Cross-Border Payment Regulation in Europe
Q. What are the major stipulations of the EU regulation on cross
border payments in Europe?
A. EC Regulation number 2560/2001 states that banks may charge
no more for a cross border credit transfer in Europe than for a comparable domestic
transfer. (In order to fall within the remit of the regulation both the remitter
and beneficiary accounts must be located in the EU.) The regulation has two
value phases – payments up to the €12,500 level are affected as from July
1st 2003, with this threshold rising to €50,000 as of December 2005. The
regulation only applies to payments that are STP transactions.
Q. How does the regulation define a “comparable” domestic transfer?
A. It doesn’t, but since cross border credit transfers are
typically executed using the high-value clearing systems, it could be argued
that the term “comparable” would apply to a domestic transfer conducted through
a high-value clearing system. Typically this would cost €20 compared with
€0.20 cents for a low value domestic payment. However, a lot of participants
are assuming that a “comparable” transfer would be one conducted through a local
ACH, which is one of the reasons why there is considerable anxiety and confusion
in the marketplace at present.
Q. What are the practical implications of this confusion?
A. The most obvious effect is that banks are having to revise
their charging structures. This regulation effectively removes yet another revenue
stream for banks, so they are obliged to look for other means of recouping that
revenue. That might take the form of new/increased account maintenance fees
or changes to value dating. The irony is that because the regulation only deals
with cross border payments below €12,500 it initially affects only a tiny
percentage of all payments within the Euro zone, but it has nevertheless caused
a completely disproportionate amount of upheaval. It is also perceived as the
harbinger of further legislation that might be applied to other areas, such
as domestic payments, which will in turn trigger further revenue losses and
therefore further revision of bank tariffs.
Q. What sort of revisions to charges are banks making in response
to the legislation as it stands?
A. In addition to the areas mentioned above, some banks are
now making a distinction between STP and non-STP payments. Previously there
was no charging distinction made between STP and repaired ACH payments, but
now we are seeing a move towards a €0.20 cents charge for STP items and
perhaps as much as €20 for payments requiring repair. In effect the banks
that are making this distinction are loading up their repair fees to recoup
the revenue lost on STP transactions.
Q. That obviously makes the interpretation of “STP” critical
– how does the regulation define it?
A. All the regulation states is that it is permissible to charge
more for a non-STP than an STP payment, but it doesn’t actually define
STP. The definition has therefore tended to evolve on a country-by-country
basis and even from bank to bank within a country. One important STP qualification
that has emerged is that in addition to including an IBAN and a BIC the
payment must not include any free format information.
Q. “Free format information”?
A. Yes – such as invoice number or other remittance related
data. If any such information is included, the payment will be immediately
categorized as requiring repair and charged accordingly.
Q. But surely if payers are deterred from adding such information
by potential additional charges this will cause major difficulties for
recipients attempting to perform automated receivables reconciliation?
In the case of larger corporations with high invoice volumes this could
be extremely disruptive and/or expensive?
A. Exactly, and this is the reason why we are refusing to accept
charge backs from banks applying this definition of STP to payments where
we have included such information at the customer’s request. In the case
of an MNC that may be making payments to multiple countries in the Euro
zone this situation would prove particularly onerous, as the corporation
would find itself having to keep abreast of the multiple STP definitions
of all its own and its suppliers’ banks. A further snag is that the payee
might comply with its own bank’s STP definition, only to fall foul of
the beneficiary bank’s different definition.
That mixture of opacity and inconsistency is clearly unacceptable, and
is further clouded by the fact that (paying) banks have differing policies
regarding the acceptance of charge backs on payments that include free
Q. Doesn’t STEP 2 addresses these issues?
A. No. STEP 2 has the same basic requirements; amounts below
EUR 12,500, IBAN, BIC – and no free format reference information allowed
in an STP payment, so the same uncertainty of definition applies.
STEP 2 is basically a book transfer system, so it depends upon all banks being
members for it to function effectively. Given that it currently has 31 pilot
banks (with another 18 joining this year) and minimal volume of transactions,
that ideal situation is evidently still a very long way off. Where banks that
aren’t STEP 2 members are involved in a STEP 2 cross border payment, there are
additional obstacles. Figure 1 shows the two possible routes (in green and red)
that a payment can take depending on whether or not the receiving bank is a
STEP 2 member. If the receiving bank is not a member and the payment is routed
through a “country entry point”, there is a charge back incurred (typically
between €1.5 and €2.0), and an additional value date loss of one or
The other point about STEP 2 to bear in mind is its limited scope. Many in
the industry see the current EU regulation as being intended as a first step
towards the evolution of a pan-European ACH. STEP 2 is specifically focused
on crossborder transactions under €12,500 so as it stands (and particularly
in view of its limited membership) is not well suited as a solution for this
long-term goal, which would also have to include domestic payment capabilities.
Figure 1: STEP 2 – in action
Q. So companies that need to make or receive multiple cross
border payments within Europe have potentially a very expensive and inconvenient
problem on their hands?
A. Not necessarily. Those companies that are exclusively using
a network bank that has a presence in all the countries where it needs
to make payments will be unaffected. All their payments can be routed
internally through the bank’s network to the appropriate local ACH and
thus handled as a domestic and not a cross border payment. As such, issues
such as the varying interpretations of STP and “comparable” are irrelevant.
However, if an MNC uses local/regional banks for even a small percentage
of its payments it will find itself directly affected by the consequences
of the EU regulation. For example, the company might use local/regional
banks for only 10% of its payments, but the resources absorbed in resolving
issues over charge backs and STP definitions associated with these could
easily outweigh the resources required for managing the other 90% sent
via its network bank as domestic payments.
There is also the consideration that this is not a static situation,
so the company will need to monitor the local/regional banks’ interpretation
of the regulation and their consequent charging on an ongoing basis. As
a result, it is important for companies to consider their exposure to
the effects of the EU regulation now, rather than assuming (in many cases
incorrectly) that it will benefit them.
Q. It sounds as if a piece of legislation that was expected
to affect only banks will actually have as much effect on corporates?
A. It certainly has important implications for corporates, but
for local/regional banks in particular this legislation is a major headache,
as their cross border transaction volumes will be too small to justify
the upheaval and cost of compliance. For example, some banks that have
decided to outsource this part of their business have only been making
100,000 cross border payments a year out of a total of several million
payments. Though that is only a very small percentage of their total payment
volume, the aggravation (as outlined above for corporates) is completely
disproportionate. Almost inevitably they will waste a considerable amount
of their time disputing charges with other banks involved in their clients’
cross border transactions or incurring these charge backs.
At the same time there are serious implications for customer service,
such as whether their clients will accept charge backs being passed on
to them, and the resolution of issues relating to short payments for fees
deducted in transit by other banks. As a result, these local/regional
banks have a strong incentive to outsource their cross border payments
to network banks that have sophisticated routing methodologies and can
therefore ensure that these payments are sent in the most efficient manner
possible as domestic payments.