Tuesday, March 27, 2007

EU council agrees on Payment Services Directive: start of the fee-blame-game

Today, the European council agreed on the Payment Services Directive. This means that if European Parliament also agrees on this text, we may have a payment services directive agreed before the summer. But... the disinformation and blame game has already begun.

First of all, all press players in the Netherlands mixed up the PSD as a directive with market developments in the domain of cards, suggesting that there were going to be a third kind of Eurowide-payments cards as a result of the directive. Which is nonsense ! The directive arranges for a legal framework for all kinds of payments, regardless of brand or type (cards or credit-transfer, direct debit etc). While this framework will help as a legal basis for the EU-internal market for payments, it does not stipulate a thing as to:
- future card payments,
- number portability (all over the Dutch news this afternoon, was the message that the directive would demand banks to introduce number portability of bank accounts).

Yet, the discussions are all about whether or not this regulation will lead to cost/price hikes or changes in payments. So it looks as if retailers have succeeded in colouring and simplifying the European discussion to the single issue that migration to more panEuropean card payment schemes might lead to higher fees for them. And also the Ministry of Finance is stating that is anxious not to see prices rise as a result of the European developments.

The thing is, prices will of course rise. And that has nothing to do with bank kartels or any market development for cards, but merely with the fact that all regulation comes at a price. This PSD is most likely going to be consumer friendly, meaning that banks will have to make a bunch of costs to achieve speedy and transparent payments with detailed contract agreements. And someone will have to pay for that.

The European Commissions was by the way, one of the first to outline how and by whom these costs should be borne: the customer. In the Commissions impact analysis (a sort of cost/benefit analysis) for this directive it is outlined that Europe may earn about 50-100 billion euro yearly as a result of more efficient payments. Their analysis is - briefly put on p 65 - that cash is a bleeder and that we need to make sure that cost-oriented fee-setting occurs in retail payments:

A more detailed breakdown reveals that cash, above all, is the main cost driver and accounts for as much as 60–70 % of the total cost of the payment system, or in other words 2 % of GDP. These studies estimate the cost per economic transaction when paid for in cash between EUR 0.30 to EUR 0.5562. Congruent with these findings, other studies confirm the cost of cash at about 1.36 % of sale value or 2.3 % of transaction value (EUR 0.32 for transaction value of EUR 14).

The overall social cost of using payment services could be reduced if consumers and business selected the means of payments in a more rational way. When prices paid by users reflect the real cost value of the service, they provide an incentive for users to select services that meet their needs at the lowest possible private and social cost. This promotes the efficiency of the payment system. It is well documented in studies that cost-based pricing of payment services triggers customer behaviour and the right price signals can drive customers to select more efficient payment services rather than less efficient ones.

So we can see that retailers, Ministry of Finance and European Commisison are now all beginning another round of the blame game, suggesting it is the banks who are keen to increase prices. While completely leaving out the message to the public that their projected financial benefits of this whole directive consist of direct pricing of cash (and retail payments in general) to the customer.

While I can understand the retailers position (use any argument as long as politicians buy it) I am a bit disappointed that both Ministry of Finance and European Commission and European Parliament so easily fall for their reasoning. Institutions, regulators and members of parliament should not suggest in any way that regulation will not cost money to society. Either they should aim at selling this directive and its benefits of 50-100 billion euro to the public and also include the complex message of cost-oriented pricing in retail payments (including cash). Alternatively, they should recognize that they themselves are too afraid to sell direct transaction pricing to the public. In that case they should be so polite not to poke the fire about banks rising prices (given that they out of fear for further Euroscepsis they don't wish the public to know that it's their regulation that is causing it).

If this is how we want the future of Europe be shaped... quo vadis...?