The European Banking Federation (EBF) has expressed “serious reservations” about the European Commission report on retail banking services published last week.
In particular, the EBF criticises the methodology and some of the conclusions drawn on current accounts and on payments and cards in particular. “The empirical part of the report seems to be based on preconceived conclusions,” says the EBF in a statement. “Many of the presupposed findings have been interpreted as evidence of lack of competition without any actual correlation.”
The EBF questions whether the timing of the report was appropriate, given the involvement of the banks in directives such as CRD, MiFID, AML as well as developments like SEPA and the possible adoption of the PSD. It says these initiatives “will foster European integration and meet numerous concerns raised by the Commission in the final report.”
The EBF adds that new regulations would also be inconsistent with the position publicly adopted by the European Commission in favour of a regulatory pause.
The Federation argues that the report take no account of different histories, market developments and practices in different European countries. It says the report “compares or consolidates data from across Europe related to very different systems and services, with hardly any weighting, and draws general conclusions which often convey a negative picture of the retail banking and card industry, which seems to be in contradiction with the high degree of satisfaction that European consumers feel vis-a-vis their banks, as the final report itself acknowledges. Banks cannot agree either with the association apparently made between level and growth of banks profitability and lack of competition.
The EBF goes on to say the sources of data used to describe the markets do not always seem to be consistent and homogeneous. “Nor does the Report take into account the specificities of each member state,” it continues. “The standards of living, the infrastructure and availability of card systems, the attitude of the consumers in general were not considered in the final report. Bank practices within member states vary and it is hard to make a comparison between them. Variances in fees between countries are mainly the result and reflection of the different nature of services offered from one system to the other and not, as it is concluded, due to a lack of competition.”
Finally, says the EBDF, the banking industry is considered as an industrial production business by examining separate “products”, whereas it should be treated as a series of ongoing processes, where several items are interdependent and should not be taken out of context. The EBF also believes that the “flawed methodology” of data collection is in contradiction with the better regulation principle and leads to misinterpretations and unfortunate generalisations.
Furthermore, continues the EBF, the final report considers the situations in the EU countries as they are before the final completion of SEPA. The conclusions drawn in the report may however not be relevant any more in the near future, claims the EBF, as banks are preparing for an effective SEPA in 11 months from now. The EBF says the EPC’s SEPA Card Framework (SCF) in particular will address most of the issues highlighted in the Report and has precisely as principal objective to enhance competition in the European cards’ market at all levels in the transaction chain. “The SCF sets high level principles and rules with the aim to enable European customers to use general purpose cards to make payments and cash withdrawals in euros throughout the SEPA area with the same ease and convenience as they do in their home country,” says the EBF. “This framework serves as clear evidence that enhancing competition is also the goal of the industry.”
While the EBF says it shares the report’s view of a fragmented EU retail market, it does not agree with the conclusion according to which this fragmentation is due to a lack of competition. “The Report itself fails to demonstrate this statement,” says the EBF. “Differences among markets are the result of a combination of factors including also historical, geographical, cultural and especially linguistic elements. They are also the result and reflection of the different nature of services offered. All these elements have not been sufficiently explored and explained in the report.”
On credit and debit cards, the report does not take into account the infrastructure and availability of card systems, the attitude of the consumers towards payment cards and the existence or absence of a National Card schemes, says the EBF.
The EBF says the report rightly identifies a number of current obstacles to the integration of retail banking markets that might be substantially reduced via a range of policy measures, namely a more effective convergence among national consumer protection regimes. However, the EBF also believes that consumer protection rules should be robust and provide consumers with a good level of protection across the EU. “However, these rules should not have the effect of hindering, rather facilitating the sale of products developed in one domestic market throughout Europe without the need for substantial modification,” says the EBF. “The EBF believes that a ‘targeted’ full harmonisation of key legislative provisions aimed at consumer protection in the field of retail services across the EU is necessary. The view of the EBF is also that, in some areas, priority should be given to market driven solutions, recognising the merits of self regulation. The goal of a single retail banking market should be to give consumers access to greater product diversity and choice.”
The EBF rejects the assumption that the level of mobility which is described by the Commission as too low is synonymous with a lack of choice for customers; nor does it subscribe to the equation that supposed low customer mobility means a lack of competition.
DG Internal market is currently working on a report with an expert group to identify whether there are any obstacles to customer mobility. The EBF believes it would be better not to anticipate the conclusions of the experts group.
There are already throughout Europe a number of existing solutions to facilitate customer mobility, resulting either from banks’ own initiatives or from self-regulatory solutions, claims the EBF. It says the Interim Report II pointed out that, according to a 2005 Eurobarometer survey, 69% of respondents declared that changing bank was an easy or fairly easy process. “As regards charges applied to customers wishing to switch their current bank account to a new provider, in a number of countries this facility is already free of charge for customers,” says the EBF. . The EBF says the banks’ different levels of profitability across member states identified in the report can be partly attributed to the fact that some of their structures of ownership are protected by national regulatory provisions or other legislation. “This limits concentration activity (at both national and cross-border level) for a significant sector of the market and thus prevents suppliers to fully exploit economies of scale and realize cost savings for the customers’ benefit,” says the EBF.
The EBF says it appreciates the Commission’s intention to thoroughly analyze possible barriers to competition caused by territorial restrictions and protection of certain ownership structures and its willingness to take the necessary steps to ensure fair competition in retail banking across Europe.
The EBGF says the use of payment cards “has enormous benefits to society as it leads to cost reductions and operational efficiency both on the micro-economical as well as on the macro-economical level.” It adds that several reports have drawn attention to the fact that the decline in cash use in the EU will lead to huge savings not only for various economic subjects but also for the society as a whole.
“This is an important issue for Europe, considering the fact that 80% of payments are still made by means of cash and cheques,” says the EBF. “It should be an objective of the European institutions to support the card industry in its efforts to gradually replace cheque payments and cash transactions with the use of payment cards. This is perfectly in line with the Lisbon Agenda. Any action that may have a negative impact on the issuance and the use of payment cards and/or limit the payment card offer should be avoided very carefully.”
The EBF also claims that merchants derive considerable benefits in terms of increased sales as well as reduced costs/risks through the acceptance of payment cards. “We are surprised and disappointed that no mention is made in the report of the benefits for merchants when accepting payment cards instead of cash,” says the EBF. “A few examples of these benefits are fuel distribution at gas stations enabling huge personnel cost savings, remote sales, travel or ticket reservations using cards, sales through vending machines accepting cards, etc The payment card was a determining factor for the development of retail cross-border payments in Europe; because of the guarantee given to the merchant, it has become the preferred means of cross-border retail and sales at a distance. However in the report, only the costs to the merchants are mentioned. This does not reflect a balanced stance. As cash is the principal alternative to payment by card, it would have been greatly beneficial to compare the costs to providers, banks, consumers, merchants and society as a whole of cards and cash. “
The EBF says the interchange fees have proven to be “essential for the sustainability, innovation and development of the payments card business.” The EBF welcomes the fact that the report does not argue in favour of a zero interchange fee but raises the question whether or not the current level of the interchange fees are “optimal in some countries.” The EBF says it hopes that this issue will be the subject of a constructive dialogue between the payment industry and the competition authorities.
“As a general statement we believe indeed that if the business model on which card payments were built and developed and which includes interchange fees was to be modified, then the economic viability of issuing cards would be strongly affected unless issuers were to recoup their costs totally from the cardholders,” says the EBF. “This would not be a desirable development. These costs include processing, capital requirements, compliance, technology related expenses, resilience, the guarantee of the payment to the merchant (as there is a shift of the liability from the acquirer to the issuer) and the cost of funds (which covers free period of credit cards). It should be also taken into consideration when referring to countries operating without interchange fees whether the costs related to card issuing are not accounted for in another form of cost recovery. There is a risk indeed that reductions in interchange fees may lead to a cost transfer from merchants to cardholders which could adversely affect the overall goal of SEPA. Finally, it must be noted that another positive aspect of interchange fees is that they facilitate the development of cards’ use in countries where card systems are less developed.”
The EBF says the European banking industry welcomes the necessity to further examine the access to credit register. “Promoting equal access on a non-discriminatory basis to databases of each member state is essential to guarantee a level playing field between national and foreign lenders and foster cross-border business,” says the EBF. “For years, the EBF has encouraged national authorities and the EU Commission to undertake more research on the modalities/arrangements for sharing data across Member States, in particular on authorisation to be sought from clients for use of data in accordance with the data protection and consumer credit legislation.”
In conclusion, the EBF says it “feels that the final Report fails to demonstrate why fragmentation is supposedly due to a lack of competition and does not reflect the banking industry’s commitment to competitiveness. Concerning cards, the report draws general conclusions which often give a negative picture of the card industry, sometimes leading to over-simplified conclusions. Moreover the final report has taken into consideration the situations in the EU countries as they were before SEPA. The conclusions may therefore not be relevant in the near future.”
The EBF stresses that in its view and experience the fragmentation in retail banking is due to cultural differences and non-harmonised regulations, namely in the field of consumer protection and tax. It welcomes the European Commission’s initiative to analyse further several of the obstacles to cross-border consolidation and hopes that initiatives towards a full targeted harmonisation will be taken in accordance with the Better Regulation principle.
Despite the nature of it attacks on the report, the EBF calls for a “constructive dialogue” with the European Commission, saying the European banking industry is “fully committed to achieving a high level of competitiveness in the sector and to providing a high level of service to European banking customers.”
The EBF adds that the completion of the Financial Services Action Plan has allowed significant progress in wholesale markets and that similar progress should now be achieved in retail banking. “This issue is however not due to lack of competition, more to lack of harmonisation,” says the EBF. “The EBF remains convinced that further retail banking market integration can be reached by the removal of various legal and regulatory obstacles to the provision of cross-border retail banking services. Therefore, the EBF welcomes the invitation of the EC for a constructive dialogue. The view of the EBF is also that, in some areas, priority should be given to market driven solutions, recognising the merits of self regulation.”