payment account market and would not solve consumers’ problems across the board. In any event, research[48] carried out for the Commission in 2010 concluded that it was doubtful that the lack of financial literacy – in particular lack of knowledge – could be effectively tackled by a policy intervention in the form of financial education, a view supported by the 2008 UK FSA study[49] on behavioural economics and financial capability, and a US study[50] on the provision of financial literacy courses in US high schools. The Commission has nevertheless sought to improve financial literacy amongst EU consumers. In 2007, the Commission adopted a Communication on improving financial education.[51] The content of this Communication remains valid today and Member States are encouraged at the European and international level (e.g. OECD) to make efforts to improve financial literacy. While the Commission study mentioned above stated that policy intervention could not improve literacy, it did conclude that simple, standardised product information could significantly improve financial decisions.[52] In addition and given the limits of financial education, it is considered that objective and independent financial advice could further help in opening of the market of retail financial services, including access to bank accounts, to consumers who are distrustful with financial institutions or do not use financial products commonly.

Second, the tying or bundling[53] of products or services to a current account may also influence consumers' decisions relating to the opening and switching of accounts. Payment accounts are "gateway" products through which consumers can access – and providers can sell – other financial products. As according to the World Bank report: "for most people, having an account serves as an entry point into the formal financial sector. A formal account makes it easier to transfer wages, remittances, and government payments. It can also encourage saving and open access to credit."[54] The most recent EU data available[55] found that there was extensive tying and bundling of current accounts with other products. Almost all banks in Hungary, Latvia, Lithuania and Slovakia tie current accounts to consumer and mortgage credits.[56] This is mainly caused by current account customers having regular contact with providers, and the providers holding high levels of customer-specific information.[57]

While cross-selling, in particular bundling, can offer consumers benefits in the form of a better price, tying significantly limits customer mobility.[58] These practices can forcibly secure consumers' 'loyalty' to a payment account since it may be costly or burdensome to cancel the contracts of insurance, investment or credit products linked to the account. Low fee transparency and other barriers to mobility[59] further enshrine these practices and consumers’ reluctance to move. The most substantial impact on mobility in the context of cross-border demand concerned those contracts where a current account was a gateway product.[60]

Tying and cross-selling are currently being dealt with in a series of sectoral initiatives that are subject to negotiations in the European Parliament and Council.[61] The tying and bundling of payment accounts to mortgage credits is under discussion in the context of negotiations on the Directive on credit agreements relating to residential property.[62] Should tying be forbidden, but bundling be permitted (as proposed by the European Parliament and supported by the Commission), this initiative would increase in importance: clear and understandable bank fee information is vital for consumers to take an informed decision as to whether to enter into a bundled contract.

Third, alternatives to payment accounts may deter some consumers from opening and even switching accounts, thus limiting the size of the problem. Globally, e-payments and m-payments collectively accounted for an estimated 22.5 billion transactions in 2010.[63] E-payments (online payments for e-commerce activities) are expected to grow globally to 30.3 billion transactions from 17.9 (in 2010-13), while m-payments are expected to grow globally to 15.3 billion transactions from 4.6 billion in the same period.[64]

Analysis of the different potential substitutes available shows that in their current form these substitutes are imperfect and do not enable consumers to access the payment services required. For example:

The UK Paypoint system allows consumers to manage payments in cash to a wide range of service providers. However, some of the problems associated with the inability to access a payment account identified in Section 3.2.1, notably the reliance on cash (such as insecurity, extra time and hassle, difficulties in finding a job or renting a dwelling) would remain.

· It is increasingly common to purchase goods or services via mobile phone. In Finland, Luottokunta, BookIt Oy and Microsoft have developed a service called iSMS® that enables users to pay for purchases by mobile, domestically and abroad. As a result, 50% of Finns use their mobile phone for payments.[65] However, it is unclear whether such a system could work without a link to a payment account (or at least a credit card) and whether the information stored on a mobile phone could be recovered if the phone were lost. In some instances consumers cannot use mobile phones to make payments as a credit contract may be required. There are also data security concerns regarding mobile phone transactions and risks of abusive use of information about consumers' purchasing habits.[66] In light of these issues, it is perhaps unsurprising 100% of Finns maintain payment accounts, illustrating the complementary rather than substitutive nature of mobile phones as a means of payment.[67]

· Finally, pre-paid cards permit consumers to make certain types of electronic payments without a payment account. They do have major drawbacks, offering a limited range of services, and many traders do not accept them. The most common pre-paid cards do not allow their holder to transfer money or to pay bills via direct debit or standing order. Receiving money via a bank transfer may not always be possible. Such cards can be a costly solution because of the top-up and usage fees applied. The cost of loading the card can be a flat fee or a percentage of the loaded amount. It is more expensive if done with cash (e.g. £ 1 per top up or 3% of the loaded amount in average in the UK; EUR 3 per top up for some cards in Belgium or 1% of the loaded amount for some cards in Spain).[68] Application, maintenance and replacement fees vary; while the Belgium pre-paid cards are obtained for free, maintenance costs are EUR 12 per year.[69] A card in France costs EUR 49 when applying for it and EUR 12 when replacing it but has no maintenance costs.[70] Transaction costs also exist. Some cards charge the user a percentage of the purchased amount (e.g. 2.95% for an Irish prepaid card).[71] Withdrawing money from an ATM machine will cost the user of a Belgian card EUR 1.5 per withdrawal and 2% of the withdrawn amount to the user of a French card. Even not using it may be expensive: Irish prepaid cards charge an inactivity fee of EUR 3.50 a month after 2 months of no usage.[72] Prepaid cards are both imperfect substitutes and an expensive means of payment.

· It may be argued that in societies reliant on cash transactions, e.g. Romania and Bulgaria, access to payments accounts is not as essential: consumers can use cash as a substitute.[73] This situation is changing quickly. In developed EU countries, the proportion of cash transactions has decreased: "The evolvement of the cashless society has been increasing in Finland in retail purchases along with other Nordic countries and along plans by the banking industry".[74] Similarly, in central European Member States, electronic payments have started to prevail: "the variable costs of cash, paper-based and postal payment instruments are so high that their substitution with electronic transactions generally results in social savings and therefore Hungarian society can realise savings by the shift in the direction of cash-free, electronic payments which we have assumed."[75] Furthermore, in some Member States there are limits in terms of the cash volume that merchants can accept. In Slovenia, traders are unable to accept more than EUR 15 000 in cash.[76] Similar restrictions exist in Belgium, Italy, France and the Netherlands.[77] This shift towards electronic payments will have increasingly significant implications for those without access to electronic banking facilities.

As demonstrated in Graph III, there are clear trends in payment methods. From 2000-2010, one can observe a steady growth of the use of card payments, credit transfers and direct debits. Use of cheques is declining.

Graph III: Number of payment transactions per year in the EU (in million)

Source: ECB payments data.

Romania and Bulgaria will follow this trend shortly. Although there is no hard data demonstrating the decreasing role of cash in these countries, the increased use of electronic payment means, such as debit and credit cards (substitutes for cash) suggest this is the correct conclusion to reach.

Graph IV: Number of transactions by all cards (in millions)

Source: ECB payments data.

There are, moreover, ongoing and planned measures that risk further exacerbating some of the negative consequences of remaining unbanked. These include Member States' deficit reduction and public sector efficiency policies, anti-fraud measures, or a combination of these. Measures to forbid payment of salaries or social benefits in cash (e.g. Belgium[78]) and to reduce the minimum amount that can be paid in cash (e.g. Belgium[79], Spain[80], Italy[81]) have been announced recently. These will render unbanked citizens' lives more difficult in future. Consequently, the substitutes outlined are not an adequate alternative to a basic payment account, and do not counter the problem of economic exclusion.

Fourth, stakeholders (particularly the financial services industry) state that they may refuse to open an account for a consumer due to anti-money laundering rules.[82] However, the Commission concludes in its analysis of the EU anti-money laundering Directive, that the Directive in itself does not create any barriers to opening accounts. Member States' analyses of national money laundering rules have reached similar conclusions: anti-money laundering provisions do not require a person who wishes to open a bank account to produce an ID card or passport. Article 8 of Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing states that: "Customer due diligence measures shall comprise identifying the customer and verifying the customer's identity on the basis of documents, data or information obtained from a reliable and independent source."[83] Similarly, a report by the Financial Action Task Force (FATF) states that: "countries' laws or regulations generally do not distinguish the types of customer information to be collected".[84] However, "although a passport or ID Card is one of the methods used to verify the identity of customers in a majority of countries, it should be noted that the FATF standards (on which the EU anti-money laundering rules are based) does allow countries to use other reliable, independent source documents, data or information".[85] The FATF report further emphasises that the pursuit of financial inclusion and effective money-laundering regimes are complementary and "measures that ensure that more clients use formal financial services increase the reach and effectiveness of the anti-money laundering controls."[86]

The FATF report acknowledges that "a customer lacking a government issued form of identification, for example, may result in a financial institution using other more costly methods to verify identification, which could be a disincentive to serve certain customers."[87] This is supported by evidence from users' representatives who note that banks use anti-money laundering rules to reject applications from unattractive consumers.[88] In short, it is financial institutions' internal processes that create 'false barriers'.

Fifth, it has been argued[89] that these differing levels of payment account penetration can be linked to the level of development of banking infrastructure.[90] The underdevelopment of the banking sector in certain countries or regions, e.g. in Romania and Bulgaria, may restrict consumer mobility and choice. Elderly people, unfamiliar with online banking, may not open an account when there is no local branch.[91] Therefore it can be assumed that together with economic growth of these regions, banking infrastructure will also improve thus allowing for easier access of consumers to bank accounts. On the other hand, studies have been unable to demonstrate a link between account penetration and the availability of banking facilities.[92] Thus, despite having few bank branches per 10 000 people, Estonia, the Netherlands, Sweden and the United Kingdom have high levels of payment account penetration.[93] However, this is partly due to the widespread use of internet by consumers to manage their bank accounts in these countries, which limits the importance of branch networks since almost all banking transactions and operations can be made directly on-line or by means of a telephone operator. The development of internet banking can substantially facilitate and improve access to bank accounts, in particular for those consumers who have an easy access to internet and do not find it difficult to use on-line banking applications and software. While it can be assumed that generally such consumers do not face access problems and can open any bank account (regular or on-line) relatively easily, vulnerable consumers face a different reality. These are low-income groups, elderly people or people suffering from social exclusion who have no regular access to internet and simply would not be able to benefit from a bank account which is available only via internet.

Sixth, it can be assumed that increasing income levels of consumers in the EU in parallel with the economic growth will encourage even more common use of retail financial products and, as a result the number of unbanked consumers will 'naturally' decrease.

Finally, the trust (or lack thereof) of consumers vis-à-vis the banking sector may affect the bank-client relationship.[94] According to a survey, 50% of European respondents admit that their confidence toward the banking industry has decreased over the past 12 months.[95] Neither of the latter issues is within the scope of this impact assessment.

To conclude this section, it is of note that a right of access to basic banking services is already recognised in some OECD countries. In 2003 Canada introduced Basic Banking Services Regulations to ensure that basic banking services are available to all individuals, including foreigners who are legally resident in Canada.[96] In order to open a basic payment account, a consumer is required to present at least one identity document from a list provided by law. The bank can reject the consumer's request based on limited and clearly specified grounds and has to justify the reason in writing, and must inform the consumer as to how to contact the regulator. Apart from a basic payment account, under the Basic Banking Services Regulation, a consumer has access to basic payment means.

3.2. Problems

3.2.1. Access to basic account services

It is difficult to estimate the number of consumers without a payment account, since much of the data available is not comparable, though research estimates the number of EU citizens with no payment account at between 30 and 68 million.[97] Calculations based on World Bank data put the figure at 56 million.[98] [99] These figures probably underestimate how many citizens remain unbanked: the data is survey-based, and national data confirms that many unbanked consumers are unlikely to participate in such surveys.

Table 2: Size of the problem (EUR, millions, 2011 data)

|| Consumers with no payment account || Consumers who would like an account, but

don't have one || have been refused || have been refused due to inadequate documentation || have been refused due to no regular income || have been refused for other reasons

EU || 56 || 25 || 2.80 || 0.56 || 1.12 || 1.12

Of which mobile || 4 || 2 || 0.18 || 0.04 || 0.07 || 0.07

Of which vulnerable || 53 || 23 || 2.63 || 0.53 || 1.05 || 1.05

Sources: Commission calculations based on 2011 data from World Bank, Eurobarometer 2012 and Eurostat.

Based on Commission calculations, there are almost 3 million EU consumers who requested a bank account but were refused one either due to irregular income (40% of them), inadequate documentation (20%), or other reasons (40%) (See Table 2). There are also many unbanked consumers (22.2 million) who would like a bank account but have not attempted to open one. This very high figure results from the fact that many consumers, in particular less-educated parts of society, believe a bank account is not accessible for consumers living on a low or irregular income. They consider it a costly and complex product and refrain from attempting to open a bank account, even when they would like one. Some unbanked consumers are unaware that they have the right to open a basic payment account at low cost (in some Member States) because they are not informed about it. In Belgium, despite the fact that there is a legal right to a basic account, 63% of those without an account surveyed in 2011 considered that the bank would reject their application. It is therefore essential to reach unbanked consumers with public campaigns, as stipulated by the Recommendation on access to a basic payment account, informing them about the availability of this product, which is strongly advocated by consumers' representatives. The above-presented figures, however, most likely underestimate the size of the problem as they are survey based and many excluded consumers are unlikely to participate in such surveys. Available national data confirms this. According to a recent UK Financial Inclusion Task Force research, 52% of the unbanked consumers in the UK would like to have an account. The size of the problem varies between Member States. In Romania and Bulgaria, 45% and 53% of consumers respectively have current accounts; in Scandinavia, the figure is close to 100% (see Graph V).[100] In terms of volume, Italy and Romania have more than 13 million citizens aged over 15 without payment accounts between them, while Denmark and Luxembourg have few unbanked citizens.

Although in the majority of Member States, representatives of the financial services industry argue that a very small percentage of consumers are unbanked, these figures can be higher in actual terms. In Germany, while just 2% of consumers are unbanked, this equates to almost 1.5 million people.[101]

Graph V: EU citizens with a payment account

Source: Measuring Financial Inclusion, The Global Findex Database, World Bank, April 2012.

The low levels of access in Romania and Bulgaria may be caused by the broader unavailability of basic banking services, or by consumers' preference for using cash.[102] However, as mentioned in the analysis of problem drivers above, the share of cash in payment transactions is decreasing steadily and this downward trend is likely to continue in the foreseeable future. In those EU countries with more developed banking systems, such as in Scandinavia[103] or Central Europe[104], the share of cash payment transactions is decreasing, not just for consumers' convenience but also due to high cost of cash for providers. Some Member States also have limits in terms of the cash volume that merchants can accept; e.g. Slovenia, Belgium, Italy, France and the Netherlands.[105]

Many of those without a payment account say they do not need or want one.[106] These people are predominately older: 65% of unbanked people over 55 say this, as do 69% of retired people.[107] This response is also more common among those with less education, including 66% of people who left school aged 15 or under.[108] Many in these groups are unaware of the potential benefits payment accounts can bring, e.g. cheaper payments transactions, lower security risks, easier receipt of benefits and lower risk of tax fraud. In this respect, as underlined by the recent European Parliament Resolution, "financial education pointing out the advantages of financial inclusion is important"[109], as a complementary measure to tackle financial exclusion, the view which is shared by the financial industry.[110] Psychological factors may help explain the apparent reluctance of these groups to open an account, including perceptions about prices, bureaucratic complications, etc. This is confirmed by World Bank data which finds that "a formal account is not costless in most parts of the world and may be viewed as unnecessary by a person whose income stream is small or irregular".[111]

Sharing another's payment account is a further common reason why some consumers have no account, especially for those who use 'household' accounts, particularly women.[112] With the changing structure of families and family roles, this is less likely to be the case in the future; for example, in countries such as Sweden and the Netherlands, consumers did not report the use of shared accounts.

Finally, as many as one third of 15-24 olds believe that they are too young for an account.[113] These consumers, despite stating that they do not want an account, could still potentially benefit from improved access and cheaper accounts. Beyond this, managing a payment account has an important role in promoting independence and financial literacy.

Graph VI: Reasons for not having a payment account

Source: Eurobarometer

Despite a number of consumers believing that they do not need an account, it is estimated that around half of those without an account would like one.[114] 33% (10 million consumers; of which almost 4 million are in Romania) of those without an account in EU12 and 55% (15 million consumers, of which more than 7 million are in Italy) of those without an account in the EU 15 would like one. As indicated above, 52% of the unbanked consumers in the UK would like to have an account.[115]Accessing an account is particularly difficult for two main population groups: 'vulnerable' consumers and 'mobile' consumers. This observation has been explicitly confirmed by the European Consumer Organisation BEUC in their feedback to the consultation on bank accounts.[116]

· Vulnerable consumers. Those with few economic resources (such as people on low incomes or the unemployed). This is a sizeable part of the EU population; in 2010, 23.4% of the EU population was at risk of poverty or social exclusion.[117] These consumers are more likely to be financially excluded than other groups.[118] Based on Commission calculations, there are almost 3 million EU consumers who have requested a bank account but have been refused due to irregular income (40%), inadequate documentation (20%), or other reasons (40%) (see Table 2) while according to the World Bank report "Inclusive financial systems – allowing broad access to financial services, without price or non-price barriers to their use – are especially likely to benefit poor people and other disadvantaged groups."[119]

· Mobile consumers. Consumers move cross-border for various reasons including for work, study or retirement. Migrant workers are probably the largest mobile group. In 2010, 12.3 million EU citizens resided in another Member State, up from 11.9 million the previous year. [120] This includes more than half a million students (of which over 210 000 are Erasmus students)[121] who study in other Member States, (foreign students are not normally considered residents).[122] This population is rising, with the number of Erasmus students alone increasing annually by 7.4%.[123] This figure also excludes all other non-resident EU migrants such as seasonal or temporary workers. The number of non-resident migrants is estimated at between 1.9 and 3.8 million.[124] Combined, then, the total mobile EU population is approximately 15.8 million.[125] [126]This excludes 20.2 million migrants from outside the EU.[127]

· According to calculations by Commission services, the mobile population with access issues amounts to 3.5 million people, or approximately 6.25% of those without a payment account. It can be estimated that 0.18 million mobile consumers who face difficulties in accessing basic account services would like an account but have been refused (See Table 2), of which around 70 000 of have been refused for reasons other than inadequate documentation.

The reasons why consumers cannot access an account vary across the EU. The consequences of lack of access are significant for all stakeholders and for the efficient functioning of the single market as a whole. These consequences are described in Section 3.4 and in more detail in Annex II.

Ineffective, inconsistent or non-existent regulatory framework

The Commission asked Member States to comply with the provisions of the Recommendation by January 2012. The Recommendation also stated that "the Commission will monitor and assess the Measures taken by 1 July 2012."[128] To this end, in August 2012, the Commission published a report presenting an overview of Member States' compliance with the Recommendation.[129] The Recommendation stated: "the Commission will propose any necessary action, including legislative measures if needed, in order to ensure that the objectives of this Recommendation are fully met."[130]

Table 3: Size of the problem (millions)

|| || No of people with no account || No of people who would like an account (but don't have one) || Response by Member States to the Recommendation

|| No intention to take further action || Action taken/to be taken

Belgium || 0.27 || 0.19 || Law in line with Recommendation || ||

Bulgaria || 3.04 || 0.7 || No problem. || ||

Czech Republic || 1.71 || 0.58 || No problem. || ||

Denmark || 0 || 0 || || Partial legal framework enough but review launched. ||

Germany || 1.42 || 1.08 || Partial legal framework enough at present. || ||

Estonia || 0.03 || 0.02 || Partial legal framework enough. || ||

Ireland || 0.21 || 0.05 || Partial self-regulatory framework enough. || ||

Greece || 2.13 || 0.98 || || Partial self-regulation under consideration. ||

Spain || 2.74 || 1.04 || No action planned. || ||

France || 1.59 || 1.46 || Law in line with Recommendation || ||

Italy || 15.12 || 7.71 || || Law in line with Recommendation adopted 2012. ||

Cyprus || 0.1 || 0.03 || No problem. || ||

Latvia || 0.19 || 0.04 || No problem. || ||

Lithuania || 0.72 || 0.2 || Partial legal framework enough. || ||

Luxembourg || 0.02 || 0.02 || Partial legal framework enough. || ||

Hungary || 2.3 || 0.37 || || Partial self-regulation adopted April 2012. ||

Malta || 0.02 || 0.01 || No problem. || ||

Netherlands || 0.14 || 0.08 || Partial self-regulatory framework enough. || ||

Austria || 0.22 || 0.18 || No problem. || ||

Poland || 9.73 || 3.31 || || Partial self-regulation under consideration. ||

Portugal || 1.72 || 0.81 || || Guidelines exist but compliance is optional. ||

Romania || 9.99 || 3.99 || || ||

Slovenia || 0.05 || 0.02 || No problem. || ||

Slovakia || 0.92 || 0.23 || || Proposals for legislation forwarded to the Parliament. ||

Finland || 0 || 0 || Partial legal framework enough. || ||

Sweden || 0.08 || 0.04 || Partial self-regulatory framework enough. || ||

United Kingdom || 1.55 || 0.97 || Partial self-regulatory framework enough. || ||

EU || 56.03 || 24.65 || || ||

Source: Commission calculations based on data from World Bank, 2012 Eurobarometer and Eurostat.

Although representatives of the financial services industry argue that measures have been adopted and are adequately enforced,[131] as illustrated by reports by the European Commission and Parliament[132] as well as feedback to a public consultation[133], the Recommendation's application is far from satisfactory. A legal framework exists to facilitate access to basic account services in Belgium, France and Italy, while partial regulatory or self-regulatory regimes are in place in Portugal, Denmark, Estonia, Finland, Lithuania, Luxembourg, Sweden, Germany, Hungary, Ireland, Netherlands, and the UK. Of these countries, Estonia, Finland, Ireland, Lithuania, Luxembourg, Netherlands, Sweden and the UK, (who together account for about 2.8 million citizens without a payment account – equivalent to almost 5% of the EU total), do not intend to take any further action arguing that their partial frameworks suffice.[134] No framework exists at all in the remaining Member States: Austria, Bulgaria, Cyprus, the Czech Republic, Latvia, Malta, and Slovenia. These countries do not plan on taking any action in response to the Recommendation, arguing that there is no problem, even though they together account for about 5.3 million unbanked citizens which is equivalent to almost 10% of the total EU population without a bank account. Furthermore, in the Member States where only self-regulatory measures have been or are planned to be adopted, i.e. Ireland, the Netherlands, Finland, UK, Greece, Hungary and Poland, there are altogether as many as 16.14 million consumers without a bank account. On the other hand, the example of Belgium which has a legal framework on access to basic bank accounts in place since 2003 demonstrates that such an approach efficiently tackles financial exclusion. According to the "Rapport Inclusion Financière 2011",[135] following the adoption in 2003 of the law introducing the right to a basic bank account for every consumer who did not already hold an account, the number of unbanked consumers fell from 40 000 to only 10 000 in 2005. Furthermore, the number of persons who were refused basic bank accounts in the country decreased significantly between 2007 and 2009 as presented in the table below, demonstrating the efficiency of the measure.[136]

Table 4: Number of refusals to open a basic bank account - Belgium

|| 2007 || 2008 || 2009 || 2010

Number of refusals to open a basic bank account || 290 || 164 || 82 || Not available

Source: Réseau Financement Alternatif, Rapport Inclusion Financière 2011

Whilst the financial services industry argues, (based on very heterogeneous data), that "there is no proven correlation between the existence of a legal obligation to provide access to a bank account and the number of bank account holders"[137], a legal framework presents the definite advantage of being enforceable.

One nevertheless needs to acknowledge that even where a framework on access to bank accounts exists, it is not necessarily effective.[138] In particular, consumer and civil society representatives in the most recent public consultation, underlined that self-regulatory initiatives have had limited success.[139] Amongst those with a legal framework, only six countries comply even partially with the Recommendation (France, Belgium, Italy, Luxembourg, Portugal and Finland). Low effectiveness is caused by several factors including consumers lacking awareness of their rights (despite information obligations for providers and Member States under the Recommendation), inadequate, incomplete and divergent application of the Recommendation (e.g. in Belgium, France, Italy and Portugal the characteristics and conditions of the basic account are defined, in others, such as Denmark, Finland, Luxembourg or Sweden not, creating a regulatory patchwork for consumers and business alike) and recent developments in the legal framework, e.g. Italy has only recently implemented a legal framework in line with the Recommendation.

Limited bank profitability from certain groups of consumers

Misaligned incentives between the payment account provider and the consumer can lead to the rejection of a consumer's application for a payment account. This is true for vulnerable consumers who may be perceived by banks as unprofitable and for many mobile consumers on whom there may be little information available. Current accounts are generally offered at low cost because they are considered as a gateway product that would allow the bank to earn additional revenues.[140] The probable duration of vulnerable and mobile consumers' relationship with the payment services provider is difficult to estimate; hence it is uneconomic to make products available to them. In fact, some academics share this view.[141]

Limited and more costly access to basic financial products and services

Feedback from stakeholders, in particular consumer representatives, indicates that the cost of basic payment accounts themselves can be prohibitive.[142] BEUC reported that in Italy, five current accounts offered by banks as an instrument of financial inclusion were more expensive than standard online current accounts.[143] In the opinion of the World Bank, "worldwide, reducing withdrawal charges and balance fees could make formal accounts more attractive to more than 500 million adults who are without one."[144] Moreover, a consumer without a payment account will find it more difficult and more expensive to purchase other financial products. Since payment accounts are often gateway products, unbanked consumers seeking a product such as household insurance may be unable to obtain the best value product. The remaining services available may be easily available (e.g. SMS loans in some EU countries) but also more expensive (e.g. high interest rates)[145] and may not provide the same level of consumer protection. Some academics argue that access to "basic banking services….would be a powerful protection against irresponsible lending practices and […] overindebtedness."[146]

These problems were underlined in a recent European Parliament Resolution: "access to basic payment services is one of the preconditions for consumers to benefit from the internal market, notably from freedom of movement, money transfer and the purchase of goods and services at reasonable transaction costs; whereas basic payment services are essential for consumers to reap the benefits of e-commerce; whereas the annual opportunity cost of not having access to a payment account is estimated at between EUR 185 to EUR 365 per consumer; whereas access to basic payment services is, in particular, increasingly becoming a prerequisite for social inclusion in terms of access to employment, healthcare and housing."[147]

Low awareness of availability of basic payment accounts

In the Member States with a legal right to a basic payment account (see Section 3.2.1), the accounts are not actively marketed due to misaligned incentives between the payment account provider and the consumer. Providers have an incentive to first offer more expensive accounts to their clients.[148] In Belgium, 30% of unbanked consumers refer to the excessive price of a payment account as the reason for not having one, despite the basic payment account's price being legally capped at around EUR 14 per year.[149] One possible explanation could be that consumers are always offered the more expensive product first.[150] In other cases, the economic advantage of having access to an account and the means of payments associated with it may not be clear for the consumer, particularly if high fees and penalties are charged where, for example, overdraft facilities are used. This problem impacts primarily on vulnerable consumers,[151] which is why consumer organisations advocate for clear, concise and comprehensible information on basic payment account fees to be made available to consumers.[152]

Discriminatory rules on accessing payment accounts

Asymmetric information between the credit institution and the consumer can lead to an application being rejected because the consumer is considered riskier or because information on the client is not readily available. The lack of information on consumers is a particular problem if the account offers credit related services (e.g. an overdraft facility) as access to the credit history of a foreign customer can also be challenging and/or costly. Consumers associations state that one of the reasons for consumers to be rejected access to an account is the absence of any regular income.[153] As stated above, 40% of consumers who would like an account and were refused cited this as the reason.[154]

An absence of any regular income is a key reason why banks reject applicants for payment accounts. Feedback from all stakeholder groups, received during public consultations also identifies this as a common problem.[155] Examples include undischarged bankrupts who are refused access to an account by most UK banks, insufficient income, poor creditworthiness, overdrawn bank accounts or the failure to maintain loan payments with their main bank.[156] This problem affects both vulnerable and mobile consumers equally. In many cases, a payment account is required in order to be provided with an employment or rental contract. Without an account, employment or accommodation contracts may remain unsigned. Consequently, consumers may be caught in a vicious cycle in which they cannot enter legal employment without an account, but they cannot open an account without a regular income – for which they must be employed.

Another common ground for refusal of mobile consumers is non-residence. Despite increasing intra-EU migration, recent data shows that only 3% of the EU population has opened a payment account in another Member State[157] though this represents the number of EU nationals resident in another Member State.[158] In Estonia, France and Austria, one third of refusals were due to the consumer being non-resident. This figure was just over one quarter in Belgium and one fifth in Slovakia.[159] Similarly, around 60% of Erasmus students who failed to open an account attributed this to "not being a national resident".[160] Feedback to the Commission during public consultations also indicate that in most cases, the legislative and self-regulatory initiatives undertaken in Member States are mostly aimed only at residents.[161] Consequently, the residence requirement for opening an account represents a significant barrier to the internal market by impeding or prohibiting cross-border activity, for example, through the free movement of persons or the free provision of goods and services by businesses.

In order to open an account in some Member States, it is necessary to present identification (e.g. ID card or passport).[162] Around half a million consumers across the EU have been refused access to an account due to the lack of appropriate documentation. In some cases, such refusals are attributed to anti-money laundering legislation.[163] In fact, users' representatives have reported that banks often use anti-money laundering rules abusively to reject applications from unattractive consumers.[164]

Low consumer confidence in the financial system

A general mistrust of banks may also explain self-exclusion. A 2010 study reported that unbanked people perceive "banks to be intimidating and untrustworthy, interested only in making money out of people."[165] This negative image of the financial industry further dissuades unbanked consumers. Some vulnerable consumers may refrain from opening an account because of the risk that, if in debt, their balance will be seized. According to a 2010 report, 10% of French poor households had had their balance seized.[166]

Restrictions on the use of basic payment services

The different characteristics of a basic payment account in different Member States create a barrier to the internal market. For example, in the Netherlands, a basic payment account can only conduct 'domestic' bank transfers and use 'domestic' ATMs and 'domestic' payment terminals.[167] The law in Belgium specifies that a basic payment account need only permit domestic cash withdrawals and the domestic use of a debit card (when a card is provided).[168] In Hungary, credit transfers from a basic payment account can only be made to a Hungarian forint denominated payment account at another Hungarian bank.[169] For mobile consumers, vulnerable consumers and those living in border areas, this represents a significant problem. For example, a poor person or a student living in Maastricht or Aachen would be forced to shop locally instead of being able to travel cross-border to purchase cheaper goods or services. Moreover, around 22% of newly banked consumers had shopped by telephone or internet since opening their account, with an opportunity to make considerable savings.[170]

3.2.2. Presentation and ease of comparison of bank fees

Providing clear and comparable information on payment account offers is a prerequisite for the free operation of market forces. The problems discussed below show an inherent level of complexity in the features that define payment accounts as well as complex pricing structures, which lead to information asymmetries and hinder consumer choice and competition.

Responses to the public consultation indicate a general consensus among all stakeholder groups that bank fees are opaque and difficult to understand. While it is difficult to measure the level of detriment caused by non-transparent, incomparable fee information, it is reasonable to assume that all consumers are adversely impacted by these issues. In addition to the inherent complexity of fees, which is the root cause of this set of problems, the available evidence collected focusses on two main aspects; how clear and comparable is information provided to consumers and; how aware consumers are of the fees they are charged.

Action to remove barriers to competition within the internal market should aim towards a level regulatory playing field for credit institutions and an equal level of consumer protection for European citizens.

A wide range of services and fees

Payment accounts cover a wide range of services and therefore charging structures may be complex. Table 5 below divides fees into four main categories and provides examples of some of those fees. The frequency with which these fees are charged varies between one-off fees (e.g. exceptions handling) and regular, standard charges (e.g. account management), while other fees are charged per transaction or block of transactions (e.g. payments and cash utilisation).[171] This makes bank charges difficult to foresee and monitor over a given future period.

Understanding fees is vital for being able to compare different bank offers and key for making informed decisions as to which account is most appropriate for one's needs. The evidence indicates that this complexity impacts upon a consumer's ability to understand what fees represent. A study carried out by the UK Office of Fair Trading in 2008[172] concluded that consumers were unfamiliar with key prices associated with their current account. Even when aware of prices, consumers had difficulty understanding when and at what level they would incur fees. It also appeared that consumers were not able to modify their behaviour when their account offered lower than optimal value for money.

More recent research conducted for the Commission in 2012, aimed to assess how different approaches to enhance information provided to consumers on bank offers and switching impact consumer behaviour.[173] The study found that a quarter of respondents (25%) felt that they were not well-informed about the cost of their current account. Even though the majority of respondents felt they were well informed about prices, when questioned more closely, "six out of ten (60%) never compare their current account charges with the charges of other institutions. More interestingly, 29% say they do not know the monthly fee on their current account fee. A third (32%) do not know how much it costs them to use other banks’ ATMs. A third (33%) do not know how much they pay for statements sent by post. Seven out of ten (70%) do not know the interest rate on their authorised overdraft and 85% do not know the unauthorized overdraft rate."

Table 5: Core day-to-day banking needs and products/services[174]

Core day-to-day banking needs || Twenty-three products and services

Account management || Current account Online banking Call centre

Payments || Cheque Debit card Credit card Branch internal wire transfer internet internal wire transfer Branch external wire transfer internet external wire transfer Branch standing order internet standing order Direct debit internet direct debit

Cash utilisation || Cash deposit at desk Cash deposit at ATM Withdrawal at desk Withdrawal at bank’s ATM Withdrawal at other banks’ ATMs

Exceptions handling || Debit card stop payment Cheque stop payment

Source: World Retail Banking Report, 2009 – Cap Gemini

Pricing models

The 2007 edition of the World Retail Banking Report[175] defined four prevailing 'pure' pricing models for payment accounts. The characteristics of each model are summarised in Table 6 below. Some pricing models appear to have simpler charging structures, (e.g. package based, indirect revenue-based) than others (transaction based, account-based). However, these simpler pricing models – due either to a lower number of applicable fees or a unique fee charge – are generally tied to other fee or interest generating products as is indicated in Table 3.4, Annex III.

Price structures may cater for specific socio-demographic groups (e.g. for students). Therefore, it is not surprising that although national markets often exhibit a prevalence of one pricing model over others, more than one prevailing model is in use in Belgium, Spain, Latvia and the United Kingdom. While this diversity provides a broader choice of products – and is not a negative feature in competitive markets – it further illustrates how charging structures may add to the complexity of choosing an appropriate product.

Table 6: Description of 'pure' pricing models for payment accounts

Account-based

A range of fees is applied to account management: - Could be based on account balance to ensure relative stability or increase non-interest-bearing deposits. All other products and services are linked to the current account: - Must open a current account before getting day-to-day banking products and other financial products (savings, credit, mortgages) Product and service pricing is based on current account balance.

Transaction-based

Fees are applied to transactions, often including any form of: - Debit (cheque, money transfer, point-of-service purchase, ATM withdrawal) or credit (deposit at desk, deposit at an ATM, etc.) - Fees consist of a fixed amount per transaction, a percentage of the transaction amount, or both: A free-of-charge limit may exist; transactions across service channels are aggregated for each statement cycle, and when the transaction limit is exceeded, the customer is charged accordingly.

Package-based

Similar to account-based model, except that the bank charges an annual fee for a suite of services, rather than just an account: - Fees/commissions are directly linked to the bank’s ability to increase cross-selling rates

Indirect revenue-based

A majority of day-to-day banking is free of charge Income is generated by other types of products, such as credits and savings: - Interest spread on credits, as well as a commission to set up credit - Interest spread on savings, as well as fees to manage savings account

Source: World Retail Banking Report, 2007 – Cap Gemini

Simplicity and transparency of fees

The presentation of fees and terminology used to describe services contribute to the current complexity in the payment account market. The terminology used to describe services is part of a broader set of activities including branding and marketing and can differentiate a product from those of other market participants. The use of different terminology by banks, while referring to the same type of services, may make it difficult to compare bank offers.

A study by the European Commission published in 2008,[176] found that while two thirds of financial institutions in the study sample provided fee information on their websites, 69% of banks did not provide clear information and further contact was needed to obtain clarifications on the fees as disclosed. The difficulties in understanding fees related in part to weak presentation. Fee terminology was complex; a coherent use of terminology was lacking, even on a single bank's website, and information was difficult to read or ambiguous. The lack of accurate information – including omission of free-of-charge services, incomplete fee information, information that was insufficiently detailed and even different tariffs quoted for the same service – added to this difficulty.

A study published by the European Commission in 2009[177] looked into current account fee structures in banks representing 81% of the market for customer deposits across all Member States.[178] The study sought to analyse and compare current account prices and attempted to measure two dimensions that have an impact on the ability of a consumer to understand fees, i.e. simplicity and transparency. The analysis indicated that only 34% of banks in the study provided sufficiently clear public information. This confirmed the findings of the prior Commission study referred to above where the figure stood at 31%. At country level, 56% of Member States scored above average in terms of simplicity and transparency of tariffs. Thirteen countries reported above average scores.[179] Graph VII below illustrates the relationship between simplicity and transparency in Member States as measured in the study.

Graph VII: Country positioning on simplicity and transparency of tariffs

Source: Data collection for prices of current accounts provided to consumers – Van Dijk Management Consultants (2009)

It seems that inherent difficulties in understanding payment account features and their price structures are compounded by a lack of clear and comparable information on the product.

Price dispersion in payment accounts within and across Member States

Wide price variations have been observed for payment accounts[180], calling into question the degree of price competition in the market. Apart from pure considerations about competition, price variations also feed the perception that payment accounts are not fairly priced, denting consumer confidence and trust in the sector. This is apparent in France where only 52% of bank clients consider that the fees charged by their bank are competitive and 68% of clients consider their fees to be unfair.[181] Furthermore, 73% of bank customers in France are dissatisfied with the level of transparency of bank fees, of which 22% are very dissatisfied.[182] Bank fees are also increasingly an important factor for consumers that are considering switching. A 2012 report found that fees ranked second in importance (2012: 50%, 2011: 50%) after quality of service (2012: 53%, 2011: 55%) as a factor that leads customers to leave a bank.[183] The 2009 Commission study[184] compared the prices for current accounts in the 27 Member States, finding very significant variations in prices in absolute terms within, as well as across, Member States.

Customer price discrimination

Price discrimination occurs between different customers so that their cost for a product with comparable features is different. An example of this is the free banking model[185] in the United Kingdom, which is partially financed through net interest income arising from deposits, but also from fees for authorised or unauthorised overdrafts.[186] Introductory pricing is another common form of price discrimination that weakens the relationship between the cost of providing a payment account and its price. It adds another barrier to clear and comparable bank offers and makes it more difficult for a consumer to understand longer-term costs associated with holding an account.[187]

Other forms of price discrimination arise from credit institutions seeking to modify modes of consumption, which favour some customers and may disadvantage others both in terms of price and convenience: "Banks appear to be using day-to-day pricing strategies to influence consumer behaviour rather than to increase revenues; banks cut online and call centre fees, for instance, and raised desk operation fees, pointing customers towards automated channels for common operations."[188]

For the purposes of this impact assessment price discrimination is a factor that contributes to the complexity of bank fees as it makes fees more difficult to understand or to compare. It also adds another variable to the elements that determine the price of a bank account and therefore further weakens the relationship between the cost of providing a service and the price charged to a consumer.

Ineffective, inconsistent or non-existent regulatory framework

The current regulatory framework covering presentation requirements and the ease of comparison of fees varies widely across Member States, in terms of their scope and depth. While Member States have generally adopted requirements for credit institutions to provide consumers with contractual terms and conditions when opening a payment account, many do not mandate specific presentation requirements. Specific presentation requirements, including standardisation of fee terms are foreseen in Belgium, Italy and Portugal and more recently in Spain. Other Member States have established requirements governing the provision of fee information in the form of lists through legislation or self-regulation. These include Austria, Denmark, Finland, Germany and Luxembourg. Ex-ante fee disclosure requirements in the United Kingdom focus on overdrafts. Even in more highly regulated Member States compliance seems to be problematic in some cases. A market study in France[189], reported that up to 42% of banks within a sample of over 1 746 branches did not make fee information readily available to consumers as required by French legislation.

The approach of Member States to the provision of ex-post information also differs widely in terms of the scope of regulatory provision, the frequency with which information is to be provided and the level of detail. For example in France, the banking industry has committed to providing monthly summary statements of fees. In Austria, monthly fees are required by legislation. Detailed annual statements are required in Belgium and Germany, while in Denmark the frequency of summary fees statements is agreed upon between the credit institutions and client. Meanwhile in Spain the requirement to provide bank statements detailing transactions (not fee summaries) has been adopted recently. In the Netherlands, there is a switching/redirection service, but consumer information on actual fees incurred is provided as part of the list of transactions in bank statements, rather than in summary form. No summary fee information is required in Italy. No requirements are found in Bulgaria, Latvia, Luxembourg or Portugal.

Uncoordinated action on the part of Member States results in a non-level playing field within the internal market and further market fragmentation in retail banking within the EU. European citizens experience different levels of consumer protection because of the lack of action in some Member States.

Impact of limitations to cross border mobility for both consumers and suppliers

Market fragmentation in payment accounts – and the retail banking market generally – is a barrier to the completion of the internal market. Fragmentation across the EU prevents consumers from obtaining the best deals and inhibits the efficiency of the retail banking market.

The degree of price variation of payment accounts across Member States is discussed above, particularly in terms of its impact on consumer confidence. Further details about price differentials across the EU are provided in Annex III, drawing from at least two sources indicating that consumers pay significantly different amounts for comparable services. A Commission study[190] also provides insight into the relationship between the cost of a payment account and the use of electronic or manual transactions in day-to-day banking, indicating that where over-the-counter transactions prevail, prices tend to be more expensive. This indicates differences in preferences in modes of banking, also points towards different degrees of development of banking infrastructures across the EU, and highlights potential for mobility on the supply side as well as on the demand side.

Switching is the manifestation of consumer choice. Accordingly, restrictions upon cross-border switching are closely related to the provision of comparable bank offer information in the EU. The problem section dedicated to switching describes mobile and non-mobile citizens' difficulties in exercising their freedoms within the internal market. Establishing a right to exercise these freedoms is important, and is dealt with in the dedicated section dealing with access to basic paymen