SEPACSMThe Changing Payments Landscape in Europe

The Changing Payments Landscape in Europe

The payment systems used by European organisations are quietly undergoing significant reform. In the near future, organisations will be offered a greater choice in the way they make and collect payments through the creation of SEPA – the Single Euro Payments Area. This presents organisations with the opportunity to improve the efficiency and extend coverage of the payments process as well as providing a single payments relationship through which to enter new European markets effortlessly. In conjunction with the promise of improvements, there are also many changes regarding regulation and supervision. This article examines the proposed changes and the potential implications they have for all organisations using electronic banking.

Since the adoption of the euro by the 12 members of the ‘euro zone’1, the European Commission (EC) and European Central Bank (ECB) have been eager to promote to organisations the benefits of operating in a single currency. This level playing field is SEPA. Having initially relied on the banks to make the sweeping changes necessary, the EC is now reverting to regulation and standardisation. The EC formed the European Payments Council (EPC) in April 2002 with the stated goal of driving down barriers between countries for payments in euros; this encompasses almost all forms of payment including credit transfers, direct debits, cash and credit/debit cards.

PE-ACH

The EPC’s goal is to make the user experience of making a payment and associated payment term the same, whether it is made between or within European national boundaries. The ECB has ambitious aspirations for SEPA as clearly stated by Gertrude Tumpel-Gugerell from the ECB2: “Real SEPA is achieved when people can make payments throughout the whole euro area from one bank account, or by using one card, as easily and safely as a national payment is today”.

The key to delivering the wide-reaching changes necessitated by SEPA is the principle of the pan-European automated clearing house (PE-ACH). The EPC-endorsed definition of PE-ACH is a “business platform for the provision of euro retail payment instruments and basic related services made up of governance rules and payment practices and supported by the necessary technical platform(s)”. A PE-ACH is similar to a domestic clearing house but with the capability to accept payment instructions from any European originator to any European beneficiary.

PE-ACH is not about centralisation or the creation of a single clearing-house for the whole of Europe. It is forecast by the ECB that in the short term there will be many PE-ACHs, each with a different focus, background and advantage. The ECB also anticipates that there will be several PE-ACHs in operation by 2010 and that they will start to absorb both cross-border and domestic payment volumes in Europe.

The first PE-ACH-compliant ACH, STEP2, live since April 2003, supports only credits at present. The key to success may lie in the ability for a PE-ACH to handle all clearing transactions and it is the view of the EC3 that SEPA cannot be successful unless it supports both debit and credit transactions.

Standards

PE-ACH payment mechanisms are defined as a common set of rules and practices for the provision and operation of a payment in euros, including legal provisions, liability and risk management procedures and shared end-to-end standards. Development of these standards is progressing:

  • the Credeuro convention, requiring IBAN (international bank account number), BIC (bank identifier code) and euro currency for an STP transaction, is scheduled to evolve to Credeuro 2 at the end of 2005.
  • Prieuro, a same-day payment instrument, is targeted for delivery in 2008.
  • Pan-European direct debits (PEDD), the key to widespread acceptance of PE-ACH clearing, is scheduled to be supported in 2008.

It is also proposed that these formats will be equally applicable for domestic direct debits and this may further encourage their adoption.

In 2003 the European Committee on Banking Standards (ECBS), the industry body responsible for, among other standards, the IBAN format, supported the EPC by aligning its standardisation work with the published schedule of SEPA work. This technical standardisation, however, is only one of the obstacles which must be overcome by the EPC and aspiring PE-ACHs. Other obstacles include differences in direct debit, data formats and the relationship between corporate organisations, the banks and the PE-ACH.

Challenges

Differences in Direct Debit

Legislation for use of direct debit varies greatly between countries and both businesses and consumers perceive legal issues as significant barriers to cross-border trade4. Payment rejection and revocation mechanisms differ significantly between Member States. It is therefore essential that agreement is gained on supranational schemes in order to achieve pan-European direct debits.

Use of direct debit also differs greatly between countries both in frequency and form. Within Europe, Germany and the Netherlands currently use most direct debit transactions per head followed by Austria and the UK. The method of setting up direct debits also varies between countries with a few still implementing paperless direct debit schemes.

Data Formats

Bank data is highly inconsistent throughout Europe and this has led to the evolution of ACHs that recognise only their own national bank data formats. This makes it difficult to combine data from different systems without giving rise to unacceptable levels of error.

Lack of Financial Motivation

Cross-border payment volumes and revenues within Europe remain relatively low (less that 1 per cent of total payments). The likelihood of this increasing rapidly may be constrained by recent EU regulation 2560/2001 that mandates that no difference in charges may be levied between domestic and cross border payments5. There are however two main reasons why an existing ACH might make the investment – the threat of another PE-ACH operating within their domestic clearing market or the chance to expand business opportunities in other countries.

Corporate/Bank/PE-ACH Relationship

Typically, most clearing systems have involved the bank in the submission of transactions, but while there is no drive to remove the banks from the key role they provide in linking corporates to their clearing houses, there is an initiative to exclude them from day-to-day operations. SWIFT has developed, in parallel with the successful migration to SWIFTNet, the concept of closed user groups to allow corporates to send information direct to clearing partners without the need for bank intervention. Take up has, however, been slow and corporates are still asking for immediate and direct access. For corporates to really benefit from SEPA they need the reliability of the SWIFT product in conjunction with the direct connections that some forward-thinking domestic ACHs have adopted.

PE-ACH Candidates

PE-ACH contenders will be a mix of new European initiatives such as STEP2, existing domestic ACHs such as the UK’s Voca (formerly known as BACS Limited), and multi-country associations such as Eurogiro, an alliance of post banks and commercial banks. As one of the more advanced domestic European ACHs, Voca is well positioned to contribute to the achievement of the SEPA vision, but it is almost certain there will be other leading players.

The EPC timetable for SEPA was updated at the end of 2004 to take account of milestones achieved. In essence, this gives 2008 as the date for consumer payments to migrate to SEPA and 2010 for SEPA completion together with the start of rationalisation in the Euro payments industry.

Accession Countries

In the original 15 EU Member States, clearing systems are well established. In the 10 new accession countries, however, there is considerable growth potential. Where incumbent mechanisms exist they are being developed, or re-developed, along more modern lines providing the opportunity for existing domestic operators to tender for the new business with both their existing and new PE-ACH-compliant systems. Domestic ACHs that have historically focussed solely on their own country are now marketing their solutions to other countries, including the accession Member States, making the commercial proposition for a migration plan to PE-ACH status even more attractive.

However, an alternative to SEPA does exist. Corporate organisations and domestic ACHs could improve the efficiency of their communications by adopting XML standards, such as TWIST, that can transcend national boundaries. Another solution would be for the larger ACHs to provide clearing systems on a multi-national but not pan-European basis. These solutions may offer advantages, but without harmonisation of payments legislation they are confined to efficiency savings.

Summary

Organisations who currently do business in Europe are presented with a number of opportunities to reduce costs and increase efficiency. SEPA offers the potential to reduce the number and complexity of relationships needed to make and collect payments. In addition, organisations can potentially benefit from the reduction in the cost of cross-border payments as payment volumes increase. Finally, clearing systems may give subscribers a business advantage by facilitating movement into new markets within Europe.

There is still much work to be done to achieve the SEPA timetable and it is unclear which PE-ACH will emerge ahead of the field. As a result of the drive for European standardisation the more sophisticated ACHs are, for the first time, positioning their services on an international stage. With 2010 only five years away, the effort to establish SEPA is very much underway.

****

1 Austria, Belgium, Finland, France, Greece, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.

2 ‘ECB Time to act – clear objectives and a convincing Roadmap for SEPA’, September 2004

3 “New Legal Framework for Payments in the Internal Market” – European Commission, COM (2003) 718 final

4 “Public Opinion in Europe: Views on Business-to-Consumer Cross-border Trade” – Special Eurobarometer 175, European Commission Public Opinion analysis

5 CREDEURO convention – European Payments Council

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