Opinion and Editorial
Dare to be Bold: Electronic Legal Tender is an Option A SEPA legal tender model spanning both cash and electronic payments
21.04.11 By Norbert Bielefeld
Key strategic initiatives launched by European Union (EU) policy makers in the past decade including the 2010 Lisbon Agenda, the Europe 2020 Strategy, the Digital Agenda for Europe and the SEPA programme imply that migration to electronic payments becomes a principal objective. If this objective is truly as important to policy makers as they state - then they should ensure that there is coherence across agendas. This is essential when it comes to the use of cash as a payment instrument. The analysis of the European Commission's recommendation on 'the scope and effects of legal tender of euro banknotes and coins' however, illustrates the prevailing inconsistencies in the regulator's approach. The recommendation artificially inflates further the perceived value of cash as a payment instrument in scope, to the detriment of a broader use of those electronic instruments which will ensure Europe's competitiveness in the wider economy. Norbert Bielefeld analyses the consequences of an ambiguous cash agenda and points to an alternative approach: the pre-conditions for moving to electronic tender are almost fulfilled.
Key Information in this Article
In March 2010, the European Commission adopted a recommendation outlining ten guiding principles clarifying the scope and effects of the legal tender of euro cash in the euro area. This recommendation forcefully asserts the position of physical cash (banknotes and coins) as legal tender.
The recommendation contradicts the strategic objective defined by European Union (EU) policy makers to incentivise a shift to electronic payment instruments which corollary is to reduce the societal costs resulting from the use of cash.
Latest data projects that over the coming decade Western Europe will see the slowest growth of non-cash payments volumes of any region globally. Contradictory EU policies will exacerbate the negative effects of this development on Europe’s relevance in international standardisation bodies, its influence on providers of payment solutions and ability to transact more efficiently.
Recent progress in the European payments market, including implementation of the Payment Services Directive and the SEPA payment instruments however, could pave the way to an effective alternative approach: a SEPA legal tender model spanning both cash and electronic payments. In such a model, the quality of legal tender would be awarded to any SEPA payment instrument.
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Coherence of the political agendas between cash and other instruments is vital
Until 20 May 2011, European citizens have the opportunity to submit to the European Commission their design for a coin to be issued at the end of the year to commemorate 'ten years of the euro in your pocket'. The winner will be announced on 30 June 2011. There can be no doubt that the winner will - justifiably - take pride from his / her award and the author would like to add his congratulations ex ante - but should the European policymakers be equally proud?
The euro has established itself as one the key world currencies and withstood the financial crisis. The fact that we are going to celebrate its first decade of existence with a coin however, should make us pause. In these times of not only worldwide competition and scramble for efficiency, but also craze for social media and everything digital, it is remarkable that Europe will commemorate its single currency with a standardised coin much similar to the first one which appeared some 3000 years ago?
Certainly, the Single Euro Payments Area (SEPA) goal cannot imply that there is a single agenda for all stakeholders. If this objective however, is truly as important to them as they state - then policy makers should ensure that there is coherence across agendas. This need for coherence is essential when it comes to payment instruments and the use of cash as a payment instrument. This article explores the current contradictions, highlights some potential consequences and points to an alternative approach.
The European Commission's recommendation on 'the scope and effects of legal tender of euro banknotes and coins'
During 2009 the European Commission convened an expert group consisting of representatives from ministries of finance and national central banks of the euro area. The mission of the expert group was to make recommendations towards establishing a common understanding of what a single currency as legal tender means and how this legal tender should be protected. The expert group presented its conclusions in January 2010, on the basis of which the European Commission adopted a recommendation in March 2010. The European Commission intends to review the implementation of this recommendation three years after its adoption in March 2013. It will then assess whether regulatory measures are needed to achieve the objectives underpinning the recommendation. The European Commission's recommendation lays down ten guiding principles.
Five of them are about the general acceptance of banknotes and coins:
- The concept of legal tender should rely on three main elements: a mandatory acceptance of banknotes and coins, for their full face value, with a power to discharge debts.
- Acceptance of payments in cash should be the rule. Refusal is only possible if grounded on reasons related to the 'good faith' principle (for example, if the retailer does not have enough change).
- The acceptance of high value denomination banknotes should also be the rule.
- No surcharges should be imposed on payments in cash.
- European Union (EU) Member States should refrain from accepting new rounding rules to the nearest five cents.
Five further guiding principles deal with several aspects concerning the protection of legal tender:
- Stained banknotes should be sent back to the national central banks as they might be stolen.
- Total destruction of banknotes and coins by individuals in small quantities should not be prohibited.
- EU Member States should take appropriate measures to prevent euro collector coins from being used as means of payments.
- The competence to destroy fit euro coins should not belong to national authorities in isolation anymore.
- Modification of banknotes and coins for artistic purposes should be tolerated.
There is a striking imbalance between these two sets of guiding principles promoted through a single recommendation - the contents of which did not undergo public consultation. The five last guiding principles either further clarify dispositions present in existing European or national legislation or Regulation (e.g. the framework for professional cash handlers for the detection of counterfeit and unfit notes), or deal with marginal occurrences (e.g. modification for artistic purposes). The five first guiding principles however, forcefully assert the position of physical cash (banknotes and coins) as legal tender.
Is it coherent with the SEPA project?
The ambition of the 2000 Lisbon Agenda was to transform Europe into the most efficient economy in the world. Creating an internal market for electronic payments (to become known as SEPA) was a pillar of this initiative. This ambition has in essence been reaffirmed through the Europe 2020 Strategy, in which the digital agenda calls for a 'vibrant digital single market'. Action two within this document is to 'Ensure the completion of SEPA eventually by binding legal measures fixing an end date for migration before 2010 and facilitate the emergence of an interoperable European e-invoicing framework through a communication on e-invoicing and by establishing a multistakeholder forum'.
There shouldn't be any misunderstanding: for the policymaker the future of payments - and beyond - is electronic, digital, or any synonym thereof. In 2008 however, there were still (according to the latest Retail Banking Research Report1) some 301 billion transactions made with cash in the EU, compared with 79 billion non-cash transactions (according to the European Central Bank (ECB) Blue Book from the same year), or about four times more. So is there really any need for a policymaker to reinforce the place of cash?
Furthermore, the use of cash as a payment instrument is not harmonious across the EU, which triggers further distortions throughout payment service user value propositions and payment service provider cost structures. Data for the number of cash transactions per EU Member State is lacking, but data for non-cash transactions provide a good 'mirror image'. There is a wide dispersion of usage across the EU: although on average each EU citizen makes 189 non-cash payments a year, a Finn makes 369 such payments and a Bulgarian a paltry 22. Clearly this and similar gaps cannot be accounted for by economic differences only: there are other motives for this wide disparity in the usage of cash across the EU.
These do not matter per se. Baselines are very different across EU Member States in every respect and they result from local practices, rules and legislation. There is however, something that all EU citizens hold in common with respect to payment instruments: they generally perceive cash as being free of charge. This puts electronic payment instruments - the target of the SEPA initiative and the digital agenda in general - at a disadvantage. The European Commission recommendation on legal tender only reinforces this disadvantage. This puts at risk more than the SEPA project.
The worldwide race for efficiency: where will Europe be in 2020?
In February 2011, the Boston Consulting Group released a study 'Winning After the Storm' on the payments world by 2020. This study includes a projection of non-cash payment volumes by region by 2020. Although the regions in the study do not perfectly match the definition of SEPA, the fact that 'Western Europe' traditionally accounts for 96 percent of SEPA would seem to allow discussion of the findings (figure 1: projection of non-cash payment volumes by region by 2020).
(click to enlarge)
It is projected that over the coming decade Western Europe will see the slowest growth of non-cash payments volumes of any region. Even North America (the largest non-cash payments region in the world to-date) will outpace Western Europe. The authors of the study found that SEPA is unlikely to have any material contribution to more non-cash payments over the next decade. This is a pity. What is at stake here is much more than a mere Olympics of payment volumes. This is about Europe's voice in international standardisation bodies, Europe's influence on providers of payment solutions, and Europe's ability to transact more efficiently. On all counts, slipping in the ranks of the worldwide non-cash payments competition does not bode well neither for European payment service providers, nor their users.
Cash as legal tender: ancillary effects
The European Commission's recommendation on 'the scope and effects of legal tender of euro banknotes and coins' holds further, rather negative implications for European citizens. By preventing a fair competition - on the basis of transparent features and benefits - to take place between the various payment instruments available to payment service users, it actually places the burden of cash usage on those preferring non-cash payment instruments, as demonstrated with the chart (figure 2: correlation between non-cash transaction per capita index and account charges index).
(click to enlarge)
The chart evidences the close correlation which exists across EU Member States between the non-cash transaction per capita index per country (the 'mirror image' of cash usage, as defined above) and the account charges index for an average payment service user. The latter pays generally more, or much more, in bank account and related transaction charges whenever cash is used more and more often as a payment instrument in his / her country.
One may harbour doubts as to how fair this is from a societal perspective, in particular when another dimension is taken into consideration. One of the features often quoted by the defenders of cash is anonymity. The high denomination banknotes (euro 200 and 500) whose acceptance is promoted by the European Commission's recommendation on legal tender represent almost 40 percent of the euro 820 billion of notes issued. These notes are almost never returned to a central bank, they are hoarded and some of them are used for and are the proceeds from the underground economy. The chart below (using again the 'mirror image' of cash usage as one variable) evidences the strong correlation between the level of use of cash in a EU Member State and the relative size of the shadow economy (figure 3: comparison of shadow economy versus non-cash payments indexes).
(click to enlarge)
Going forward, should users of non-cash payment instruments continue to pay for the cost of cash, which is also used to either purchase legitimate goods or services, but where at least one party to the transaction wishes it to remain anonymous, or access illegal goods or services, where both parties to the transaction have an interest in remaining anonymous? Surely there has to be a better message for the European citizen.
A SEPA legal tender model
There can be no discussion that the euro must be a credible currency: notes (and coins) must look 'right' and counterfeiting must be difficult yet easy to detect. How much does the European Commission's recommendation on legal tender really contribute to the acceptance of the euro? Actually, the net societal value of this recommendation should be challenged on the basis of the evidence provided in this article. The recommendation artificially inflates further the perceived value of the payment instrument in scope, to the detriment of a broader use of those instruments which will ensure Europe's competitiveness in the wider economy.
A forward looking solution could however be rather close. Europe's payment systems have proven that they are secure and reliable and they are certainly well overseen. The Payment Services Directive has provided for much enhanced consumer protection for non-cash payment instruments and both this Directive as well as the e-Money Directive2 (now being transposed) allow for quality competition. Bancarisation (the number of people holding a bank account) is almost complete (acknowledging that a very small percentage of the population would not hold an account under any circumstances) and solutions covered by the two Directives referred to above exist which allow for catering to these exceptions, thus ensuring access to convenient and secure means of payment for all segments of society. These assets and developments pave the way for a SEPA legal tender model spanning both cash and electronic payments which would notably fully transpose the principle of 'indifference' between payment instruments so often referred to by policymakers. In such a model, either discounting or surcharging for the use of any payment instrument would be allowed, in order to enable genuine competition in the marketplace. Merchants would no longer be compelled to accept high denomination banknotes, and the quality of legal tender would be awarded to any SEPA payment instrument.
A bold proposal? Not any bolder than any of the proposals which have brought the EU forward since the Treaty of Rome. What are we waiting for?
Norbert Bielefeld is Deputy Director - Payment Systems with the European Savings Banks Group (ESBG). He serves as a member of various EPC bodies including the EPC Cash Working Group. The ESBG is a member of the EPC. The views expressed in this article are those of the author and may not necessarily represent the views of all ESBG members.
Related articles in this issue:
Related articles in previous issues:
Significant Growth in Cashless Payments in Europe. Yet cash will remain predominant payment method in 2014 (EPC Newsletter, Issue 6, April 2010)
Overcoming the Homer Simpson in Us. How to create a 'less-cash' society (EPC Newsletter, Issue 2, April 2009)
1Retail Banking Research. The Future of Cash (January 2010).
2Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions.
Other articles in this issue
21.04.11 SEPA Scheme Change Management - Public consultation starts in May 2011 By Javier Santamaría 21.04.11 EPC Plenary Meeting Update - Main decisions taken in March 2011 By Gerard Hartsink 21.04.11 Time to Prepare the Eulogy - 'Six Feet Under' for the Magnetic Stripe in SEPA - Eurosystem recommends migration to chip-only cards By Wiebe Ruttenberg and Monika Hempel 21.04.11 The Magnetic Stripe: Why it is Hard for Americans to Say Good-Bye - In the US, clinging to old-fashioned payment methods is more than just a bad habit By Bob Sullivan 21.04.11 Moving Into New Territory - The impact of the e-money Directive on payment service providers By Dermot Turing 21.04.11 More Europe is Needed, Not Less - Lessons learnt from the financial crisis By Graham Bishop 21.04.11 Facing the Facts in April 2011 - The EPC Newsletter tracks the progress of SEPA migration By Gerard Hartsink 21.04.11 Innovacompegration (This is Not a Typo) - Reflections on the best approach to innovation, integration and competition in payments By Javier Santamaría 21.04.11 The SEPA Regulation - A Progress Report - First reactions by European Parliament and Council of the European Union introduce important improvements to European Commission´s proposal for a SEPA Regulation By Gerard Hartsink 21.04.11 The Trailblazer - Kela, the Social Insurance Institution of Finland, completes migration to the SEPA Credit Transfer By Anneli Seppälä (Interview) 21.04.11 Have Your Say - EPC Mobile Contactless SEPA Card Payments Interoperability Implementation Guidelines: consultation starts in April 2011 By Dag-Inge Flatraaker 21.04.11 SEPA Direct Debit for Billers: The SDD Mandate - EPC Newsletter series provides support for billers preparing migration to the SDD Schemes By Javier Santamaría and Herman Segers
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