Regulatory framework and payment systems issues

Presentation by Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank
Conference of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP)
entitled “Financial transfers from migrants in the Euro-Mediterranean area: a lever for development”
Paris, 22–23 March 2007

Ladies and Gentlemen,

I would like to thank the organisers, the European Investment Bank and the European Banking Federation, for inviting me to this conference on the increasingly important topic of remittances. It is a pleasure for me to chair this session entitled “Regulatory framework and payment systems issues”. Before giving the floor to our distinguished speakers I will take the opportunity to make some general remarks.


Let me first note that, according to the Statute of the ESCB and of the ECB, one of our main tasks is to “promote the smooth operation of payment systems”. Our mandate is not limited to the operation, oversight and regulation of, for example, large-value payment systems or any other specific type of payment arrangements. Therefore, remittances are also within our field of competence.

On a more general note, let me also mention the ECB’s interest in, and dialogue with, neighbouring regions regarding economic and financial issues. The Mediterranean countries represent a neighbouring region that commands particular attention. The ECB supports the European Union's Neighbourhood Policy and has regular contacts with all the central banks in the Mediterranean region.

In my short speech today I will first refer to some facts and figures related to migration and remittances. I will then look at some of the challenges and the work under way before drawing some conclusions and considering the prospects.

1. Facts and figures

Many of you may be familiar with statistics on remittance flows and may have received the statistical information distributed on the first day of the conference. I would nevertheless like to share with you some numbers on migration to the European Union (EU), remittance flows to the Mediterranean countries and how these flows relate to economic indicators for the receiving countries. I will be quoting from the article in the ECB’s February 2007 Monthly Bulletin entitled “Migrant remittances to regions neighbouring the EU”.

Let me start with some figures on migration. As stated in the article, 95% of the population in the 27 EU Member States live in their country of citizenship. The remaining 5% amounts to 24 million people. Of these 24 million, 7 million are EU citizens living in an EU country that is not their country of citizenship. Of the remaining 17 million, about 8% – or 1.9 million – originate from countries on the southern and eastern shores of the Mediterranean Sea.

[Slide 2]

Regarding remittance flows, World Bank estimates place worldwide flows at USD 226 billion for 2004, up from USD 69 billion in 1990. The ECB has estimated that aggregate remittance inflows into the EU’s neighbouring regions totalled USD 49 billion in 2004. The Mediterranean is by far the largest receiver among the four regions analysed. In 2004, the Mediterranean region received USD 23 billion in gross inflows or USD 14 billion after inflows are netted against outflows. [Slide 3]

[Slide 4]

How does this compare with the economic structures in the Mediterranean countries? A comparison of net remittances with GDP clearly shows that remittances play a particularly important role as a source of income for Jordan and Morocco, and for Lebanon, Tunisia and Egypt as well. Remittances also finance a large share of imports of goods and services. This applies in particular to Lebanon, Jordan and Morocco. [Slide 5] Finally, it was found that remittances substantially exceed foreign direct investment in these countries – by up to five times in the case of Morocco. [Slides 6 and 7]

The numbers I have mentioned suggest that there are good reasons for paying increased attention to remittances, the modalities used for their transfer and the role they can play as a contributor to economic growth and development in the receiving countries.

2. Challenges

As you all will know, the transfer of funds is a complex business, especially at the cross-border level. In order to provide efficient payment services, a well-functioning market infrastructure for payments is needed, including appropriate building blocks, such as systems, clearing and settlement arrangements and standards. In modern economies, these are put in place mainly by banks and are available within countries, or currency areas; they are rarely available for transfers between countries or currency areas. It is a very complex task to set up successful interconnections between the payment systems of different countries and, as a result, most cross-border transfers are handled via correspondent banking or other bilateral arrangements. Moreover, the effects of high initial investments and large economies of scale on the processing of payments imply that the business case for setting up new payment arrangements must be clear, especially since cross-border payments represent only a very small percentage of all payments. For these reasons, the handling of cross-border payments is usually slower and more expensive.

The difficulties related to cross-border payments are well known to the Eurosystem. The ECB is currently closely involved in the European banking industry’s project to establish the Single Euro Payments Area (SEPA). Even within the euro area, with one single currency, agreeing on common payment solutions has taken considerable time and effort. I am however very glad to note that the SEPA project is now well on track and that the banking industry will launch the first SEPA instruments according to schedule on 1 January 2008. I hope that the experience gained in the SEPA project will also be helpful to European banks in addressing issues related to transfers to the Mediterranean region.

The vast majority of payments within the euro area and the European Union and between countries in these two areas are made through regulated institutions. However, this is not necessarily the case with remittances to third countries, in which non-bank remittance service providers may play an important role. There are several reasons for this, but I will mention only a few. First, in sending countries, migrants may have difficulty accessing banking services because of language barriers, lack of experience in using banks, or due to banks’ know-your-customer requirements.

Second, the availability of banking services may be limited in receiving countries. Third, non-bank remittance service providers, by their own network and agent arrangements, often are able to offer speedier service than banks do, and to provide better outreach and accessibility to receiving parties. Moreover, new innovative payment solutions for remittances, such as mobile phone payments, are often proposed by non-regulated parties.

This brings me to a general observation the ECB has made: there seems to be a trend towards the increasing involvement of non-banks in payment systems activities. We feel that these developments need to be better understood, especially in light of the potential challenges they might pose to the regulatory framework and central bank oversight.

3. Work completed and under way

Let me now turn to the completed and ongoing work in this field, in Europe and on a global level.

Within the EU, legislation regarding the banking business and e-money institutions as well as legislation dealing with money laundering and the financing of terrorism has been harmonised. The issue of money remittances is however still a matter for national legislation, meaning that regulatory and supervisory frameworks for money remitters vary substantially between Member States.

This issue is being addressed in the proposed Payment Services Directive, which puts forward a new concept of “payment institutions” that are more lightly supervised than banks and e-money institutions. This concept would cover money remitters as well. The proposed directive prohibits entities other than licensed institutions or those expressly excluded from its scope from providing payment services. Apart from the licensing of these payment institutions, the proposed directive also establishes a harmonised set of rules for the provision of payment services, e.g. information requirements, authorisation, transaction times, and liability. On the critical issue of supervisory requirements for payments institutions, I think that the latest draft of the directive presents quite a balanced proposal. The directive will also provide a legal foundation facilitating the move to SEPA. The directive is now subject to negotiations in the EU Council and Parliament. When implemented, it will certainly help enhance safety for users of money remittance services.

Besides promoting the smooth operation of payment systems at the euro area level, the Eurosystem also contributes to work in different international fora.

Let me first mention the joint report of the G10 Committee on Payment and Settlement Systems (CPSS) and the World Bank entitled “General Principles for International Remittance Services”, published in January 2007 and available on the BIS website. The report analyses features of the market for remittances that can lead to inefficiencies in the way remittance services are provided. To address these issues, the report sets out five general principles for ensuring secure and efficient international remittance services.

Money laundering and terrorist financing issues are being addressed in the context of the Financial Action Task Force (FATF), and you have all probably had to deal with the FATF Recommendations and Special Recommendations. Since 2002, there have been efforts to better understand the importance of informal funds transfer systems and a report came out in 2005 on Alternative Remittance Systems.

Finally, as regards remittance statistics, statisticians have already put forward a new improved set of definitions for remittances (covering personal transfers, personal remittances and total remittances) for the International Monetary Fund’s balance of payment statistics. The new balance of payments manual is expected to be released by the IMF by the end of 2008.

4. Conclusions and looking ahead

To conclude, irrespective of whether payments – including remittances – are made via banks or through other providers, it is important to ensure that concerns related to consumer protection, money laundering and terrorist financing, inter alia, are properly addressed. Authorities should seek to devise a regulatory framework that provides for the necessary safeguards, yet at the same time does not drive activities underground.

Looking ahead, I would like to mention a few short and medium-term issues. I will start with the short-term ones. First, within the European Union, it will be important for the proposed Payment Services Directive to be adopted and written into national legislation as soon as possible in order to support a timely implementation of SEPA and facilitate safe and efficient payments for everyone in Europe, including those sending remittances. According to information I have received during the past few days, the ECOFIN Council may come to an agreement on the directive soon. This would allow the European Parliament to adopt the directive at its first reading, probably next month.

My second point concerns the relations between EU and Mediterranean partner countries. Several Eurosystem central banks, sometimes in liaison with other authorities, cooperate with their counterparts in Mediterranean countries on issues that will allow banks to improve their remittance services. I very much welcome this kind of cooperation and would like to further encourage private sector initiatives aimed at making remittances between EU and Mediterranean countries safer and more efficient.

Third, according to recent research by staff of the ECB, which will be published soon, countries with more liquid capital markets and developed banking systems grow faster on average. Similar results are found in case studies that explore the aftermath of financial sector reform in developed and emerging countries. Building trust in the banking sector is therefore an important measure for countries wishing to increase their economic growth. This could be achieved through public activities to ensure the enforceability of laws, consumer protection and monetary and financial stability. In addition, efforts are needed to increase financial literacy, and banks need to provide appropriate outreach to the population by means of distribution channels and financial products. I recognise that these are not things that can be developed overnight, but I would encourage defining them as medium-term goals that are pursued in parallel to the short-term ones I have already mentioned.

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