Non-STP Fees - What's Really Happening and Why?
What’s really happening with non- STP1 fees? Further to EC Regulation 2560/2001, the European Payments Council got together to prescribe the conditions under which one could achieve a euro payment in the EU without the deduction of charges and to establish new pan-European inter-bank charging principles. The document that came out of these discussions is called the Interbank Convention on Payments (“ICP”). Contained within the ICP was a key principle, the full effects of which were probably not remotely recognised at the time. An appropriate extract from Principle 3 of the ICP is quoted below:
“If the MT103 or MT102 message fully complies with the STP definition as stated in Annex 1 for MT103+, the payment order should be considered Regulation compliant from a customer point of view and not lead to additional charges for the beneficiary or ordering customer. The intermediary or beneficiary’s bank receiving such a payment will be entitled to charge the originating bank for the additional work resulting from the receipt of a non-STP basic credit transfer, as of 1st January 2004.“
Under what circumstances can a bank effect a charge back to the remitting bank under the ICP? Actually the ICP is surprisingly clear in this respect. If the payment is denoted charges “SHA”2 and is covered by Regulation 2560/2001, then it may be subject to an interbank charge if:
The idea behind this charging approach was that if one (or more) of the above occurred, the beneficiary bank would most likely have to repair the receipt in order to process it. Rather than the beneficiary bank charging the beneficiary customer for that effort, the beneficiary bank could charge the remitting bank instead. It is for this reason that these charges are generally referred to as non-STP fees (in the context of the ICP). In practice, a payment may not contain an IBAN (for example, the payment may contain the normal domestic account number) but it is perfectly possible for the beneficiary bank to process the payment on a straight through basis. However, the beneficiary bank is still able to, and in many cases does, charge a non-STP charge in cases where it is able to process on an STP basis. This leads to a vicious circle. If one bank starts to apply a charge even where they can process on an STP basis, then other banks also start to charge on a similar basis in order to cover the costs extracted by other banks. Therefore, de facto, the ICP has lead to interbank charges being applied where payments simply fail the ICP STP criteria, irrespective of whether they were processed STP or not. In turn, this means banks must charge their customers in a similar way.
So, the effect of Principle 3 of the ICP has been to create an unregulated interbank charges industry! Of course ultimately these interbank charges must be, directly or indirectly, being applied back to the initiating customer. The word “unregulated” is a deliberate choice. The ICP does not prescribe the fee which a bank may charge back to a remitting bank for failing the STP criteria. It does not prescribe how (e.g. via written invoice, detailed spreadsheet, SWIFT message with agreed formatted fields) banks should claim these fees. It does not prescribe how often (other than “periodically”) such fees should be claimed. It does not prescribe what information should be contained in such claims, in order that they may be validated by the bank being claimed upon. The result is, therefore, not simply that the amount of interbank fees being charged in the EEA has increased dramatically, but also that the amount of manual effort required of banks within the EEA to process these claims (and hold bilateral negotiations), has increased dramatically! One could argue that one shouldn’t simply be passing on the cost of these fees received to the initiating customers but also the cost of processing and settling these fees. One can only assume that this was not the intention of the EU or the EPC.
The ICP conferred the right (the term “right” is used loosely since the ICP is ultimately a convention and not strictly legally binding) to claim for these non-STP fees from 1/1/2004. At first, only a few banks took advantage of this right. Then the vicious spiralling circle took effect. After all, if a bank is being charged these fees, why shouldn’t it also charge under the same circumstances, in fact, it would not be serving its shareholders by not doing so. The volume of these non-STP charges increased through 2004 and continues to increase.
And what of the size of these charges? As mentioned earlier in this article, the ICP does not prescribe the size of repair fee that can be claimed. In fact, as an industry body, it would probably have great difficulty stepping into the realms of pricing without encountering antitrust/competitive issues. The result has been quite a range of charges. Anecdotal evidence suggests the average charges seen are in excess of €7.50.
Still at least the ICP is pretty clear, right? It can’t be used to justify interbank repair fees for payments in other currencies, or in euro amounts not included EU Regulation 2560/2001? Well, that should be the case. The ICP is exceptionally clear in this respect. It applies to euro payments only. Nevertheless that has not stopped some banks generating invoices for non-STP fees related to payment in other currencies or for euro payments greater than €12,500. There is no contractual basis for such fees, and it is important that this practice be highlighted and stopped. If action is not taken soon, the quagmire that is non-STP fees related to the ICP will expand to all currencies and all amounts, and to the banking industry globally. Action needs taking now.
Philosophically, the idea of charging back to the remitting bank for a instruction that does not include appropriate details to enable STP processing is a good idea. After all, it isn’t the beneficiary’s or the beneficiary’s bank’s fault that a receipt is received without the appropriate information. So why should either accept the cost with such a receipt? The answer is that they could (and until the ICP, did) accept the cost, and if the beneficiary wants to take action with the ordering party and request that they provide better format instructions to their bank in future, then they can do so. After all, the payment, and the underlying contractual relationship is between the ordering party and the beneficiary. The other alternative is to create the monster which is interbank non-STP fees. This only serves to increase banking cost, and ultimately, of course, customer cost. It will be difficult to improve upon on how interbank non-STP fees are handled, without the creation of another guideline/convention that specifically addresses this issue. At a minimum, this would need to cover:
Without the above, we will continue to see an increase in interbank charges, especially from 1/1/06 when EU Regulation 2560/2001, and therefore the ICP, is raised to cover transactions for €50,000 and less. We will see more banks, starting to link payment of invalid non-STP charges to reciprocity. Thus in discussions with respect to non-STP fees for currencies other than euro, banks sometimes start to mention that they may be likely to consider moving existing business placed with the bank from which they are claiming, if their claims are not met. We will also see the continuation of the dangerous trend to start trying to claim non-STP fees from banks outside the EEA.
This article was written by an external contributor whose name and affiliation has been withheld on request.
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1Non-STP as defined by the Interbank Convention on Payments
2“SHA” is a defined SWIFT codeword meaning, “The transaction charges on the Sender’s side are to be borne by the ordering customer and the transaction charges on the Receiver’s side are to be borne by the beneficiary customer.”