SEPA: The View from 2010
Those with long memories will recall how it all started, back in 2002, with a vision to create a Single Euro Payments Area – or SEPA, as we’ve come to know it.
Back then, Europe’s banks were coming to terms with the fact that the European Parliament had enacted its first piece of legislation directly affecting the fees that banks were charging for cross-border payments in the European Union.
Although this legislation was targeted deliberately at preventing banks from discriminating in the price charged to their customers for domestic low value payments (typically cheap) and for their cross-border equivalent (typically more expensive), its effect was also surely intended. A significant loss in revenue for Europe’s biggest banks in their cross-border activities was the direct consequence of the benefits seen by bank customers from tariff reductions introduced by the banks in July 2003, when pricing regulation took effect for a subset of credit transfers.
Those of us around at that time will also remember how Europe’s bankscame together with their representative banking associations to form the European Payments Council (EPC). We will also recall the rash of activity from EPC between 2002 and 2004, as the banks sought to overcome the decades of established practice, diverse infrastructure and multiple standards that characterised cross-border payments at that time and made them so different from what we used to call domestic payments.
Right at the outset we came up with new standards for straight through processing (STP). A great play was made to promote the use of the Bank Identifier Code (BIC) to identify the bank of the beneficiary and the International Bank Account Number (IBAN), based on a standard endorsed by the European Committee for Banking Standards to denote the beneficiary’s account.
We knew at the time that only a standards-based approach would allow the full validation of key information and facilitate the drive towards STP. With STP levels today close on 100% it is easy to forget the effort that was expended in the early and middle part of the decade to get automation of cross-border payments through the 30% barrier.
Now that payment practices are totally transparent across the whole of SEPA, it seems a lifetime ago when EPC was commissioning working groups and task forces to recommend new pan-European practices governing aspects such as interbank charging, value-dating and payment clearing cycles.
While the Credeuro guidelines were developed in 2004 to become a fully-fledged scheme for basic direct credits, it was not until 2006 that banks at EPC agreed on a set of standards for urgent payments. Now, of course, we have highly efficient systems covering the whole of Europe for standard and premium payments and the scheme rules that go with them.
Of course, back when we were creating the first set of rules and guidelines for SEPA, it was normal for clearing cycles to extend over a number of days. It was also routine practice, as part of their overall pricing mix, for banks in many countries to hold funds for a day before crediting the beneficiary.
No surprise that the increased levels of interest from consumer bodies in this area, supported by the European Parliament and together with competitive pressures, led to the demise of this practice by 2007. Advances in technology and processing capabilities, both in the central clearing infrastructures and at individual bank level, led, by 2008, to the situation we have today, where all payments are completed and notified to the beneficiary within minutes.
In 2003, the banks agonised for months over the development of a new scheme for direct debit. Conceptually, of course, this proved a far more difficult prospect than dealing with direct credit – the greatest obstacle being the very different arrangements already in place in local direct debit schemes, usually underpinned by existing legal contract or well-defined scheme rules and business practice.
Having finally endorsed a business model for the pan-European Direct Debit early in 2004, it was considered a great achievement when the scheme rules, technical standards, legal construction and infrastructure for processing debit transactions were all in place by the middle of
Who would have thought in those early days that EPC would become the strategic powerhouse that we know today, driving forward payments issues in the single market?
EPC has changed a lot since that first meeting, when delegates argued to maintain their national quota in a geographically and banking-sectorally representative plenary. And one of the key decisions was whether or not the delegate from Iceland should be allowed to attend.
Like the rest of Europe’s institutions, it has had to contend with the expansion from a union of 15 countries to a union of 27. At the same time, the single currency zone has in the last few years expanded from 12 to 22 countries.
With this geopolitical expansion, EPC realised the need to create a more streamlined governance structure, with the ten-member Executive Committee being formed in 2005. At around the same time, the European Commission recognised the authority of EPC within a new legal framework for payments in SEPA, which helped to overcome the difficulties previously encountered in implementing the decisions reached by EPC. Now, for the first time, EPC decisions moved from being mere guidelines or best practice advice and became binding on all banks in Europe.
It was in 2006 that EPC absorbed the Euro Banking Association and so began the process of taking over the payments-related activities of the individual national and sectoral banking associations in Europe. These were key acts in removing much of the duplication of cost and effort that had been in evidence since the founding of EPC. The result was the formation of a single representative body of practitioners involved in European-wide payments initiatives and a reinforcement of EPC’s role as the banking industry’s single voice in the interchange with regulatory bodies, such as the European Commission and the Central Bank.
While the activities of the Euro Banking Association were amalgamated with EPC, the business of the EBA’s clearing company has gone from strength to strength. Of course, this took on a whole new dimension in 2006, when the EBA Clearing Company was restructured and new shareholders from the technology sector brought in to commercialise the company, forming what we now know as the Pan European Clearing Company.
Operating integrated IP-based private sector payment and securities platforms, PECC is now the dominant provider of euro clearing solutions. The EBA’s old EURO1 and STEP1 systems were upgraded in 2006 to reflect its nature as the Euro Interbank Net Settlement platform, carrying low volumes of high-value payments. Progressively since 2003, volumes of retail and commercial customer payments have been migrated onto the Euro-ACH platform, which was originally launched by EBA as STEP2.
One of the biggest challenges to face the industry in creating the infrastructure to support the low-cost-operating environment needed in SEPA has proved to be the migration of domestic traffic onto the Euro-ACH platform. Domestic payments, of course, are bound up with silo-like practices and years of evolved and highly specialised features and functionality. However, it was recognised back in 2002 that SEPA would only really be considered a success when traditional domestic and cross-border payments were co-mingled on a common platform. This was commercially sound, since it would only be by attracting the largest possible volume that the platform would offer the lowest cost solution.
With the French and German banks still among those supporting their own clearing platforms (as ever) and the UK still not a member of the single currency (ditto), Europe’s three largest payment markets, accounting for some 20 billion transactions a year, remain outside the scope of the Euro-ACH. Even in these countries, it has been agreed that euro clearing will move onto the Euro-ACH at the end of the current investment cycle.
The introduction of the EBA’s STEP3 platform in late 2005 allowed corporate clients to initiate transactions directly with the Euro-ACH, utilising vintage XML standards over the IP network, secured by a range of PKI solutions. In a related application, the Euro-ACHe platform was launched to facilitate the on-line capture, initiation, exchange and settlement of e-payments.
Together, these developments allowed banks to move away from the business of transaction capture and initiation, which analysis had revealed was the most costly element in their payments activities. This permitted the finest possible pricing to be offered to the corporate client and also meant that banks could concentrate on providing value-added solutions in terms of integrated end-to-end supply or purchase-chain management and working capital management.
The banks long ago took the view that the standard euro payment was essentially a commodity. Consequently, individual retail customers of the banks have now grown used to freely completing their on-line payment instructions through their banks’ interactive banking applications. This may be through the old screen-based, browser solutions, on-line watch, fridge and key fob, or even one of those quaint palm-top devices, which were popular at the turn of the century.
Looking back on 2003 – and taking into account what we know now – we can appreciate that the financial community showed drive and desire in overcoming the difficulties of the past. That commitment has today, in 2010, resulted in Europe’s single payments area becoming a reality.