On 28 March 2018, the European Commission (EC) proposed two amendments to the Regulation (EC) No. 924/2009 (Cross Border Payments Regulation) to:
a) reduce the cost of intra-EU payments in Euro; and
b) enhance transparency so that consumers understand the true costs associated with dynamic currency conversions.
These proposed amendments follow the publication of the EC’s Consumer Financial Services Action Plan which recommended reducing charges for cross-border transactions in all Member States and reform of dynamic currency conversion to allow consumers to choose the best rate.
Cross Border Payments Regulation
The Cross Border Payments Regulation was first introduced in 2001 and then updated in 2009. The Regulation ensures that Banks and other Payment Service Providers cannot charge more for cross-border payments (credit transfer, card payment, cash withdrawal) in euro than the cost of a domestic transaction in euro within any euro-area Member State. Depending on the cost of domestic transactions, it now costs consumers and businesses nothing or a few cents to make cross-border transactions in euros within the euro area.
The objective of the Regulation is to deepen the EU’s Single Market by ensuring the cheap movement of funds and capital across all Member States.
What about non-euro Member States?
Non-euro Member States have the option to extend the Regulation to their national currencies. Of all non-euro Member States, only Sweden has opted into the Regulation to align fees for cross-border payments in Swedish krona with domestic payments in Swedish krona. As a result, most non-euro Member States do not currently benefit from the lower costs associated with the Regulation.
The associated higher charges for cross-border payments is a barrier to the full integration of the Single Market for businesses and citizens of non-euro Member States. This position creates two categories of payment service users in the Union. On the one hand are the vast majority of payment service users who benefit from the single euro payments area (SEPA). On the other hand are payment service users that engage in cross-border transactions in euro between euro area Member States and non-euro area Member States that continue to pay high charges.
For example, a citizen or company in Bulgaria making a cross-border transfer of EUR 500 to Finland may have to pay up to EUR 24 in fees, whereas a person transferring the same amount to Finland from France would pay nothing or almost nothing, accordingly to a study undertaken by Deloitte and commissioned by the EC.
Reducing the costs of intra-EU payment in Euro
The EC’s first proposed amendment is to extend the Cross Border Payments Regulation so that cross border transactions in euro may only be charged at exactly the same price as an equivalent domestic transaction in the official currency used in the Member State from where the transaction is sent or received. As a result of extending the Cross Border Payments Regulation, the price of a cross-border transaction from Bulgaria to Finland is expected to decrease to about EUR 1 only. The extended Regulation will come into force on 1 January 2019.
The EC has not proposed to extend the Regulation to cross-border transactions made in EU currencies other than the euro. The EC considered this option but concluded that this option was too cumbersome and would result in few benefits. The EC cited a concern that, should the Regulation be extended to cross-border transactions in EU currencies other than euros, payment service providers may raise costs of other services, notably domestic payments, to cross-subsidise cross-border transactions in non-euro currencies.
Transparency but not banning Dynamic Currency Conversion
The second EC amendment proposes to enhance transparency in respect of dynamic currency conversion. When paying or withdrawing money in a foreign country, consumers are often offered the option to pay the transaction amount in their home currency – this service is called Dynamic Currency Conversion. When a local currency and a home currency option is provided, consumers usually will not have the level of information needed to provide for a quick and clear comparison and may end up choosing the most expensive option.
The European Consumer Organisation has found that dynamic currency conversion leaves the consumer financially worse off in practically every single case (whether point of sale or ATM withdrawal) and called for the practice to be banned entirely.
The EC’s amendment to the Cross Border Payments Regulation falls short of a complete ban of dynamic currency conversion. Article 45 of the second Payment Services Directive (EU) 2015/2366 (PSD2) already requires there to be transparency of charges and of the exchange rate used prior to the initiation of a payment transaction. This existing transparency however is not enough for consumers to understand the true cost of their payment options. Recognising the importance of providing true transparency, the EC has empowered the European Banking Authority (EBA) to produce regulatory technical standards to improve the level of comparability of currency conversion services.
During the 3 year transitional period until the EBA’s formulated rules come into force, there EC has proposed a cap which will limit on the charges under dynamic currency conversion to limit consumer detriment whilst at the same time still maintaining fair competition among payment service providers.
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