Payments in the European Union. Cashless wanderlust

Date: 20/05/06

A small step towards seamless cross-border banking

GERMAN tourists in South Tyrol or on the Costa Azul will soon be carrying less cash in their porte-monnaies. Under an agreement this week with Germany's main banking associations, Italian and Portuguese banks will accept German debit cards at cash machines and points of sale, starting next year.

This is a small but significant step towards the European Commission's goal of making payments between European Union countries as easy as they are within them--an idea known as the single European payments area, or SEPA. It will help not only tourists but also shopkeepers, who will have to pay intermediary banks as little as one-tenth of what they now do for credit-card transactions and half of today's fees for Mastercard's pan-European Maestro debit card.

The banks' decision will thus cost them revenue, at least in the short run. They are also taking a step away not only from Maestro but also from a pan-European payment method being touted by Visa, Mastercard's rival credit-card association.

The commission wants cross-border payments to be seamless by January 2008. That can be done reasonably cheaply by making national systems interoperable: in a study published this week, Boston Consulting Group (BCG) puts the likely cost to banks at euro500m ($640m). Three years after that, however, is the deadline for a single European payments mechanism. Everyone agrees that this will be far harder and cost much more: euro5 billion, reckons BCG. The commission used to insist that a pan-European scheme must replace national systems by the end of 2010. Now it speaks of a gradual "market-driven migration".

BCG's study says that the banks' best tactic would be to lobby for a delay to SEPA's 2010 deadline. This is because it makes sense to fit the replacement of cards, payment infrastructure and related elements in with the banks' own investment cycles. These do not necessarily match the commission's timetable.

Even the commission admits that individual banks have a case when they argue against investing so much money for the small proportion of their customers who make cross-border payments. Nevertheless, it is convinced that the spending makes sense for the EU as a whole; and its direction is set. Earlier this month the commission and the European Central Bank (ECB) gave warning, in a joint statement, that the level of service by the end of 2010 would have to be "at least as good as existing national instruments, but preferably better."

The German/Italian/Portuguese project is supported by the ECB, which has tended to favour a market-driven approach rather than one governed by decree from Brussels. Other countries are expected to join, although the French banks may go their own way. It is no big surprise that the Germans, Europe's most eager tourist nation, were first to sling their towels over the sunbeds.

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