Market exchange rates: “real” and hidden payments

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Hidden fees in international payments have been always a common place. However, in the EU they have been banned legally since 2020 for cross-border payments among the member states. But, it is still a serious problem in trade outside the EU-27 that cost people and businesses in the EU about €30 billion in 2023 alone. However, the EU is adopting legal means to facilitate the market for payments.  

For European consumers, these money could have been used for daily spending, savings or investment, especially during time of high inflation. Specifically for the EU-wide small and medium-sized enterprises, SMEswhich have been hit the hardest by hidden fees – these money could have gone to finance corporate activities, product investment, marketing and/or savings.

People and businesses in the EU are being overcharged, concluded experts: thus, recently they lost €30 billion to hidden fees in international payments. It is not that everyone deserves to know the mid-market exchange rate when sending bills and/or spending in other currencies; but such payments contain hidden fees. In the EU, the Payment Services Regulation can fix them.

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The “real rate” issue

Banks and other providers all set their own rates: i.e. there is no one-size-fits-all answer; but for all intents and purposes, there is a “real” rate, which is called the mid-market rate.

Bankers and traders buy and sell currencies all the time: in any currency exchange, there are prices they are willing to pay for and prices they are willing to sell for. Thus the “midpoint” of these prices is the mid-market rate.

Since this is the rate that the market naturally sets, it is the most “real” and fairest rate available. This is the rate that same companies (like Wise, e.g.) gives on each transaction. Different organizations use different data sets to calculate the mid-market rate, so it may vary depending on the where one looks for it, though not vary much. E.g. Wise derives its own rate from independent sources and updates it in real time when the market is open.

Banks and money transfer services use the mid-market rate when trading with each other, but they rarely give it to ordinary customers; instead, they often mark up the rate to make extra money.

Therefore, one has to be very careful when an exchange service promises zero-fees or no commission at all: they could hide these costs in their version of the exchange rate.

For example, sending a thousand pounds, the mid-market rate is 1.43 for a pound; the non-mid-market rate is 1.37; thus, the “hidden cost is 60 euros.


The EU-wide regulations

The Payment Services Directive, PSD-2 empowers the Commission to adopt delegated and implementing acts to specify how competent national authorities and market participants shall comply with the obligations laid down in the directive. The PSD-2), also known as The Revised Payment Services Directive, is a European regulation that creates a more open, competitive and secure EU-wide payments landscape; the PSD-2 provides requirements for Strong Customer Authentication, SCA.

The PSD-2 makes it clear that customers have a right to use what are termed Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs) where the payment account is accessible online and where they have given their explicit consent. Hence, every consumer legally residing in the EU has the right to at least a basic payment account free of charge or for a reasonable fee, i.e. one that comes with a debit card, covers cash withdrawals, safekeeping of funds and making and receiving payments.

The Payment Services Directive -1, PSD-1 was approved in 2007 to create a single market for payments in the EU. It simplified payment processing and created the EU-wide rules and regulations for payment services; it opened up the gates for new payment service providers. E.g. PSD provided legal foundations for Europe’s bank payments infrastructure (Single Euro Payments Area,  SEPA), powered by IBANs and Direct Debits.

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An efficient market for retail payment services in Europe should guarantee: – the same rules in all EU member states; – clear information on payments; – fast and instant payments; – consumer protection; and -wide choice of payment services.

Besides, with this legal acts, the EU is creating a single payment area, which lets citizens and businesses make cross-border payments as easily and safely as they would in their own countries

where cross-border payments are subject to the same charges as domestic payments.

The Commission reached at the end of 2023, the political agreement between the European Parliament and the Council on the Commission’s proposal to make instant payments in euro available to all citizens and businesses holding a bank account in the EU. The new rules, which modernized the 2012 Single Euro Payments Area Regulation, SEPA aim to ensure that instant payments in euro are affordable, secure and processed without obstacles across the EU. Instant payments offer fast and convenient solutions for citizens in everyday situations, like receiving funds promptly in case of emergencies or splitting shared costs immediately in various social settings. They also improve cash flow management for public administrations and businesses, specifically SMEs, enable charities and NGOs to access funds quickly, and encourage banks to develop innovative financial services and products.

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