August 30, 2018
March, 2018 the European Commission proposed requiring better disclosure of credit-card foreign-exchange fees and that charges on intra-EU cross-border euro and domestic non-euro payments be the same. To improve payments markets and further economic integration, the EU has intervened repeatedly. Interventions may be justified and useful where there’s a market structural problem or imperfection harming consumers.
Brussels’ interventions have been highly prescriptive. It imposed payments price controls to address perceived problems, notwithstanding attendant market distortions and shortages. Payment Services Directive 2 mandated banks provide payments for free. In 2015 the EU imposed price caps on networks like Cartes Bancaires’, Mastercard’s and Visa’s interchange fees. And its March, 2018 proposal would direct that prices for cross-border euro and domestic payments in other currencies be identical.
In contrast, other regulators’ and policymakers’ interventions have been discrete and one-time fixes improving market performance. UK banks used to own the monopoly interbank payment-processing utility Vocalink. The UK Payments Systems Regulator pressured banks to divest it and required they put processing out to bid, thinking competition – particularly if banks didn’t own their processor, would improve performance. In the US Mastercard and Visa prohibited banks using their payment products from using competitors American Express and Discover. The US DOJ forced Mastercard and Visa to eliminate their bans. And, the 2010 Dodd-Frank Act mandated banks provide US merchants debit routing choice between at least two networks. These interventions tweaked rules and market structure to boost competition.
The EC’s proposal for enhanced disclosure of credit-card foreign-exchange costs is pro-market, pro-consumer, and long overdue.
When abroad travelers paying with a card are routinely offered the option by the merchants and ATMs to pay in their familiar home rather than the local currency. The service is called Dynamic Currency Conversion. Payment processors and merchants mark up the exchange rate, typically 400 to 500 basis points, but often considerably more. The Brussels-based consumer-advocacy organization BEUC reported DCC transactions at ATMs in non-euro EU countries were from 2.6% to 12% more costly than if they’d been made in local currencies. The temptation to fleece one-time customers who will be none-the-wiser is almost irresistible for many merchants and ATM owners. Cardholders’ alternative is to pay in the merchant’s currency and have payment networks like Mastercard and Visa perform the currency conversion at close to the wholesale rate. But few consumers know that’s their choice.
With DCC there are significant information asymmetries between consumers and merchants, and, therefore, competition, perversely, systemically harms consumers. DCC is enormously profitable for merchants and payment processors. Consumers have no idea they’re being ripped off. Consequently, processors not offering DCC would forego profits and be competitively disadvantaged. Merchants not offering it would leave money on the table.
Regulators worldwide haven’t been interested in DCC because it’s foreigners being fleeced and national merchants and payment processors benefiting. The supranational EU however, has eleven currencies, and millions of consumers under its jurisdiction gouged every year by DCC.
As American Supreme Court Justice Louis Brandeis observed, “Sunlight is the best disinfectant.” Once merchants and ATMs offering DCC have to disclose side-by-side the costs of cardholders paying in their home and the merchant’s currency before they choose how to pay, the market will work. Consumers will be able to make informed decisions. Few will choose to pay 5 to 10% to see payments in their native currency immediately.
The EC’s second notion of forcing equalization of fees for euro payments with domestic non-euro money–transfer fees, at first blush, sounds good for consumers and greater EU economic integration. In practice, however, it would be problematic. It would force payment systems with different costs, value and competition to price the same.
Domestic and cross-border interbank payments in most national markets are monopolies, or, best case, oligopolies. While there is an emerging patchwork of cross-border payment systems, building network critical mass and therefore commercial relevance is challenging.
If the EU wants to enhance competition and consumer choice for cross-border payments, it might require every bank offering cross-border euro payments give consumers and merchants at least two choices. That would spur competition and development of a deeper market, and leave banks and interbank-payments systems free to price and compete as they saw fit.
Bank-owned payment systems likely to be in the mix include dominant global cross-border payments network Swift, French-bank payments cooperative STET, and Italian-bank cooperative SIA/SSB. European commercial payment processors Worldline Equens and Nets support national interbank payments and could step up. Mastercard with relationships and real-time connections with most major banks planet-wide and its UK interbank payment processor Vocalink, could be a compelling player. And cryptocurrency Phenom Ripple is trying to build a cross-border payments network to rival Swift.
The EU should mandate full DCC disclosure sooner and harness market forces rather than price diktats to improve the intra-EU cross-border payments market.