The impact of CBPR2 on the payment industry – Part 1: The equality of charges principle

On 19 March 2019, the European Parliament and Council adopted Regulation 2019/518 amending Regulation 924/2009 (the Current Regulation) as regards certain charges on cross-border payments in the Union and currency conversion charges. Regulation 2019/518 came into force on 18 April 2019 but its provisions will progressively become applicable between 15 December 2019 and 19 April 2021 – this consolidated text being referred to below as "CBPR2".

Regulation 2019/518 was the subject of intense discussions between the Commission, the Council and the European Parliament and the final text has been significantly changed since the original Commission’s proposal in March 2018[1].

Regulation 2019/518 essentially introduces two amendments, consisting in (i) the extension of the equality of charges principle in non-euro Member States and (ii) new rules on the transparency of charges regarding currency conversions for payments at the point of sale (“POS“) or at the automated teller machines (“ATM“), the so-called ”’dynamic currency conversion” services (“DCC“), as well as for credit transfers.

Regulation 2019/518 will a have an important impact on the industry, by limiting revenues of payment service providers and forcing them to implement important changes in their processes and IT systems.

This contribution analyses the first amendment brought by Regulation 2019/518, i.e. the changes to the equality of charges rule.

How will the amended equality of charges rule impact the payment industry? 

Under the Current Regulation, charges levied by payment service providers (“PSPs“) for cross-border payments (between two EU Member States) denominated in the euro must be the same as those for national payments of the same value and involving the same currency. In practice, under the Current Regulation and even though it is not stated as such in its territorial scope of application, only payments initiated in Member States of the eurozone are concerned since, in the non-eurozone, the benchmarking payment transactions (national payments in the same currency, i.e. in euro) do not exist. For those countries, the possibility is left to “’opt in”, which has only been done by Sweden (Romania also notified the Commission of its decision to opt-in. However, it appears that the national implementing regulation has not yet been passed and that the rule is not applied in practice[2]).

Under CBPR2, charges levied by PSPs for cross-border payments denominated in the euro will have to be the same as those for national payments of the same value in the national currency of the Member State in which the PSP is located (which may either be euros or another currency). By replacing the reference to “national payments in the same currency”’ by “national payments of the same value in the national currency”’, in practice lifting the practical barrier of the absence of benchmarking national payment transactions in the Current Regulation, Regulation 2019/518 extends the equality of charge rule to the non-eurozone.

In practice, the equality of charges rule under CBRP2 will apply as follows:

(a) To which payment transactions does the equality of charges rule apply?

The scope of the equality of charges rule remains unchanged, and requires that the following cumulative conditions be met:

(i) The payment transaction must be in “euros” – payments in other currencies (including in currencies of non-euro Member States) are not affected, unless the Member State concerned opted in.

(ii) The payment transaction must be “cross-border“‘ within the EU, i.e. be a payment where the payer’s PSP and the payee’s PSP are located in two different Member States of the European Union – national payments and payments outside the EU are therefore beyond the scope.

(iii) There are no restrictions as to the type of payment transaction (defined substantially as under PSD2) concerned, except that it must be “electronically processed“. According to Recital (6) of the Current Regulation, this concept must be broadly construed and includes: “(…) payments initiated or terminated on paper or in cash, which are processed electronically in the course of the payment execution chain, excluding cheques, (…)”.

(b) To which charges does the equality of charges rule apply?

The concept of “charges” also remains generally unchanged, and broadly includes (for the purposes of the equality of charges rule) “any amount levied on a payment service user by a payment service provider that is directly or indirectly linked to a payment transaction (…)”.

However, as under the Current Regulation, the equality of charges rule does not apply to charges for currency conversion. This leaves room for PSPs to price differently a transaction where a currency conversion is involved provided that these charges are in fact related to the conversion service.

(c) How should the amount on which the charges subject to the equality of charges rule be determined?

Under CBPR2, PSPs must align the charges for (EU) cross-border payments in euros on the charges levied by the PSP for “corresponding national payments of the same value in the national currency”’ of the “Member State in which the payment service provider of the payment service user is located”.

To determine which payment transactions must be used as benchmarks, PSPs will have to determine:

(i) Which payment transactions “correspond”, in their nature, to the ones concerned. Besides the value of the transaction, the corresponding national payment must have similar characteristics to the cross-border payment so that categories of payments may be differentiated on the basis of inter alia the channel used to initiate, execute and terminate a payment, the degree of automation, the customer status, or the urgency (or speed of execution) of the payment.

(ii) Which Member State should be used as benchmark: contrary to what was first proposed by the European Commission (which wanted to align the charges to those for national payments in the Member State of the payment service user) PSPs are required to align the charges on those levied on corresponding payment transactions in the Member State where they are located. Regulation 2019/518 does not contain any additional explanation on how to determine exactly where a PSP provides its services to the payment service user. In our opinion, this must be construed as the Member State where the PSP that is providing the payment service is established (this would typically be the location of the payer’s PSP, but it would also apply to the payee’s PSP where it levies a charge for receiving payments). As a consequence, a PSP providing services from multiple places in the EU may still operate charge differentiation between Member States depending on the places from which it provides its services.

What’s next – Will the EU stop at euro transactions?

As reports show, there were a lot discussions at the European Commission and Parliament as to whether the equality of charges principle should be extended to other EU currencies. If, for now, this option has been left out, it seems to be only so for reasons linked to feasibility and costs – so that a future iteration of CBPR2 cannot be excluded.

This article was originally published in the May 2019 edition of Osborne Clarke’s EPSM Legal Research Newsletter.

[1] The initial Commission’s proposal has been heavily criticised by the payment industry. See the European Payment Institutions Federation’s position on the Commission’s proposal.

[2] See the Impact Assessment performed by the Commission on the Current Regulation, p. 87.