Regulation 2560/2001 on cross-border payments in Europe.

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Regulation 2560/2001 on cross-border payments in Europe        

Regulation 2560/2001 on cross-border payments in Europe


Table of contents


Introduction

The widely acknowledged aim of the European Union is to ensure increasing integration between its member states. The most important field on which integration takes place is the economy. In the treaties of Maastricht 1992, a milestone in economic integration was brought on its way; the euro. When it was introduced as book money in 1999 and when it replaced national coins and banknotes in 2002, experts and politicians were expecting a huge leap forward in the integration process. While the full effects still are difficult to assess, there is also agreement that other factors and obstacles to the free flow of capital must be removed in order for the Euro to unleash its full potential. One such obstacle is the high prices that banks charge on international money transfers. The prices are in sharp contrast to the extremely low ones charged domestically and are thus at odds with the idea of a European domestic market. To change this undesirable situation, the EU first tried to lobby the banks to change their pricing and when this was not successful, it enacted regulation 2560/2001 “on cross-border payments in Euros” that

“lays down rules on cross-border payments in

euro in order to ensure that charges for those payments are the

same as those for payments in euro within a Member State.”

        (see regulation in Appendix A)        

The regulation was enacted on December 19, 2001. In June 2002, Swedish authorities decided to extend to the Swedish Krona. It came into force for debit card payments and ATMs in July 2002 and for bank credit transfers in July 2003.  In the beginning, the regulation’s reach was restricted to payments of less than €12.500 and from July 2006, this maximum will be raised to €50.000.

It is the purpose of this paper to clarify why and how this regulation has been implemented and what its consequences were to banks and to the economy as a whole.

In pursuit of this goal, the paper first builds the case for the regulation and shows how the need for it built up. Then, some counter-arguments are given as they are held up by banks. The following gives some technical background of the decision before some economic background analysis is given. Another part makes some observations on the patterns of governance that surfaced in the process of forming the regulation in question and evaluates those. Eventually, a conclusion is given that sums up all these aspects and evaluates them.

Arguments for and against

The case for the regulation

For the European Commission, there were a number of important reasons to initiate this regulation. A starting point in their analysis was that the Euro was meant as mean to further integrate European national economies. However, as stated in Article 1(4), (see Appendix A) there has been not much impact of the common currency and the accompanying removal of exchange rate risks on the prices of cross-border payments. Table 1 shows an overview of average transaction prices prior to the regulation. From these data follows that these costs are far from marginal and can indeed be considered as a cost factor in making business decisions. This is also supported by complains from companies. Some US firms even consider costs of cross-border payments as disadvantage of doing business in Europe (Jansen, C., 1996). Thus, high cross-border transaction costs were already very early defined as a hinder to a full integration of European economies and to development and growth (The Economist, 2001). In the light of these problems, one might even ask why the European Union had not taken action earlier. However, before the introduction of the Euro, banks could use exchange rates risks as an argument for high margins and additionally, even as late as 1998, many economists still expected a harsh fall in prices after the advent of the Euro (Marjanovic, 1998).

In addition to the high price level, another thorn in the EU commission’s flesh was the intransparency of prices. As can be seen from table 1, both the sender and the beneficent of a transfer were charged. As banks barely informed their customers about this, these could not compare prices which further reduced competition. Additionally, this practice was very bothersome for customers. When they had to pay bills in the European area, they could never be sure how much they had to transfer exactly in order for the full amount to arrive at the beneficent. Therefore, the commission explicitly mentioned transparency as a goal of its regulation (see Appendix A, Article 4).

After 1999, it became clear that banks were not changing their pricing strategies. They could keep up their “absurdly high prices” (The Economist, 2002) because of a situation of imperfect competition and because most alternative payment methods whether they were credit card based or internet systems are either too cumbersome or just as expensive.

Finally, in December 2001, the EU enacted regulation 2560 that forced banks to price international money transfers like domestic ones. This regulation extended also to the use of debit cards to pay directly and to draw money at ATMs. But these methods often were already rather cheap and additionally not as widely used as credit transfers. For the most important part, namely the restriction on money transfers itself, the commission granted a period of transition of two and a half years so that it actually came into force in July 2003.

The case against the regulation

Of course, the main adversaries of Regulation 2560/2001 are the banks, since they can now not fully exploit their monopoly position on cross-border payments anymore (The Economist, 2002). Banks in all euro area countries are represented by the respective association of their country. The statements of these associations on Regulation 2560/2001 are generally quite neutral, except for the Bundesverband Deutscher Banken. In a speech, dr. Wolfgang Arnold, vice-president of this German association of banks, mentions some points of criticism against the regulation. These will be discussed here.

Firstly, Mr. Arnold argues that the volume of low-value money transfers is very small. At least for Germany, 7 billion intra-country transactions are conducted per year versus 16 million cross-border transactions. SWIFT, a standard-setting company in the (international) money transfer market, notes on its website that in 2003, on average 50,000 cross-border transfers were made each day; this is negligible compared to the 50 million payments that are carried out per day domestically in France alone (Reuters, 2003). This low value made investment in automated systems to process the transfers unjustifiable. The transfers were conducted manually, causing high costs. Next to the low volume and manual processing, the low value of the payment is also problematic, because transfer costs can so easily rise to a significant share of the value of the transfer itself. In short, the handling of cross-border money transfers is inefficient and thus costly. Moreover, the relative unimportance of cross-border payments do not justify high investment costs.

The second argument in Mr. Arnold’s speech is the incompatibility of the processing systems in the various euro area countries. Technically, systems have been developed completely isolated in each country. The reconfiguration of these systems would require significant and unjustifiable investments. Furthermore, the legal frameworks that surround the various systems also differ, further increasing the effort needed to design a fully compatible system.

These arguments demonstrate why the lobby of the EU did not have any effect on prices of international money transfers. Banks were in a monopoly position and did not have an incentive to invest in systems to process cross-border payments. The banks needed to be forced through Regulation 2560/2001 to undertake these investments.

In fact, the regulation is not even as strict as the EU would like it to be, because it needs to give the banks time to adapt to the new situation (The Economist, 2001). The ultimate goal is to create a Single European Payment Area (SEPA). SEPA should extend beyond the debit and credit transfers that are dealt with by Regulation 2560/2001. Some very specific instruments, such as bills of exchange, money market instruments and commercial papers, as well as cheques, will not be part of SEPA, but all other means of payments are. Next to Regulation 2560/2001, Directive 97/5/EC on cross-border credit transfers is in force. Furthermore the Commission has issued a Recommendation (97/489/EC) concerning electronic payments. The fact that many member states have so far not adopted this Recommendation shows that financial integration still has a long way to go (Hammonds Reporter, 2004).

Implementation in the context of general EU governance

As described above, the regulation on international payments in Euro was enacted after a long history of discussion and a thorough search for different ways to reach the goal of unhindered small-amount capital flows. Still, from the beginning, many banks, especially the German ones resisted it and criticized both its nature and the nature of its development (VÖB, 2004). This paragraph argues that such resistance was at least partly provoked because this regulation marked a departure from the standard EU style of governing. Beate Kohler-Koch (1999) provides a useful framework for analyzing styles of governance. According to this framework, governance styles can be distinguished along two dimensions; the organizing principle of political relations and the constitutive logic of the policy. The first one relates to whose opinions are included in decisions. Kohler-Koch differentiates between majority vote, where minority interests are not usually considered as strongly and consociation where decisions are based on as broad a coalition as possible. The latter dimension “defines the grounds and reasons on which a legitimate political unit of action will be formed” (Kohler-Koch, p. 22). The poles at this point are governing by actively searching for the common good or to reconcile individual interests. From the extremes on these two axes, four distinct governance styles can be derived as shown in table 1.

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Classifying typical EU governance on the organizing principle of political relations is rather easy. Given that the EU emerged from multilateral treaties and that single states still have veto rights on many issues, EU governance is strongly based on consociation. On the constitutive logic, things are not as clear cut. Given the idealistic values that its very existence reflects, one might expect an active common good style. This was certainly true in the starting phase of the union, when the memory of WWII was a main driver for integration. However, with time, this changed. Political actions in the area ...

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