As representatives of the financial services and payments sector, we would like to express our appreciation for the ongoing work on the Payment Services package (PSD3/PSR), which has the potential to greatly improve the functioning of the payments market within the EU and beyond.
More concretely, we welcome the fact that currency conversion charges, including foreign exchange (FX) rate mark-ups, are now explicitly recognised as charges that must be clearly disclosed. Due to vague language in the Payment Services Directive (PSD2) as well as the Cross-Border Payments Regulation (CBPR2), PSPs have implemented different ways of disclosing their charges for cross-border payments. They use different FX rate benchmarks, which has led to confusion among customers and a lack of comparability.
The requirement for all Payment Service Providers (PSPs) to disclose exchange rate mark-ups against a uniform benchmark rate is an important step that will promote transparency, empower consumers, and foster competition in the cross-border payments and remittances market. While the current PSR proposal is a welcome step forward, it will have a negative effect on both consumer understanding as well as on the PSP’s ability to charge effectively and in line with the real time nature of the FX market. This can be mitigated with a few small tweaks.
The European Commission’s draft proposal for a PSR suggests using central bank rates as the benchmark to calculate the mark-up and using percentages to communicate that mark-up. However, these proposals will not lead to the intended results, as:
- Central bank rates are not a practical benchmark. They are static benchmark FX rates which are only updated once every 24 hours on business days. This prevents providers from being able to price in a way that reflects the real-time FX market, as firms that use live rates would have to resort to daily pricing rather than real-time pricing. In a world where we are moving towards instant payments, introducing static central bank FX rates as a reference point feels like a step backwards. Customers also do not recognise central bank rates as a point of reference. Instead, they would usually search for a live FX rate online (for example via Google) when they want to make a comparison.
In addition, limited availability of currency pairs via any given central bank (e.g., the ECB only provides around 30 reference rates) means that providers need to scrape the data of all central banks around the world to provide a global cross-border payment service.
Central bank rates can also differ depending on the country. As a result, the estimated charges provided to the customer are not representative. Finally, the European Central Bank (ECB) has strongly disagreed with the use of their reference exchange rates for reference purposes. All of these issues disappear entirely when using an aggregated live mid-market rate.
- Disclosure of fees in percentage terms (or a mix of percentage and monetary amounts) will confuse retail consumers and introduce complicated fee structures.
To achieve better comparability, the estimated currency conversion charges of such
international transactions must be expressed in the same way and the following changes should be made to Articles 13 (1)(f) and 20 (1)(c)(v), as well as Recital 50 and any other Article in which a reference to an FX benchmark rate would be introduced:
- Enabling real time pricing and simplifying implementation: PSPs should disclose their currency conversion charges and FX mark-ups as a total cost over an aggregated live mid-market exchange rate provided by neutral entities. This is the rate that customers see when they search for an exchange rate online. Many PSPs already use independent sources to calculate and disclose their currency conversion costs. Using an aggregated mid-market exchange rate would allow consumers to accurately compare providers and enable firms to price in real-time and mitigate any currency risk.
Regulators could establish criteria for selecting trusted mid-market rate providers that would ensure their independence. This would be similar to the ECB’s proposed solution of using the WMR benchmark, which relies on a live, aggregated mid-market rate provided by Refinitiv or any other comparable provider
- Enabling comparison and competition: Mark-ups should be disclosed in monetary terms or as a ‘total fee’ instead of percentage terms. The charge should be disclosed in the payer’s currency, i.e. the currency in which the payment is initiated, as this is likely the currency that the payer is most familiar with. In the majority of cases, this will be the currency in which the account is denominated.
The European Parliament’s suggested compromise amendments for Articles 13 (1)(f) and 20 (1)(c)(v) are a step in the right direction, however, they lack a reference to neutral live FX mid-market rate providers and introduce a mixture of percentages and monetary amounts.
Within the European Parliament, we suggest adopting the following Amendments, which address the issue and introduce a live fx benchmark rate:
- Amendment 105: To adjust Recital 50 and introduce a live benchmark rate;
- Amendment 216: To introduce the mid-market rate as the benchmark rate, as well as
moving towards expressing mark-ups as a ‘monetary’ value in Article 13 (1)(f)
- Amendment 228: To introduce the mid-market rates as benchmark rate, as well as moving towards expressing mark-ups as a ‘monetary’ value in Article 20 (1)(c)(v)
The PSR should also ensure consistency across the different Articles, in which disclosures of currency conversion costs are required. For example, the provisions within Article 5 and Article 7, should be similarly consistent with the other provisions and introduce references to a live mid-market rate instead of a central bank rate benchmark.
The European Central Bank (ECB) has also expressed their disagreement with using their reference exchange rates as a benchmark. When the ECB rate was introduced within the CBPR2 (for card transactions), the ECB issued an opinion disagreeing with their reference rates being used for such purposes, as it could, among other things, incentivise some market participants to trade at the ECB reference rates. The ECB has re-confirmed their concerns for the PSR, as their rates don’t meet the necessary benchmark criteria (under IOSCO). Instead, they advocated for the use of ‘neutral and independent’ rate providers that align with international standards or comply with the EU’s Benchmark Regulation.
Consequently, we urge policymakers to move away from the central banks rates as the benchmark from which to calculate FX mark-ups, and move towards using a neutral and independent aggregated live mid-market rate as the benchmark across the PSR.
We remain at your disposal to provide additional information.
The European Fintech Association (EFA)
The Dutch Payments Association
The European Third Party Providers Association (ETPPA)
Smart Fintech Network
The International Association of Money Transfer Networks (IAMTN)
The Open Finance Association (OFA)
The Electronic Money Association (EMA)