When the Payment Services Directive begins to bite, Italians will open bank accounts in The Netherlands to avoid high charges and banks will lose a fortune. Chris Skinner examines the true nature of its teeth.
What is it?
The Payment Services Directive is the legal framework for creating a single payments market for cash, cards and electronic products across all EU member states. It follows several other key milestones in Europe including: the implementation of EU Regulation 2560/2001, which made charges for low-value electronic cross-border payments the same as domestic payments; and the creation of SEPA, the Single Euro Payments Area, by the European Payments Council (EPC) in 2002.
Who dreamed it up?
The Directive originates from the 1992 Maastricht Treaty on European Economic and Monetary Union (EMU), which created the plan for the euro.
When will it be implemented?
The intention is to have a single payments market for Europe operating by December 31, 2010.
Who wins, who loses?
The intent is to create one market for payments across all 27 member states of the EU. That means that there can be no cross-border charges for any account movements between one member state and another, and all banks charge the same for managing deposit accounts. Europe’s citizens and businesses will be major winners as this will encourage freedom of economic movement across the region. But banks will lose significantly as fat margins on cross-border currency movements disappear. In particular, the countries with high bank charges lose out, such as Italy, where citizens pay an average €252 a year for a deposit account compared with only €34 in the Netherlands.
What’s in the small print?
The Directive released in December 2005 says: “[It] will cover payments made in any currency, not only those made in euro or in another national currency used in the EU. This is a key difference with the SEPA initiative consisting of the delivery of common standards and services for euro payments by 2010.”
How much will it cost?
About €40bn. According to a recent study by ABN AMRO, SEPA – which is purely for euro payments – could reduce bank payments revenues by as much as 60% or €29bn. On top of that lost revenue stream are the costs to connect to new infrastructures. For example, TowerGroup estimates it will cost Europe’s banks about €10bn in new investments to connect to new infrastructures. For example, Europe’s existing automated clearing houses (ACH) either become obsolete or pan-European ACHs. The former will require re-architecting existing payment systems to work with the latter. There are also significant changes to central bank gross settlement systems with a single settlement engine being developed by the European Central Bank (ECB) called TARGET2 for 2007.
The law of unintended consequences
According to studies by the EC, payments cost about 3% of GDP with inefficient cash management accounting for up to 70% of those costs. With Europeans making 231 billion payments each year, worth about €52,000bn, the savings could be worth up to €100bn which, as shown above, comes mainly out of banking revenues. As a result, many banks will go out of business or be acquired by more efficient operators and we can see some of these trends already occurring.
What the industry says
“This is not a new debate but it isn’t clear what the value is for the industry. Banks would like to offer better services, but they also need to cover their costs. Everyone thinks SEPA is inevitable, but the upside hasn’t been decided yet.” Lázaro Campos, head of the Banking Industry Division, Swift, in a September 2005 interview.
What the regulator says
“The single payment area will benefit each and every European, and bring savings to the EU economy to the tune of €50-€100bn a year. We will work with the industry and ECB as closely as possible to make sure it happens by 2010. I count on the banking industry, which is responsible for SEPA, to accelerate its work,” says Charlie McCreevy, internal market and service commissioner, in the press release for the Payment Services Directive, December 2005.
Could we live without it?
Only if the European Parliament agreed to disband the euro and end the EU!
Rating: 4 Useful but costly
