Thursday, 29 March 2007

At last, some good news from Brussels

I have just transferred some money between two bank accounts, without leaving my desk, with just a few clicks of my mouse. It is called eBanking. It is not very exciting; indeed, it seems too prosaic to mention. Certainly, it should go without saying that it cost nothing to make the transfer. Why should it? It is just one computer telling another computer that it has reduced a number by a certain amount, and the other computer can add that amount to a number it stores. There is no marginal cost.

Add one more calculation, however, and a fee is charged. Lets say that the receiving computer has to take the first figure and pass it through a very simple formula before adding the figure to the number it stores. Let us call the first number “pounds” and the second number “Euros” and the formula the “exchange rate”. Since time immemorial banks have been telling us that this, for some reason, costs money. To transfer pounds from London to Scotland is free; to transfer them from London to Calais costs money.

I remember having a stand-up row with a bank clerk in Stockholm about this. Why, I demanded, was there a fee? What cost was I incurring? What was the difference between sending money to another Swedish bank and sending it to an English one (even one that had branches in Stockholm)? She was unable to answer the question, of course.

The answer is that there is no extra expense. It is a money-making ruse. It is not the bank’s fault as such, however: they are merely the beneficiaries of national legislation that has failed to inject competition into the banking industry. This may be about to change.

Yesterday, European finance ministers passed the Payment Services Directive. The aim of this is to create a “Single Payment Area, in which citizens and businesses can make cross-border payments as easily, safely and efficiently as they can within their own countries and subject to identical charges.” This means that one can have one’s salary paid into a foreign bank (handy if you are on a short-term contract), debit and credit card payments will be easier (though I’ve never had much difficulty) and those unnecessary bank charges should begin to disappear.

It will also open up the retain banking market to more competition. This is good for everyone, and particularly good for the British. Everybody benefits from competition, and sometimes it does seem that things are a little cosy on the high street. But actually, the UK has a fairly competitive banking sector. Our European allies may get a bit of a shock when HSBC and the Royal Bank of Scotland open up branches in Paris and Munich. And it will make it even easier to pop to the cash machine for a few Euros without having to pay £1.50 for the privilege.

And things should be a bit calmer in SEB without an irate Englishman hectoring a poor Swedish bank clerk.


Wonga Wallah said...

If you think it has cost you nothing, you have been sadly misinfomred, unless you are aware of some transfer variety that I'm unaware of.

Because the transfers that I know of hang on to my money in cyberspace for three days, withholding the interest for that period. Unless I use CHAPS, for which they will charge me £30-£45.

As you say, the transfer is electronics - bytes travel at the speed of light. Ok, a few firewalls and contention issues will slow them down, but not to the level of catching a bus!

Ben C said...

Exchanging currencies costs money because it is not simply a case of multiplying one amount by an exchange rate. Funds must be transfered and administration must be completed. Additionally banks must have a registered person or persons who can actually trade on the FX market. This also costs money.

Secondly the single payments area is for the Euro area. Companies have no duty to pay your salary in a currency other than the national one. The main point of it is to increase competition and cross border trade (shopping and work based) within the Eurozone. If a company agrees to pay you in your choice of currency it is assuming a level of risk that is not its responsibility. If they agree to pay you a set salary in sterling but the EURO/GBP rater moves against them they are suddenly paying you more. If, on the other hand, you just get paid a set EURO salary that is converted to Sterling you bear all the risk. And then you have no Euros to spend. Finally this facility is already available, it's called foreign exchange and still costs money.