Towards a single payment area
Keynote address of Mr. Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank, at the EU Commission conference Payments in euro in the Internal Market Brussels, 24 September 2001
Ladies and gentlemen,
In Frankfurt, a few hundred metres from the offices of the European Central Bank, a clock tells that, at this very moment, only 98 days, 13 hours, 30 minutes and a few seconds (10:30:00) separate us from the introduction of euro banknotes and coins. The daily use of pieces of paper without intrinsic value to exchange "real" value between people who do not know each other is perhaps the most significant sign of mutual confidence between members of the same society; for us it is a sign of a common European identity. This is why that clock marks the approach of a major event in the recent history of this continent. In three months' time, prices in all marketplaces will be quoted in the same currency. Whether one is buying a reindeer skin at one end of the continent or a bottle of sun-tan lotion at the opposite end, the same banknotes will be used without discrimination.
For most euro area citizens the cash changeover is the real introduction of the euro. And for most it seems self-evident that the elimination of transaction costs on banknotes will be accompanied by the elimination of transaction costs on cross-border cashless payments. Citizens indeed expect that, from next year onward, cross-border transfers will be as speedy and inexpensive as domestic payments are today. What else could they expect from a monetary union? As has been pointed out by Karla Peijs, the European Parliament has made it clear that European citizens would not understand why this would not happen. They are asked to make an effort to adjust to the single currency. They expect in return concrete benefits and, in particular, they expect cross-border payments to become easy as domestic payments.
The importance of this ultimate removal of currency borders should not be underestimated. Bankers, with perhaps too narrow a technical focus, have failed to fully realise the psychological, social and political dimension involved in preparing retail payments for the euro. I am grateful to the European Commission for the initiative it has taken to host today's conference, as a follow-up to the important Round Table of last November. Commissioner Bolkestein has already mentioned various initiatives taken by the Commission. I will concentrate on what the ECB and the Eurosystem have done and how we see the future.
Like the Commission and the Parliament, the ECB is fully committed to the objective of creating a single payment area for the euro. We therefore share the view that pressure should be kept on the banking industry to obtain the necessary improvements. Both the ECB and the Commission have an important role to play in encouraging enhancements of cross-border payment services. The Commission recognised the need to improve the efficiency of cross-border credit transfers in the early 1990s. However, years of encouragement from the Commission did not result in a self-correction from the market. In 1997 a directive was issued in order to increase transparency, ban double charging and reduce transfer times. This was a first step in the process. Although this first step has contributed to reducing transfer times to less than three days on average, it has not proven sufficient to significantly reduce the prices of retail cross-border payments for the users.
Immediately after the introduction of the euro and hence the start of TARGET, the Eurosystem focused on ways to address the lack of efficiency in cross-border retail payments. In 1999, it defined seven objectives for cross-border retail services, which the industry was invited to fulfil before January 2002. Last year, while acknowledging that progress had been achieved, it insisted that intensified efforts were necessary to address outstanding issues.
The Eurosystem has been working in close co-operation with banks to promote the use of European standards in order to facilitate the automation of payment processing. It has also convinced statistical authorities to raise the exemption threshold for balance of payment reporting to EUR 12,500. Moreover, in order to increase price transparency, it has requested the banking sector to define a standard cross-border credit transfer product with a single name which could easily be recognised by consumers. Despite early negative reactions from the banks, it now seems that a basic credit transfer scheme, possibly to be called "Eurocred", is under preparation. When it became clear that double charging had not disappeared, despite the Directive, the Eurosystem pushed banks to suggest a workable solution. As a result the industry has proposed a multilateral interchange fee (MIF) as the best alternative.
In summary, the Eurosystem has helped banks to lower their costs and to find practical solutions to issues which had been left unresolved for years. We have not directly addressed pricing of payment services to customers because we think that, in a market economy, prices should be determined by competition. But we have strongly indicated that we expected customer fees to decrease substantially in 2002. From 1 January 2002 the reduced reporting requirements will take effect and, hopefully, the MIF as well. In addition, banks will increasingly benefit from the existence of European standards.
In spite of this good news, in recent months two very negative indications from the private sector have increased our fears that the price objective will not be met in 2002:
Firstly, banks have proposed that the MIF be set at 3 euro. The competition authorities will judge whether this is consistent with banks' costs. But it is clear that if the fee is so high, further efforts are needed to lower costs.
Secondly, recent surveys prepared by the Commission show no reduction in the fees charged to customers which, on average, remain surprisingly high (17 or 24 euros, depending on the survey). If competition were efficient in this market, cross-border payment fees would have started to decrease.
What can the Eurosystem do in these circumstances? Three kinds of tools are at its disposal to fulfil its Treaty obligation to "promote the smooth functioning of payment systems". It can be a catalyst for change, it can become operationally involved, and, finally, it can issue regulations.
Being a catalyst for change is the option we prefer. It involves discussing practical solutions with banks, so that a balance can be achieved between public policy objectives and business needs. The Eurosystem has used this tool extensively. But whilst playing the catalyst role has proved effective in addressing technical problems, it is fair to recognise that it has had limited impact, if at all, on pricing issues.
The second option, direct operational involvement, would consist in the Eurosystem doing itself what the banks seem to have been unable to achieve. Obviously, the direct provision of payment services to customers would run contrary to the historical evolution of central banking towards being the "bank of the banks" and focusing on public policy issues, and moving away from commercial activities. The possible operational involvement therefore relates to processing payments between banks. This would have limited effect because the interbank leg of payment processing represents only 3-4% of the price paid on average by consumers. Yet, the 50-80 cents at which cross-border payments can already be processed between banks is quite high in comparison with domestic processing, which sometimes costs less than 1 cent. However, most of the costs for cross-border payments arise at the interface between banks and their customers, a segment of the process where an operational involvement of the Eurosystem is hard to conceive. The possible operational involvement of the Eurosystem is still under discussion as a medium-term option, not as an issue for 2002.
The third tool is the provisions of Article 22 of the Statute of the European System of Central Banks, which assigns to the ECB a regulatory power to ensure efficient and sound clearing and payment systems within the Community. It is not clear whether Article 22 could have been used in the present context. However, since the Commission has already taken a regulatory initiative based on consumer protection, the issuance of an ECB regulation would have created confusion and had to be avoided.
Concerning the Commission's initiative, I would first like to emphasise that the ECB shares its objective. In the single currency area there should also be a single payment area, with no difference in the level of service between cross-border and domestic payments. We understand and share the discontent of European citizens with the lack of visible progress on the part of the banking community. Failing to see their strategic need for self-regulation, and having neglected clear signals from public authorities, the banks themselves have paved the way for the regulatory response of the Commission. I say so somewhat reluctantly, because central bankers are in principle not in favour of regulatory instruments that, in their view, hamper natural market developments. This is particularly true for price regulations. Thus, while sharing the Commission's key objective, the Eurosystem has indeed a strong preference for solutions that avoid regulating prices.
If the political authorities consider a regulation a political necessity, though, at least two aspects of the present draft should be modified. They relate to the timing of the implementation and to the choice of instruments the regulation should promote.
Firstly, the timing of the implementation. If banks were required to adjust their cross-border prices to the level of their domestic prices very rapidly, there is a clear risk they would seek compensation through an increase in domestic fees. Needless to say, it would be very damaging if customers associated the introduction of euro banknotes with an increase in the price of domestic payments. Other undesirable side-effects could follow from too short a time horizon. With little time to adjust, for example, some banks may indeed decide to simply withdraw cross-border transfers from the range of services they offer. In some regions, this might mean that customers would lose access to this service. Similarly, in the card payment business, where banks' costs are shared between the user and the merchant, banks could react with an increase in the fees they levy on merchants.
How could the desire for legislative action be reconciled with economic efficiency? The answer may simply be: time. The regulation aims to solve in a few months, by an administrative measure, complex problems which cannot realistically be solved so quickly. A more reasonable time horizon could offer a better combination between political and economic objectives.
As to the political issue, citizens will be inevitably disappointed next year by the still high level of cross-border fees, but the regulation would clearly indicate that the situation is transitory. Central banks have taken three years from the start of Monetary Union to be able to distribute banknotes in euro. If it took double the time before commercial banks could offer domestic and cross-border payments at the same price, the general public would conclude that central banks are more efficient than banks. There would still be an image problem. But instead of an image problem for European integration, this would be, I am afraid, an image problem for the banks!
The economic issue would be resolved by leaving banks time to adjust their prices progressively, in line with the progressive decrease of their cost base. The benefit of the regulation, despite the serious and well-founded reservations expressed by the central banks, would be to persuade the banking sector that there will no longer be any escape.
In no EU country today is the price of local payments different from the price of inter-regional payments, notwithstanding differences in costs. There is no reason why this same result cannot also be achieved in the euro area if banks are given a reasonable peridod of time to adjust. Time would also allow consumer organisations to play their role in ensuring that domestic prices do not unduly increase.
The second drawback of the draft regulation concerns the payment instruments it involves. We agree with the Commission that the single euro payment area calls for enhancements for cash withdrawal, card payments and credit transfers. However, we disagree on the need for enhancement of the cross-border use of cheques. The cheque is not extensively used in the euro area, except in Ireland and France. It is easy to use, but has two major disadvantages. First, being paper-based it cannot be processed as efficiently as electronic payment instruments. Second, it is not sound for the receiver, because cheques are frequently stolen or written without provision. On the whole, the cheque is a costly instrument for the economy. This is why national central banks consider that the domestic use of cheques should be discouraged and this is why the cross-border use of cheques should not be facilitated.
To promote the smooth functioning of payment systems, it seems sufficient, at the euro area level, to promote the cross-border use of credit transfers and of card payments. The combination of these two instruments basically covers all payment needs, and in particular those which the cheque may also cover.
Let me summarise and conclude. It is the view of the Eurosystem that co-operation within the industry and between the industry and the authorities, combined with continued consistent pressure from the public and the authorities, is the preferable way to foster a single euro payment area. In the current situation, progress has been too slow, which explains why a proposal has been made to resort to price regulation. If the EU regulation is ultimately adopted, it should be well-focused to avoid economic distortions, which would be difficult to redress afterwards. In this respect, a realistic timeframe should be allowed for necessary structural changes to take place. For credit transfers, 2005 would be a reasonable adjustment period. Moreover, cheques should be taken out of the regulation, and it should be explained to customers that the cheque is to be considered only as a domestic payment instrument.
Ladies and Gentlemen, the Eurosystem is confident that a good compromise between political necessity and economic reality is under way and stands ready to fully contribute to this process. Thank you for your attention.