HANAU, Germany (Reuters) -Germany's savings banks are turning to a leading U.S. financial firm to help customers with international payments, a move aimed at fending off upstart low-cost competitors that has raised concerns over the sovereignty of Europe's financial services.

The banks, or Sparkassen, are teaming up with BNY, formally The Bank of New York Mellon ( BK ), to process customer transfers of up to 3,000 euros ($3,475.50) to recipients outside the European Union, four bankers told Reuters.

The effort is in the test phase at two smaller German savings banks and will be rolled out more broadly in the coming months, they said.

EMPOWERING GERMAN BANKS TO COMPETE WITH FINTECH CHALLENGERS

By lowering the fees they charge by as much as 75% in some cases, the savings banks hope to win back business lost to the likes of Revolut, Wise and others. They also aim to capture a growing segment of German residents: migrants who make low-value transfers abroad.

Savings banks are a major force in Europe's largest economy, collectively holding 1.5 trillion euros in assets and more than 36 million bank accounts for individuals and 4.6 million for businesses.

A BNY document seen by Reuters describes the joint project, called Crossmo.

"It empowers the German savings banks to compete effectively with fintech challengers," it said.

The savings bank in Hanau, close to Germany's financial capital, Frankfurt, is currently testing the new system after a banker there, Jan Miska, read an article that described many people making transfers abroad to support their families.

"But it wasn't something we were seeing at our bank. We wondered why are there so few transactions. Why are people not doing it here? So we looked into it," Miska said.

Customers, the savings banks found, were turned off by their high fees and were instead withdrawing money and using cheaper alternatives to send it. They fear those customers may be lost for good if they then open accounts with those competitors.

Miska showed how the new initiative allows his customers to make a transfer to a recipient at a bank outside the EU using the Sparkasse website or app for a fee of 5.50 euros, compared with a previous charge of 22 euros.

CRITICISM AND A CALL FOR EUROPEAN ALTERNATIVES

But the effort comes amid criticism of Europe's heavy reliance on U.S. finance infrastructure, ranging from Visa to PayPal ( PYPL ), at a time of heightened geopolitical tensions. 

"The time has actually come to think about purely European alternatives or projects ... That should be the top priority," said Carolina Melches, a finance expert at the Berlin-based advocacy group Finanzwende.

But Axel Weiss, who oversees payments at the savings banks' national umbrella association DSGV, addressed criticism of partnering with a non-European institution, saying the issue of sovereignty does play a role.

"However, we believe that we need good strong partners who have a global network with extensive country coverage and who, of course, also offer secure and cost-effective transaction processing," he said.

($1 = 0.8632 euros)