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Banking and Finance column – Banks pass on costs of euro

The benefits of the single European currency are starting to look a trifle dubious to those who find themselves subsidising their banks for the costs of conversion.

However, somewhat ironically, the European Commission has now entered the fray on behalf of the victims, those customers who are bearing the brunt of conversion costs in the form of higher bank charges on foreign exchange transaction fees.

Only a few weeks ago two banks, Germany’s West LB and Belgium’s Bank Van Breda, were forced to cut their charges to all customers with immediate effect, from 3.5% to 1.5% per transaction, and from 100 Belgian francs to a flat rate of 1.25%, respectively.

The EC subsequently dropped cartel charges against the banks. However, the commission started proceedings last year against 150 banks in Belgium, Ireland, Finland, Portugal, Germany, the Netherlands and Austria, and although several charges have been dropped, more than 100 proceedings are still underway.

Eurozone banks have proven themselves every bit as adroit as their UK counterparts in recovering costs to the detriment of their customers.

The Germans, for instance, operate a system of “value days” – banks do not credit a company’s account on the day a payment is received, but one or two days later to obtain the benefit of the interest.

It speaks volumes for eurozone solidarity that, while the EC deems price fixing by banks a violation of EU rules against forming cartels, in some cases the banks have introduced the higher charges in connivance with their respective central banks. “They were given the green light by the central bank authorities,” says a source familiar with the situation.

Even before the advent of the euro in January 1999 people were saying that the costs of transition would be passed on. Compared with the UK and US, European bank charges on transactions, such as custody and cash management, are low. But the final cost of euro conversion is expected to be of the order of 3% of each bank’s annual operating expenses, an enormous sum in the case of European giants such as Deutsche Bank or Banco Santander Central Hispano. It is hard to imagine these institutions absorbing a hit of this size without attempting to share the burden with customers.

According to the most recent calculations, Britain’s banks face a #1bn conversion bill if and when the country adopts the euro, and it is likely that UK banks will also be keen to unload some of this on to customers.

“In theory, doing transactions in euros shouldn’t cost more than in the legacy currencies,” says Dominic Bennett, a partner at KPMG. “I suspect the banks are trying to cover the cost of the change in their accounting systems and they are using this as an excuse.”

The problem will not go away next year with the introduction of euro notes and coins, says the commission. A recent EC report highlights the fact that there will still be 12 retail payment areas in the eurozone after the single currency becomes legal tender next year. “Although the physical introduction of the euro naturally calls for the establishment of a European payments area, the work under way is progressing too slowly and may not be completed by next January,” the commission says. Money transfer costs now average 17 euros for a 100 euro transfer made within the euro area, ranging from 10 euros in Luxembourg to 30 euros in Portugal.

According to the European Central Bank, the average cost of a cross-border transfer is roughly 100 times the charge levied on domestic credit transfers.

Mid-cap corporates are easier prey for bank charges than are large multinationals that work with a syndicate of banks and are able to play one off against another to obtain the best pricing. Most mid-cap companies are usually tied in to one clearer and depend on their bank for key services such as financing. There is no easy way round this when it comes to negotiating a better deal on foreign exchange transmission fees.

“It depends on each company’s clout and its ability to switch from one bank to another,” says KPMG’s Bennett. He says that for companies with a revenue stream in euros, or that are concerned about Britain’s eventual entry into EMU, it is worth bearing in mind the growth of pan-European banks. “Mid-cap corporates should consider looking at one bank that can satisfy all their needs throughout the eurozone,” he says.

Stop cheques, says BACS

BACS, the automated clearing-house, is calling for an overhaul of the UK’s bill payment culture. BACS research shows that 89% of suppliers want to be paid by direct credit, as half of all payments arrive late. Nine-out-of-ten companies still raise cheques to pay suppliers.

Banks costly for forex

British importers and exporters are losing out to the tune of #6,500 per month per company. Research conducted by British Research Group for forex dealer Moneycorp reveals that 80% of FDs only deal with banks when trading foreign currency, without considering more competitive rates or using market movement to their advantage.

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