Opinion of the Economic and Social Committee on the "Proposal for a Regulation of the European Parliament and of the Council on cross-border payments in euro"
Date: 2001-11-29
Institutions: European Economic and Social Committee
Subjects: bank charges, euro, frontier region, intra-EU payment

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Official Journal of the European Communities

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10. Conclusion

There are few new ideas in this opinion. The simplifi-
10.1.
cation process does not need new ideas; what it needs is the
effective implementation of the ideas which have already been
expounded by the Committee itself, by the Commission, by

Brussels, 29 November 2001.

the Lisbon European Council, by the Molitor Report and by
numerous other concerned bodies. While the Committee
acknowledges that it is often simple to complicate matters and
complicated to simplify them, it would observe that there is
no point
in talking about commitments if we are not
prepared to implement them and it is futile to introduce new
commitments when the existing ones are not being met.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Proposal for a Regulation of the European
Parliament and of the Council on cross-border payments in euro’

(2002/C 48/29)

On 25 September 2001, the Council decided to consult the Economic and Social Committee, under
Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 12 November
2001. The rapporteur was Mr Burani.

At its 386th plenary session of 28 and 29 November 2001 (meeting of 29 November) the Economic and
Social Committee adopted the following opinion by 38 votes to one, with two abstentions.

1.

Introduction

1.1.
The draft regulation is intended to ‘reduce bank charges
for cross-border payments in euro to a level in line with those
applying at national level ... it will at last enable individual
European consumers to become active participants in the
Internal Market, ensuring that individual consumers are able
to benefit from increased price transparency and choice.’

cross-border payments to be unacceptable, and on the other
the banks who cited economic, technical and organisational
reasons for the differences in price between domestic and
international transactions. Although it has adopted measures
of various kinds (see points 2.9 to 2.14 below), the banking
sector has been unable to respond fully to expectations: hence
the draft regulation which the Commission has drawn up to
solve the problem definitively.

1.2.
The Commission’s initiative is the final stage in a
dialogue between Commission, banks and consumers begun
more than a decade ago: on the one hand the Commission and
the consumers who judged — and still judge — the costs of

1.3.
The Committee agrees with the aim of the regulation
— that transfer costs for sums expressed in a single currency
in the countries of the European Union should be reduced to
levels which are compatible with a single market without
borders.

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2. General comments

2.1.
Payment systems represent an important aspect of
economic life, making possible the settlement of the commer-
cial, financial or personal transactions of firms and individuals.
Whatever form they assume, their basic requirements are
common to all: security, speed and low prices to the consumer.

and communications designed to achieve

2.1.1.
The Commission has been working for years to
achieve these objectives, both through directives, recommen-
dations
the
maximum degree of systems security and monitoring, and
through a range of measures intended to encourage compe-
tition among service providers and to protect the consumer.
The aim is to reduce the cost of ‘European’ money transfers,
currently regarded as too high and incompatible with the euro
monetary area which should have no internal borders.

2.2.
The statistics (which are taken from various sources
and are based on various approaches, but which all agree in
their assessment) show that, in terms of number and volume,
fraction of
cross-border payments represent only a small
domestic payments. The reasons for this are obvious: trans-
actions within a given country, especially those of consumers,
occur on an infinitely greater scale than cross-border trans-
actions.

2.3.
The above consideration highlights the enormous
difference in the relative importance of domestic and cross-
border payment systems, and the various existing economies
of scale. A second consideration is the size of national markets
which is still very great compared with international markets:
the difference should diminish with the gradual completion of
the single market and, above all, use of the euro.

2.4.
It could be said that up to now the banking sector has
enjoyed a virtual hegemony, in that, on the one hand, it is the
only sector to be allowed to make the settlements managed or
controlled by national central banks, and, on the other, the
massive investments necessary have prevented other less
powerful competitors from entering the field.

This situation is changing rapidly (1), however, and two
2.5.
groups of new competitors working on the Internet are
emerging on the market. They are operating mainly in
inroads into
America, but have already made significant
Europe:

— first, on-line service providers,

in the micropayments

market;

(1) These comments are drawn from the Boston Consulting Group

study ‘Global Payments 2000/1’.

— second, producers of network access mechanisms and
network managers, who are starting to utilise their
extended client networks and their wide-ranging market
penetration to provide alternative payment options.

2.6.
The banking sector is thus likely to see a gradual
relative shrinkage in market share — offset by an increase in
transaction volumes — and a reduction in operating margins.
This is a result of competition, which is well-received by the
market and which is also spurring innovation and the search
for more rational and less cumbersome solutions.

2.7.
The current changes have major implications for
companies and consumers. For the first time, clients have
access to new alternatives to the traditional retail payment
mechanisms offered by banks: a series of new services and
options, often offered at attractive prices. Still more important
is the fact that increasingly with e-commerce, the client can
choose the most convenient mode of payment (credit card,
debit card, electronic money, etc.).

There are however grey areas in the e-commerce
2.8.
picture. The credit card systems are somewhat suspicious of
the new commercial sites and often the traditional ‘acquirers’
refuse to allow them to subscribe. The Committee points out
that there is good reason for this, as figures provided by Visa
show that Visa transactions via the Internet in 1999, which
represented 1 % of all transactions, accounted for 22 % of
fraud cases and 50 % of ‘charge backs’.

2.8.1.
In order to bypass the obstacle presented by the
acquirers’ refusal, solutions have been provided by non-
banking operators. These are expensive however and do not
provide the guarantee of security offered by the ‘official’ card
systems (SET — Secure Electronic Transactions, and SSL —
Secure Socket Layer). Consumers, meanwhile, are aware of the
lack of security offered by systems not based on SET and SSL
and are reluctant to give their card details on the Internet.

2.9.
The pressure exerted by the Commission over a
number of years on the ‘traditional’ fund transfer systems has
alerted the European banking system to the need to provide
users with secure and efficient systems at a low cost. Indepen-
dent institutions or groups of banks have devised no fewer
than 22 different systems, together with technical means that
differ from the traditional systems (credit transfer and direct
debit). All these systems are supposed to meet these require-
ments, but they do not quite fulfil the objective of making the
cost of cross-border transfers equal
to that of domestic
transfers.

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2.9.1.
A full picture of the existing systems — for wholesale
and retail — is provided in the ECB’s ‘Blue Book’ of June 2001
(pp. 15-54), which shows that cross-border retail payments
have not yet reached the service quality level of domestic
payments, despite the considerable volumes managed by major
banks or banking groups.

2.10.
In addition to the differing economies of scale
suggested by the volumes mentioned in point 1.2, the banking
organisations (1) cite the following main obstacles (the list is
not exhaustive):

— the absence of a single central structure (apart from that
offered by the EBA — European Banking Association) for
the transmission and settlement of every transaction;

— the absence of a single standard for every type of

transaction;

— the absence of tax harmonisation, especially regarding

backup withholding on dividends;

— varying requirements with regard to reporting to national

monetary authorities;

— considerable legislative differences in the area of ‘black

lists’;

— differences in national legislation on money laundering;

— the scale of investments in the new system, to be added
to the national systems, given the relatively minor
importance of cross-border volumes (the banks put the
ratio of domestic to cross-border volumes in Euroland at
300 to 1).

The Commission agrees at least in part with this
2.11.
comments on
(see
explanatory memorandum,
analysis
Article 5, first and last paragraphs, and on Article 6, first and
second paragraphs). The lack of automation and standardis-
ation, and differences in national legislation, result in ‘costly’
manual handling and the adoption of differing procedures.
The Commission and the banks seem therefore to agree on the
technical and legal reasons for the differences. In addition, the
banks would add difficulties of an economic nature owing to
the scale of investments, which is out of proportion with the
current and prospective volumes concerned.

2.12.
Despite the difficulties outlined by the banking sector,
and in addition to the initiatives mentioned in point 2.9, the
pressure exerted by the Commission has nonetheless had one
other positive effect. The European banking organisations have

asked the Competition DG to examine a proposal
for a
European MIF Convention (2) concerning a new automated
system for cross-border retail transfers in euros. This Conven-
tion groups together approximately 9 000 banks and provides
for an interbank charge of EUR 3 per transaction. In accordance
with competition rules, every bank would then be free to use
the terms and conditions of its choice for its customers. The
Commission’s response to this proposal is not yet known. The
MIF Convention would enable the bank of the orderer to know
in advance the payment to be made to the bank of the payee
(as it would be a single charge).

A fundamental condition for the establishment of the
2.13.
it is approved — is however the
MIF Convention — if
generalised adoption of the ISO Standards (IBAN — Inter-
national Bank Account Number and BIC — Bank Identifier
Code), which will provide a single way to identify the account
number of every customer in every bank throughout the
European Union. The draft regulation rightly makes the
adoption of the BIC and IBAN codes compulsory.

2.14.
The Commission’s draft regulation will impose the
principle of equal charges for domestic and cross-border
transactions in all the countries of the European Union from
1 January 2002 for electronic payment transactions and from
1 January 2003 for transfers. The banks are opposed to this
measure. The European Central Bank (ECB) endorses the
Commission’s objectives while commenting that in a market
‘the ECB
economy prices should be set by competition:
would like to emphasise its reservations against a regulation
influencing prices for services which risks disruption of the
working of the market economy (3)’. At the same time, the ECB
stresses that costs for customers should fall sharply in 2002.

An important point emerges from one of the ECB
2.14.1.
observations (4): that the current average cost of processing a
transfer of funds between banks is 50-80 eurocents, which is
very high compared with the equivalent processing of a
domestic transaction, which in some cases is less than one
eurocent. The Committee notes that the ECB itself is unable to
align the cost of processing a cross-border transaction with
that of processing a domestic transaction: whereas the official
TARGET rates vary from a minimum of EUR 0,80 to a
maximum of EUR 1,75 (plus VAT) per transaction, domestic
rates (e.g. EUR 0,17 on average per transaction in Belgium) are
5 to 10 times lower.

(1) European Banking Federation, European Savings Banks Group,

(2) MIF: multilateral default interbank fee.
(3) Opinion of the ECB of 26 October 2001 (CON/2001/34).
(4) Round Table of the European Parliament’s Committee for Econ-

European Association of Cooperative Banks

omic and Monetary Affairs, 12 July 2001.

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2.15. When work began on drawing up this opinion, the
Committee would have liked to have hard figures indicating
whether the proposal for a regulation could realistically —
without prejudice to consumers’ interests — require charges
on domestic and cross-border payments to be ‘the same’, as
stipulated in Article 3, or whether cross-border charges could
be reduced to ‘a level in line with those applying at national
level’, as stated in the third paragraph of the explanatory
memorandum.

Committee feels that this limit is too high: for payments of
this size — and even for smaller sums — the TARGET
system already exists, specifically for large transfers and with
favourable rules and tariffs. Users are fully satisfied with this
system. The European Parliament has declared itself to be in
favour of a limit of EUR 12 500, partly in view of the fact that
the ECB has reduced the reporting threshold for statistics
required of banks to that level. The Committee agrees with this
limit.

An indirect response has in the meantime been
2.16.
provided by the European Banking Federation: in place of the
regulation, the banking sector (or at least a major part of it) is
prepared to undertake to establish a system whereby in the
case of cash withdrawals and transfers the difference in price
between domestic and international euro transactions would
be gradually reduced so as to achieve alignment by 31 Decem-
ber 2005.

2.17.
The awaited clarification has arrived, albeit somewhat
late (subject to the Committee’s opinion on its feasibility, once
the details, which are not yet available, are known): with
appropriate arrangements and the necessary investments,
charges can be aligned, albeit gradually and allowing the time
needed technically to change systems and structures. The
Commission, Council and European Parliament will consider
whether or not the system of self-regulation proposed by the
banking sector is preferable to the regulation.

3. Specific comments

3.1.
Treaty reference — legal basis. The proposal for a
regulation is based on the application of Article 95(1) of the
Treaty (measures on establishing the internal market). Within
the Council, some Member States have raised doubts about the
legal foundation of the Commission’s proposal. Among other
things it has been noted that the requirement to apply the
(see
same price to products
point 2.15.2 above) amounts to imposing prices and restricting
the freedom of enterprise guaranteed in Articles 15, 16 and
18 of the Nice Charter.

that have different costs

3.1.1.
Other doubts concern the compatibility with Treaty
Article 4(1), which establishes the principle of free competition,
in so far as the regulation would introduce price distortions
that would ultimately reward the more inefficient entities. The
Committee does not wish to explore the issue here, but it
hopes that the problem will be considered in detail and
resolved incontrovertibly before the regulation is definitively
approved.

3.2.
Article 1 — Subject matter and scope. This article
defines the scope of the regulation, which is to ensure that
charges for domestic and cross-border payments in euro are
the same up to a maximum amount of EUR 50 000. The

3.2.1. With respect to the scope (the regulation applies to
‘cross-border payments in euro ... within the Community’), it
seems clear that this also includes payments in euro carried
out between non-euro Community countries in favour of
accounts in other non-euro countries or euro countries. The
regulation therefore embraces the entire internal market,
provided that the transfer is made in euro. In the case of non-
euro countries, a transfer in euro is not equivalent to a transfer
in foreign currency (since the transfer is made from an
account denominated in euro). Currency conversion costs and
exchange risks therefore do not arise in such situations.
The persons or undertakings concerned opt to make their
transaction in a currency (euro) other than their national
currency.

3.3.
Article 2 — Definitions. The Committee agrees with
the definitions set out, and would simply recommend that
terms be checked in the different language versions: in the
Italian version, for example, point c) refers to ‘carte di addebito
diretto’ (‘debit cards’) and point d) to ‘strumento di pagamento
ricaricabile’ (‘reloadable payment instrument’), whereas the term
‘rechargeable’ (‘reloadable’) is used in both cases in the French.

3.4.
Article 3 — Charges for cross-border payments. The
first paragraph fixes the date from which charges levied on
cross-border electronic payment transactions must be the
same as domestic charges as 1 January 2002. According to the
definition in Article 2(a)(ii), such transactions are transfers of
funds effected by means of an electronic payment instrument
and withdrawals from cash dispensing machines and automat-
ed teller machines.

3.4.1.
On the same date (1 January 2002), the eurocheque
agreement — which has proved effective since 1968 — will
expire. This agreement made it possible to withdraw money
abroad (but not in the issuing country) at an affordable rate
(around 2 %) for the customer. The systems established for
international cards (Visa and Eurocard-MasterCard) which
generally set higher charges (around 4 % or even more) that
vary according to the bank advancing the funds will continue
to exist. Technically the higher charges are justified by the fact
that the withdrawal is not from the card-holder’s account but
is an advance on the card-holder’s funds. However, as far as

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the consumer is concerned, the fact remains that withdrawing
money will become more difficult when the eurocheque
agreement expires.

customer in the form of higher charges on other services
(‘cross-subsidisation’), but it would be strange if this were not
the case.

Given the time that will be needed to approve the
3.4.2.
regulation — at best it will be adopted at the end of this
year — it is difficult to imagine that there will be time to revise
the contracts with thousands of banks (contracts that are often
different from each other). Realistically, it will be necessary to
choose between extending the deadline or having an uncertain
situation that could lead to suspension of services.

3.5.2.
Automatic processing of cheques does not pose
problems at national level, apart from the high costs, but at
international level the complete lack of harmonisation (differ-
ent formats, cards, magnetic codes (CMC7 or E13B), code
fields of magnetic strips and their format) presents an insur-
mountable obstacle. Since harmonisation would be too
expensive, processing of foreign cheques can only be perfor-
med manually, which is extremely cumbersome.

3.4.3.
The issues raised in the previous point apply to all
payment systems: hitherto domestic charges have accrued
entirely to the national networks, but the need to make charges
on domestic payments the same as those on international
payments will require that for the latter an amount is ‘deducted’
from the charges to the customer in order to pay for the
service provided by the foreign bank. In this case too the
necessary negotiations, which must be approved by the
competition authorities, could be lengthy or at least difficult
to complete within the deadlines imposed by the regulation.

3.4.4.
Another problem arises with determining the
amount of national charges: many banks in most countries
actually apply flat rates for holding an account, which often
cover withdrawals, domestic electronic transfers and payments
with a national debit or stored-value card, without any special
charges. One possible solution could be to allow one flat rate
to be applied for exclusively domestic transactions and one for
national and international transactions.

3.5.
The second paragraph of Article 1 sets the deadline for
applying the same charges to cross-border credit transfers and
cheques as 1 January 2003. As far as credit transfers are
concerned, the same comments apply as made in points 2.8
to 2.19. Cheques raise different issues and these should be
given some thought.

3.5.1.
Statistics from the Commission and from indepen-
dent studies confirm a phenomenon that anyone can see:
cheques have become an obsolete payment instrument that is
costly and at odds with the trend towards replacing paper
documents with electronic systems. The sole exception is
France, where cheques and processing of cheques are by law
completely free of charge. This obviously means that this
method of payment is always preferred by the consumer
(accounting for over 40 % of total payments.) It is not known
whether the cost of processing cheques is passed on to the

3.5.3.
Another element which should be considered is risk:
with the disappearance of the eurocheque agreement, all
cheques circulating either in their own country or abroad will
they are highly
cease to be guaranteed.
unlikely to be accepted abroad, except for encashment in
banks, a procedure which is far more complex and costly than
straightforward negotiation.

In consequence,

3.5.4.
As regards charges, there is also the problem outlined
in point 3.3.4 above: the cost of processing cheques is rarely
charged for each individual transaction. It is usually included
on a flat-rate basis in the account handling charges. It is
therefore difficult to ensure equalisation of charges based on
the those levied for transactions within a single country, quite
apart from the French system where processing incurs no
charge.

3.5.5.
In conclusion, given the circumstances and the clear
impossibility of equalising domestic and international charges,
the risks involved, and the need to avoid anything which might
encourage the international use of a system which is now
outdated and costly, the Committee proposes that cheques be
excluded from the scope of the proposed regulation. This
position is shared by the ECB in the opinion mentioned above.

3.6.
Article 4 — Transparency of charges. The Committee
fully endorses this article, particularly since it is based on
general and specific principles which the Commission has long
upheld.

Article 5 — Measures for facilitating cross-border
3.7.
payments. The adoption of ‘bank’ and ‘customer’ code numbers
is a precondition for automating services. It is therefore logical
for this article to specify that banks must
inform their
customers of the code numbers that concern them, and that
the originator of a payment must inform the bank of the
beneficiary’s code numbers.

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3.7.1.
The draft regulation has omitted two possibilities:
firstly, where the originator is unable to communicate the
beneficiary’s code numbers, and secondly, where the benefici-
ary does not have a code number (typical examples would be
payments to persons temporarily abroad for study or holidays,
or migrants’ remittances to spouses who do not have a bank
account). In such cases, credit transfers have to be processed
manually, but the draft regulation does not indicate whether
the charges must be the same as for domestic transactions.

3.8.
Article 6 — Obligations of the Member States. In order
to facilitate service automation and rationalisation, this article
removes the statistical reporting obligation upon Member
States with effect from 1 January 2002 for payments up to
EUR 12 500 and from 1 January 2004 for payments up to
EUR 50 000. In addition, all information concerning benefici-
ary data which might prevent automation of payment
execution is to be abolished.

The Committee agrees

3.8.1.
in principle with these
measures. However, the Member States must assess whether
or not these obligations interfere with measures to prevent
money laundering or tax evasion. If it is true that statistical
instruments are not usually the best means of detecting
unlawful transactions, it is hard to see why the information
given should include data other than the necessary figures and
the motive for the transfer. It is clear that this information is
also used for purposes other than purely statistical ones.

4. Conclusions

4.1.
As stated earlier, the Committee endorses the aims of
the draft regulation. At the same time, it raises the question of
how to avoid any rise in domestic charges, which some might
seek to justify on the grounds of higher costs for international
transactions. In a free pricing system, this possibility must not
be ruled out or underestimated.

4.2.
Any downgrading of service quality, or withdrawal by
banks of services they may consider unprofitable, is to be

Brussels, 29 November 2001.

avoided. Consumers, the Commission and the ECB will have
to keep a close eye on this aspect.

the members of

4.3.
The Committee is unsure about the last paragraph of
the impact assessment form appended to the proposal for a
regulation, which states that
the FSPG
(Financial Services Policy Group, made up of high-level experts
appointed by the Member States) ‘fully endorse the idea of
creating a single-payment area’, but that ‘a majority consider
that the Regulation is premature’. Transparency of procedures
should demand that the FSPG’s conclusions be made public,
or at least communicated to people working in this area, who
must be fully aware of all aspects of the problems facing them.

4.4.
The Committee would also question the deadlines for
implementing the regulation. The time between adoption and
entry into force appears by any standard to be short, while the
time required for the technical implementation of the various
measures must be properly evaluated if payment systems are
not to be disrupted, just at the time that the euro is being
introduced. It is for the Commission and Council — taking
into account the ECB opinion, which has raised the same
concerns as the Committee — to judge whether the implemen-
tation deadlines are consistent with the need for an orderly
change with no harmful effects for consumers.

4.5.
In this regard — and also in the light of the opinion of
the FSPG referred to in point 4.3 above — the Committee
would point to the initiative launched by the banking sector
mentioned in point 2.17 above: given that the final outcome
of the draft regulation or of the proposed self-regulation is
identical, apart
the
decision is a purely political one and as such is up to the
appropriate decision-makers.

from the implementation deadlines,

4.6.
Lastly, in order to avoid a situation whereby a pre-
viously adopted regulation might subsequently be challenged
in the Court of Justice — regardless of the merits of the case
— the Committee strongly urges that the legal bases of the
regulation be carefully checked. The credibility of Community
legislation must be incontrovertible.

The President

of the Economic and Social Committee

Göke FRERICHS