The euro and cross-border payments

Removing barriers to trade has been one of the founding principles of the European Union. Indeed, it is still today one of the major pillars of Community activity and policy making.

With the imminent adoption of the euro as our national currency, the notion of cross-border payments and their associated charges is garnering the attention of all those who legitimately expect the single currency to deliver tangible benefits and financial rewards.

European legislation has been increasingly coming to the aid of the retailer and consumer. Most importantly, it establishes the principle of equal charges between domestic and cross-border payments in euro. In principle, therefore, when it comes to cash withdrawals or payments, one should not expect differences in the charges applied simply because the payment crosses a border. This applies to a maximum of transaction value of €50,000

It is crucial to emphasise that this does not mean that no charges may be imposed at all. EU legislation does not set prices; rather it establishes the principle of non-discrimination whereby charges imposed on domestic and cross-border payments should not differ. The very fact that a payment crosses a border should not provide a reason for a different charge to be imposed.

One may simply counter argue that banks will react to this by increasing their charges for domestic transactions but it is also true that an analysis of how European banks reacted to this legislation shows that most of them did not increase their domestic charges but, rather, invested in new systems that facilitate cross-border payments to reduce their costs. An important aspect of European legislation is that banks are obliged to inform their clients in advance of tariff changes and, consequently, customers are given the opportunity to react by changing their bank, thus increasing competition between banks.

The same applies for Maltese bank customers withdrawing euros from cash machines abroad in the eurozone and for card payments in retail outlets abroad. A Maltese consumer withdrawing euros with his Bank X debit card from a cash point in, for example, France should pay the same charges as those applying for withdrawing euros with his Bank X debit card from a Bank Y ATM in Malta. The charges will be debited to one's account in Malta. If there are no costs for withdrawing cash from a cash point in Malta, than the bank is obliged not to impose any charges from withdrawing from a cash point in the eurozone. The same applies for foreign tourists coming to Malta; when withdrawing cash or paying in retail outlets they will be charged the same rates as if they were affecting the transaction in their home country.

Where cheque payments are involved European legislation provides a completely different scenario. Since they are considered as a "bureaucratic means of payment" that is rapidly decreasing in use in other European countries (in Scandinavia they are now virtually unheard of), their usage is further discouraged through European legislation. It is evident that, by their nature, cheques are less process-efficient than electronic transfers (because they require manual activity) and, as a result, they are kept out of European provisions concerning equal charging of cross-border payments.

All this forms only a part of the European drive towards a complete integration of European financial markets. This will be known as the Single Euro Payments Area (SEPA) and involves the creation of a zone in which all electronic euro transfers and payments are considered as domestic. The development of common financial instruments, procedures and standards, and, more importantly, infrastructure, shall bring around a significant improvement in the efficiency of international transfers and, consequently, allow economies of scale. European Union research shows that costs associated with such transfers account between two and three per cent of total European GDP.

SEPA is expected to be completed in less than three years' time. However, by next year the eurozone will witness the introduction of pan-European payment instruments for credit transfers and debit cards, in addition to the national ones. Consequently, more benefits for eurozone countries are just round the corner.

Malta will join SEPA on January 1, 2008.

Mr Camilleri is NECC executive director.