20 April 2018
Cross-border Payments in Euro to Become Cheaper Across Whole EU, with Resulting Benefits bor Both Consumers and Businesses
On 28 March 2018, the European Commission issued two proposals which should be beneficial for Hong Kong sellers across the EU that routinely make and receive cross-border payments. The aim of the proposals is to reduce the cost of all intra-EU payments in euro and unify the single payment market for consumers and businesses.
The Commission estimates that its proposals will result in savings of one billion euros a year, for consumers and legal entities involved in selling goods trans-border.
The first proposal relates to cross-border transaction fees. The current system distinguishes between cross-border transactions in euro within the euro area (the Eurozone) and transactions from a non-euro area to a euro area.
In particular, the proposal provides that fees charged for cross-border payments in euro would be the same as those that would be charged for equivalent domestic payments in the local currency. For example, a cross-border transfer in euro from Bulgaria (which is not part of the Eurozone) will be priced the same as a domestic Bulgarian lev (BGN) credit transfer.
This is a major change, as fees for a simple transfer can be exorbitant in some non-euro area Member States (up to EUR 24 for a transfer of EUR 10). On the other hand, in the case of payments within the Eurozone, it costs consumers nothing or, at most, a few cents to make cross-border payments. The substantial fees are rightly believed to be an obstacle to the Single Market as they create barriers to cross-border activities of households when buying goods or services in another currency zone, and businesses, in particular SMEs. This creates a major gap between euro area residents who benefit from the single currency, and non-euro area residents who can only make cheap transactions within their own country. The Commission’s proposal is to extend the benefits of cheap cross-border transactions currently only enjoyed by euro area consumers and businesses, to those in non-euro areas.
Notably, the proposal is limited to euro payments and does not extend to cross-border payments to and from only non-euro area Member States.
The second proposal concerns currency conversions. When paying for purchases abroad, consumers face the choice of paying in the local currency or paying in their home currency. This is the case, for example, when goods imported from Hong Kong in one Member State, are bought online by a consumer in another Member State, with a credit card. If consumers choose to pay in the local currency of the seller, their bank will convert the amount of the transaction and consumers will only know the true cost when they look at their bank statement. If consumers choose to pay in their home currency, a payment service provider converts the amount of the transaction on the spot in exchange for a fee, known as a “dynamic currency conversion”. The lack of necessary information to make the best choice often results in consumers being unfairly led towards the more expensive currency conversion option.
The Commission’s proposal focuses on increasing transparency. Specifically, the proposal provides that payment service providers will have to disclose the full costs charged to consumers. The result is that a consumer must be informed of the cost of currency conversion options before any card payment thus allowing consumers to make an informed choice.
The proposal contains a three-year transitional period during which the European Banking Authority will define a transitional cap on currency conversion fees. This transitional period is provided in order to allow the European Banking Authority to establish Regulatory Technical Standards and to allow the market to make the necessary adaptations to the changes.
Notably, the Commission made the decision not to ban the aforementioned dynamic currency conversions outright. This decision was made on the basis that the increase in transparency may ultimately boost competition, thus benefiting consumers. If the fees for dynamic currency conversion become more competitive, banks may also provide better rates for their currency conversion services.
In sum, the Commission proposes:
- That all intra-EU cross-border transactions in euros outside the euro area will now be priced the same as domestic payments in the local official currency.
- Payment providers must disclose the cost of currency conversion options before card payment.
The proposals will now be submitted to the European Parliament and EU Council of Member States’ ministers with a view to their adoption.