To guarantee bank accounts accessibility and fairness to all EU citizens, the European Parliament and Council have decided on a new basic payment account rule. As the directive is set to achieve higher standards and increase competition in retail banking, Valentina Romeo examines the main features of the account and what lies behind its implementation
The World Bank estimated that about 58m EU consumers over the age of 15 do not have a payment account. It also said approximately 25m of them would like to open one.
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This means that a large number of consumers in Europe do not currently participate in the internal market for financial services, limiting the development and competitiveness of many retail banks.
The revised Payment Service Directive, the new initiative proposed and recently approved by the EU Parliament and Council, says anyone legally residing in the EU should have the right to open a basic payment account. Furthermore, this right should not be denied on grounds of nationality or place of residence, as well as regarding people’s personal financial status.
"In many member states there are no requirements for banks to provide basic bank accounts and so the European Commission brought forward this initiative already last year to deal with this problem," Syed Kamall, London MEP and Leader of the Conservatives in the European Parliament tells RBI.
Though sounding positive on the initiative, Kamall argues: "Although supportive of the measures, I have often wondered if it was appropriate for the EU to be mandating this, given that this is clearly a social policy issue, over which the EU has no jurisdiction. I was also extremely concerned about how this would affect the system in the UK, where 9m consumers already have basic bank accounts, but I’m confident that the final deal will protect it."
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By GlobalDataWhatever the scenarios may look like in one country or the other, the solution offered by the new directive has a clear aim. Still, the lack of transparency and comparability of charges and the difficulty of switching bank accounts continue to figure as a barrier to a fully integrated internal market for retail banking, the Parliament warns.
In fact, a recent survey conducted by Eurobarometer in 2012 showed that only 3% of the respondents declared having opened a payment account cross-border. With the new agreed rules, fees for all payment accounts should be transparent and comparable and it should be easier to switch to another payment account if offering better terms.
Kamall stresses on the promptness of the Parliament to push ahead the decision and come to its final stages and approval on 20 March 2014. "Negotiations in Parliament moved very quickly, over a period of about 6 months. Given that most financial services legislations take years on average to make it through the European institutions, this must be some sort of record, reflecting the desire of all stakeholders to get it done before the elections," he says.
Although the new rules have seen official approval recently, already back in October 2012, The Single Market Act II identified a legislative initiative on bank accounts in the EU as one of the twelve priority actions to generate real effects on the ground and favour the financial inclusion of EU citizens.
Before the new directive, only France, Belgium and Italy had laws in place that ensured people have access to a basic bank account.
Open access
Surveys and complaints from consumers demonstrate that many EU citizens have often faced difficulties in opening a payment account due to their lack of a permanent address in the member state. According the Parliament, this problem affected a large number of EU consumers living in another country in the Union (12.3m people in 2010).
Parliament insisted that basic payment accounts must be offered by all credit institutions or by a sufficient number of them to guarantee access for all consumers in any given EU country providing competitive offers.
Moreover, in regard to this, the fees charged by credit institutions for the offer of such services must be ‘reasonable’. To encourage unbanked vulnerable consumers to participate in the market, the directive also says payment accounts with basic features should be free of charge.
While fully respecting the fundamental rights of customers, EU member states might only require them to show a genuine interest in opening the bank account, without making such a request too difficult or burdensome.
The basic account
The Article 16 of the directive describes what the basic bank account looks like.
First of all, a basic payment account will enable customers to pay in and withdraw cash and execute payment transactions within the EU. However, it will be up to the member states to decide that such accounts should not include overdraft facilities, or to limit the amount of such overdraft facilities. Customers will be able to execute an unlimited number of such operations, either for no fee or for a reasonable fee.
Moreover, the directive says banks should provide assistance to the consumer, including providing a list of standing orders, transferring any positive balance remaining on the account to the new account and closing the account. Banks will be also obliged to refund, without delay, any financial losses resulting directly from faults in the switching process.
Kamall says: "Most UK banks participate at huge cost, so the directive probably won’t have a huge impact on the UK experience. Many other member states have systems in place as well, such as France, Portugal and Germany. The biggest changes will probably take place in newer member states, whose financial sectors are less developed."
Clarity and transparency
Recent surveys say consumers throughout Europe were dissuaded from purchasing retail financial products cross-border by unclear information (21%), lack of clarity of the rights available to the consumer (18%) or the process being too complicated (15%).
According to the directive, anyone who opens a payment account should be able to understand its fees and interests rates and easily compare account offers across the EU.
Also, in each EU member state there should be at least one independent website comparing the fees charged by banks.
Consumers will also be accessing transparent information regarding the network of branches and ATMs offered by banks. "This feature aims at promoting competition of quality, instead of a competition merely focused on prices favouring internet banking over local bank," the Commission states.
Switching
As said, research showed that EU consumers found it difficult to compare offers and prices for payment accounts from different payment service providers. Even when comparison is possible, the process for switching from their existing payment account to a different one is often complex and unreliable.
The account switching has been the forefront debate over the last months, especially in the UK. However, the UK has already gone further, with its speedier seven working-day switching plan.
"The Commission has been very open about its intention to introduce a UK-style switching elsewhere in the EU via this directive. The UK has the most developed retail banking market in Europe and so it’s unsurprising that a lot of the best parts of this system are regarded as potential models for the rest of the EU," Kamall comments.
The common principles for account switching already established in 2008 by the European Banking Industry Committee provided a model mechanism for switching between bank accounts. However, given their non-binding nature, these common principles have been applied in an inconsistent manner throughout the Union and with ineffective results. Moreover, those rules only addressed payment account switching at national level and did not involve cross-border switching.
Also, it comes quite automatic to think about the new directive and how it is actually aligned with SEPA, as it will also encourage and facilitate the cross-border payment exchange.
Kamall’s view: "As SEPA develops further, it makes less sense to have a cross-border switching service, which would be a technical nightmare to introduce. I hope the Commission will consider deepening SEPA further now that the proposal to introduce cross-border switching has been removed."
Controversy?
Unsurprisingly, not everyone has given the new rules a big thumbs-up.
"In France, numerous measures are already in place to facilitate comparability of banking fees, banking mobility and access to a bank account," highlighted the Banking Federation of France at the presentation of the banking directive in May 2013. The organisation denounces "the establishment of a legal framework which would cause more problems without ameliorating consumer service or meeting previously expressed concerns."
Although the French banking federation records 99% bank account penetration rates, the Commission highlights that there are a lot of disparities among countries in the EU. In fact, the Commission says almost half of the population in Romania and Bulgaria do not have an account at all.
However, the result of a study led by a French consumer association shows another interesting picture. It says over "40% of French people had trouble changing bank account due to simple errors in the system" and that "31% of consumers did not finalise their account change."
Before and during the implementation of the new rules, there were also other concerns about a standardised basic bank account. In fact, defining financial inclusion as consumers just having access to a bank account underestimates the actual impact of exclusion. As The Financial Inclusion Centre and the Community Development Finance Association (CDFA) say, ‘simply measuring the number of accounts opened tells nothing about how these accounts are being used.’
They also state: "While self-regulation and voluntary initiatives can be effective in certain markets, we do not believe that is sufficient to ensure that the most vulnerable consumers have access to a basic bank account."
Indeed, the organisations point out that a self-regulation approach in some countries, such as the UK, has not been successful in tackling financial exclusion.
"In the UK the government has relied too much on self-regulation and delegated much of the responsibility for ensuring vulnerable consumers have access to a basic bank account to the trade associations," CDFA says.
Kamall is strongly convinced that the new rules should have remained on a voluntary basis.
"The UK has had in place one of the most successful basic bank account agreements in the EU since 2003. The problem has been convincing European regulators and politicians that the system should remain voluntary and not turned in legislation. There were concerns about whether a directive could be transposed into member state law via a non legislative instrument, so it was more a technical problem. But I am confident that our system will remain untouched.
"It is in no one’s interest to undermine a functioning system."
The new rules could significantly affect the payments market, especially in terms of competition between new entrants and non-EU players, as the intention of the Commission is to clearly cap the level of fees and create a level playing field.
Kamall concludes saying that the basic bank account element of the directive will not change much, as ‘the numbers aren’t big enough’.
