Pressure grows on banks over euro-zone fees

Date: 05/10/00

By Renée Cordes

MOST of the countries which joined the single currency club at the start did so expecting that it would become easier for their citizens to transfer money to banks in other euro-zone countries and withdraw cash from dispensers while travelling abroad.

But nearly two-thirds of the way from the birth of the euro to the arrival of the actual notes and coins, these widely promised benefits of a single financial market are still a long way off.

A European Commission study published earlier this year revealed that many banks in the 11-country single-currency area collect fees from both the senders and recipients of cross-border transfers - a practice known as 'double charging' - in breach of a Union law which explicitly states that banks can only charge the party sending the money.

A number of banks are also under investigation for alleged collusion. EU competition officials took the first step towards legal proceedings against 120 banks and banking associations this summer, accusing them of collectively setting charges for changing currencies in the euro-zone.

Most of the banks were given until this month to respond to these allegations, and many will also have the opportunity to defend themselves in public at a meeting organised by the Commission's internal market department in November.

But by the time the Union executive delivers a final verdict on whether the banks are guilty of collusion and, if so, what level of fines should be imposed and what action must be taken to guarantee customers are treated fairly in future, it may well be too late to make a difference. After all, once the euro notes and coins enter into circulation in January 2002, customers within the single currency area will no longer need to change their money.

After more than a year of evidence-gathering, the banks are coming under pressure to decrease the costs of euro-zone financial transfers swiftly . "We would like to see a commitment to have cheap and secure cross-border payments by 1 January 2002," said Dominique Forest of the European consumer lobby group BEUC. "Anything afterwards will call into question the whole credibility of the euro."

But critics say a lot of the damage has already been done. Soon after the advent of the euro last year, the Commission began receiving complaints that banks in several countries had collectively fixed charges for exchanging currencies in the 11 euro-zone countries.

A month later, competition officials carried out raids on banks in Germany, France, Italy and Spain, followed by more in the Netherlands, Belgium and Ireland in October. This summer, the Commission disclosed that it had found evidence that a long list of banks and banking associations in Belgium, Finland, Portugal and Ireland had violated Union competition rules.

The EU executive was immediately criticised by consumer groups and MEPs, who argued that competition watchdogs had taken far too long to act. But Commission officials said afterwards that they wanted to be sure they had enough evidence before setting out their case against the banks. The Commission has also hinted that other banking groups could face action.

If found guilty, they face fines calculated according to the seriousness and duration of the infringement. "Banks are free to set the level of charges individually for exchanging currencies," said Competition Commissioner Mario Monti in July. "But they should be under no illusion about the Commission's determination to severely punish any agreements to fix those charges. Consumers must be able to shop around for the best price."

The investigation carried out by his officials found that banks may have entered into price-fixing agreements to increase exchange fees or to control their decrease - a fall which the EU executive says should have been a "natural consequence" of locking the rates of euro-zone currencies.

But although the elimination of exchange-rate risk should have resulted in lower fees, financial institutions claim they had to find other ways to recover the cost of cross-border payments, especially for small amounts which are less economical for banks to process than larger transfers.

Wilfried Wilms of the European Banking Federation refused to discuss the pending cases. However, he insists that banks have no choice but to discuss fees because those sending credit transfers often do not know how much the recipient bank will charge. "The system is wrong because the sending bank should be able to know in advance the charges of the beneficiary bank," he said.

He also points out that it is still common for smaller institutions to have to pay larger banks to handle the workload involved in currency transfers, leaving them with no choice but to come to some sort of arrangement over fees.

In the long run, argues Wilms, banks need to agree a standard sector-wide fee for cross-border exchanges, which account for just 2% of all credit transfers and are therefore costlier than domestic transactions which benefit from economies of scale. Banks are also seeking to create an automated system for processing cross-border transfers, although this will require huge investments in infrastructure and technology.

In addition, Wilms claims the Commission itself has encouraged banks to collaborate, issuing a notice several years ago which urged financial institutions to agree a standard 'interbank' fee for transferring money, although with the caveat that they should not take advantage of this to over-charge customers.

This has now come back to haunt the banks, which are also under pressure from the European Central Bank to act. The ECB has given the sector until the middle of next year to implement new standards for processing cross-border payments automatically. In a report issued last month, the ECB also endorsed the creation of a multilateral interbank exchange fee (MIF), a common charge for cross-border transactions being developed by the sector. In other words, banks would have to sign up to a guaranteed service level and ensure transparent and attractive prices.

An ECB spokesman conceded that this might also be seen as a threat to competition, given that the Commission is investigating banks for collaborating on fees. But the central bank is confident that such an arrangement could be exempted from normal competition rules, provided that customers were able to reap the benefits and there was a direct link between customer prices and the fee charged - something which is not a common practice today. "In order to prevent them from becoming a barrier to competition, it is crucial that the rationale for and the level of such MIFs are reviewed regularly," said the spokesman.

The ECB has also called on the sector to begin informing private and corporate customers of the new standards. But it was the Commission which perhaps did the most to encourage the public to scrutinise their bank statements when its officials launched their raids. Now customers are waiting to see whether the institution can act to ensure they get a fair deal before it is too late.