EU’s Proposal on Cross-Border Payments Regulation Explained

Tuesday, January 22nd, 2019

Payments systems rarely get the credit they deserve. Better payment systems play a bigger part in people’s everyday lives than many could imagine or stop to think about. They offer security, speed, features, benefits, network coverage and protection. In 2016 alone, there was an overwhelming 59.6 billion card payments, 30.6 billion credit transfers and 24.8 billion debit transfers in the EU.

Always seeking to improve wherever possible, the European Commission proposed a new regulation in March 2018. Essentially, this new regulation would require better disclosure of credit card foreign exchange fees and that charges on intra-EU cross-border euro and domestic non-euro payments be equalized. The aim behind this intervention (repeatedly) by the EU is to improve payments markets and further economic integration.

In the opinion of leaders, the European Commission’s proposal for enhanced disclosure of credit card foreign exchange costs is both pro-market and pro-consumer – and long overdue. The main issue at hand is the service called Dynamic Currency Conversion (DCC). When abroad, travelers paying with a card are routinely offered the option by merchants and ATMs to pay in their native currency, rather than the local currency.

Unfortunately, the temptation to fleece one-time customers, who are none-the-wiser, is almost irresistible for many merchants and ATMs workers. The 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. However, few consumers are aware that they have a choice.

Enormously profitable for merchants and payment processors, consumers have no idea they’re being ripped off. On the other hand, in not offering DCC, processors would forego profits and be competitively disadvantaged. It would also mean merchants leaving money on the table. Given this, DCC use is exploding.

Between 2013 and 2017, the number and value of DCC transactions within the EU leaped 128 percent and 65 percent, respectively. Until now, regulators worldwide have been uninterested in DCC. If the EU wants to enhance competition and consumer choice for cross-border payments regulation, it should consider requiring every bank to offer cross-border euro payments to offer consumers and merchants at least two choices.

Experts are calling for the EU to mandate full DCC disclosure sooner. They say it should also harness market forces, rather than price to improve the intra-EU cross-border payments market. After all, in the end, consumers are the ones affected with the way the system works right now.

As American Supreme Court Justice Louis Brandeis observed, “Sunlight is the best disinfectant.” The belief is that once merchants and ATMs offering DCC are required to disclose the cardholders’ costs side-by-side and the merchant’s currencies before they choose how to pay, the market really work. Only then can consumers really make informed decisions.

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