Evalation of regulatory proposal on Bank Accounts by Simon Lelieveldt
Dear business and Linked-in contacts,
In this e-mail I provide you with a first analysis on the proposed Bank Account Directive. What I found quite interesting is the strange obligation for non-bank payment operators to be able to offer direct debits and account services to former bank-account customers.
Directive on Bank Accounts: why the rush?
Two weeks ago, the European Commission announced a proposal for a Directive on Bank Accounts that covers the following areas:
- comparability of bank account fees: the aim is to make it easier for consumers to compare the fees charged for bank accounts by banks and other payment service providers in the EU;
- bank account switching: the purpose is to establish a simple and quick procedure for consumers who wish to change from their current bank account to a different one, with the same or a different bank or other financial institution;
- universal access to bank accounts: the aim is to allow all EU consumers, irrespective of their country of residence or financial situation, to open a payment account, which allows them to perform essential operations.
With the proposal the Commission continues its standard policy towards the financial sector: ride the road of regulation as long as the sector is still unpopular with the public. It has done so with regulation 2560 (on fees) which had to motivate banks to speed up intercountry payment processing in Europe and it has in a similar vein used the regulatory process for the Payment Services Directive. Repeatedly we see the banking sector respond with initiatives to improve operations and just as repeatedly we see the European Commission and Parliament find that this was not sufficient and move forward with regulation.
While we should be open to possibility that there might be a need for further regulation, it is quite telling that the Commission wishes to move forward. Without much ado it finds the disclosure requirements of the Payment Services Directive insufficient and thus proposes comparative websites on fees for banking services. While the research results of the evaluation of the PSD are ready, the Commission postpones their publication in order to first make this bank account directive move forward. In doing so it not only moving too fast. The Commission also makes a major analytical misstake: whereas bank account services may be a high interest factor to some civil servants, it is a low-interest product for the consumers in Europe.
The amount of money that can effectively be earned by finding a cheaper alternative in the banking and payments market is far lower than the amount of money that can be earned by shopping more smartly for important bigger-ticket items such as mobile phones, subscriptions, tablets etcetera. And thus, the consumer is wise enough to only switch or add bank accounts on switching moments as the move to a different house, a wedding or the birth of children, getting kids.
Turning a blind eye to the non-credit-institutions
At face value, the goals of the Commission with this Directive seem laudable. But what strikes me most is the degree to which the Commission has done its regulatory homework. Quite some time ago, there were EU-initiaves and rules on 'better regulation', which meant that a solid cost-benefit analysis would be required by the Commission before proceeding with further regulation. In the process of discussing switching cost, the Commission hoewever more often than not 'forgot' those rules.
With the current proposal, the impact assessment looks quite solid, but it tells an interesting story. The Commission (or perhaps: the occassional intern) had to re-write the proposal before it could pass the impact assessment board. Much of that rewrite, must have had to do with the narrow-minded approach of the Commission to only focus on credit-institutions. The Commission turned a blind eye as to the rest of the market (payment service providers, e-money issuers) and leaves the impact on this market undiscussed, while still formally obliging them to be able to offer similar services (direct debits) as credit-institutions. This seems an analytical and legal error to me.
Another flaw in the proposal is the fast forward reasoning towards the norm that unless everyone in Europe switches bank accounts quite a lot, the market is evidently failing and thus regulation is necessary. Given that the analysis misses out on the most relevant parts of the newly formed market of alternative payment providers, no strong conclusions may be drawn from the tentative data that the Commission provides. In addition it ignores the reality that payments are a low interest product (see also the presentation here that discusses which assumptions would lead to which regulatory preference).
A Directive is certainly the wrong tool
Seeing the current state of discussions (a directive proposal) it seems hard to imagine that the plan would be withdrawn or modified seriously. Still, it would be useful if the Commission had done their homework a bit better and at least had chosen a proper regulatory tool. If indeed the provision of bank accounts accross the EU is a concern, why not choose Universal Services Obligation (USO) as the regulatory mechanism, that is most suited?
We used this mechanism before in Europe, to designate the amount of public telephone's that had to be available to the public. And setting it up for banking isn't hard to do (read this Tilburg University Report) but it does require one thing: a better cost/benefit analysis: Furthermore, designating all banks to take care of the product dimension of a Universal Services Obligation (e.g., consisting of only a basic bank account service) may be the most effective way of implementing it, provided that the USO has a minimal scope.
The report also states that with a Universal Services Obligation, one needs to determine if it is nesessary for each geographical area or not: However, with regard to the geographical dimension of a USO, designating all banks leads to unnecessary cost duplication, so that it is worthwhile to consider other options, such as self-regulation and a franchising mechanism in combination with an auction. ... . By interfering in these processes without having made it clear in advance that there is a problem, such developments may be distorted; hence the importance of carrying out a cost-benefit analysis as a starting point.
Costly and ineffective proposal
I think the citizens of Europe would most appreciate a goverment body that only regulates when the facts are evident and the tools of regulation are properly geared to the problem at hand. At this point in time, with this Bank Account Directive, we are not there yet. It appears as if we are heading for an emotion-based, cost-increasing all-in Eu-wide regulation, which underlying problems (if any) could have been solved much cheaper and easier by at least considering the market facts first and then choosing more appropriate regulatory tools.