The creation of a single european payments area (SEPA), the goal of the political world after the introduction of the euro in 12 EU countries, has been on the table for several years. Admittedly, significant progress has already been achieved but the final objective, the emergence of a genuine SEPA in the EU, is not just around the corner.
SEPA – A Roadmap to a Pan-European Payments Area
The vision underlying SEPA is that all payments in the euro area become domestic and reach a level of efficiency and safety at least on par with the best performing national payment systems today. This vision was laid down in the May 2002 white paper which:
- specified the political commitment to SEPA;
- created the European Payments Council (EPC) to drive action by the banking industry;
- outlined the need for convergence between domestic and cross-border payment systems; and
- provided specific recommendations on payments infrastructure and products.
The political aspirations regarding SEPA are best summarized by Mrs Tumpel-Gugerell of the European Central Bank (ECB) in September 2004:
- Real SEPA is achieved when people can make payments throughout the whole euro area from a single bank account as easily and safely as making a national payment today.
- By 2008 the banking industry must have delivered “SEPA for the citizen” with cross-border and domestic use of pan-European instruments. End-to-end solutions for initiation and reconciliation are to be standardised and deployed too.
- By 2010 transformation of infrastructures is fully underway either by conversion of national infrastructures into pan-European infrastructures (no parallel domestic and cross-border systems) or their elimination. Several PE-ACH operators gradually absorb volumes across the EU.
- The EPC response to these aspirations is reflected in the SEPA Roadmap, which refines the definition and scope of SEPA, presents the key deliverables and priorities, and specifies the timeline, supported by clear objectives (see figure 1 below).
ECB Objectives
The EPC working groups, each focusing on a specific aspect of SEPA, have achieved significant progress moving on from payment formats to payment schemes for Credeuro (credit transfer), Prieuro (priority transfer), PEDD (pan-European direct debit) and cards, all of which must be finalised before the end of 2005. Nevertheless, the third SEPA progress report published in December 2004 by the ECB repeats its criticism of the EPC and the banking industry for achieving too little progress and being too slow. The report also reflects stakeholder views, by the European Association of Corporate Treasurers (EACT), and explicitly rules out a postponement of the January 2008 deadline.
The ECB’s point of view is crystal clear: co-existence of domestic payments schemes with pan-European ones is to be temporary and national infrastructures must be either phased out or transformed into pan-European ones. Although the exact implementation scheme is still being discussed, EPC has committed to full SEPA receiver capability by 1 January 2008 and all domestic payment schemes have to submit their migration plan and path by the end of 2005. The request to dismantle all domestic payment schemes by (the end of) 2010, however, is judged as unrealistic as the transition period is too short. Three obvious reasons are often cited:
- The planned pan-European systems, PE-ACHs, do not provide full cover of the existing domestic product range, excluding cheques, bills of exchange (e.g. LCR in France), etc. This leads to a residual use for domestic clearing infrastructures that will translate into higher transaction unit costs. This in turn will make these systems less viable in the medium term as economies of scale prevail in the payments industry (the existing economies of scale, favouring the domestic schemes over the cross-border ones, will disappear).
- The pan-European systems imply the use of both the IBAN (international bank account number) and BIC (bank identification code) of the beneficiary bank. Currently, the beneficiary bank’s BIC in domestic schemes is not used at all, therefore adding this extra data element will be imposed on all domestic payment and collection transactions, which roughly represent 95 per cent of all transactions in the EU. To date, national banking associations of different countries have a divergent view on how to move forward.
- Co-existence or inter-changeability between domestic and pan-European systems would imply that the BIC also has to be introduced in domestic clearing systems during the transition period, prompting a sizeable investment in systems to make them (more rapidly) obsolete.
TARGET-2 and PE-ACH Issues
Even at the ECB side, progress is not as swift as anticipated. Recently, the ECB has announced it will delay the launch of TARGET-2, the new EU high value payment infrastructure, from January 2007 to September 2007. This delay impacts both the national clearing infrastructures in EU countries, as well as the introduction of the euro in the accession countries. As TARGET-2 makes domestic high value RTGS clearing systems (e.g. Ellips in Belgium) redundant by offering direct cross-border bank-to-bank connectivity, the lifeline of local RTGS systems has to be extended. The new accession countries wishing to introduce the euro in January 2007 will have to position their local RTGS as a temporary gateway to TARGET pending the launch of TARGET-2 later that year.
The future picture of the low value payments infrastructure is less clear. To date, EBA’s euro STEP2 is the only existing pan-European clearing system (PE-ACH), handling over 300,000 cross-border payments daily (peak in May 2005). Considering that domestic ACH systems in the big EU countries handle tens of millions of transactions daily, some doubt persists about the scalability and cost efficiency of the euro STEP-2 system. Additionally, investments in the latter system are ongoing to expand the product range to cover domestic payments and pan-European direct debits also. Not all is gloom in this respect. Recently, seven major Italian banks have committed to migrate their domestic retail payments to euro STEP2 in the first quarter of 2006. EBA is as well conducting discussions on functionalities with banks in Luxembourg and Finland, and signed a Memorandum of Understanding with the Centro de Cooperacion Interbancaria (CCI) Madrid in March to review the feasibility of using the euro STEP2 platform by the banks in Spain for processing their national retail payments. Similarly, several corporate banks have already earmarked ICT resources for developing PEDD before the end of 2006, contributing to the emergence of a full SEPA product range.
The Way Forward
The European Commission favours the creation of multiple PE-ACHs to stimulate competition and reduce operational and systemic risks in the payments industry. As a result, multiple domestic ACHs are looking to upgrade their system to become a PE-ACH themselves (e.g BACS in the UK, Interpay in the Netherlands, Elexir-2 in Poland and the Slovenian Small Value Payment System) or are considering such a move (Greece and Portugal). France announced an even bolder initiative to build an additional new PE-ACH called STET. Corporates should not worry needlessly. A single format per payment scheme is compulsory, covering both domestic and cross-border transactions and enabling end-to-end STP. This includes automated reconciliation and should in time enable the use of a single account in the EU. Nevertheless, due attention is recommended as all new PE-ACHs will strive for the highest possible STP ratio, the amount of (commercial) information and the use of commonly used code-words, such as INTC (indicating an inter-company payment), in transactions eligible for PE-ACH low-cost processing may come under pressure.
Numerous problems beyond the EPC’s grasp are also expected, a few important ones are described here:
- Due to the introduction of the euro, the decision power at national levels is on the wane and the leverage of national industry groups is being eroded. The result is an internationalisation of the decision bodies and of the decision processes, often characterised by a wider divergence of viewpoints than that commonly observed at national level.
- Other obstacles such as the compulsory use of a domestic bank account for social security payments, customs and excise duties, VAT payments, make the transition to SEPA more difficult.
- On the collection side, the legislation on irrevocability is not harmonized at all. The national legislation ruling the revocable period for pre-authorised direct debits diverges widely, ranging from four days to almost unlimited. Reaching an agreement on a EU-wide revocability period is likely to be difficult and has an immediate bearing on corporates as a shortening or extension of this period impacts their working capital requirements if they use this collection method extensively. As PEDD will additionally shift the burden of the debtor administration to the corporate remitter, possibly in combination with longer delays in crediting in a number of EU countries, market acceptance for domestic use is likely to be rather low initially.
Conclusion
The payment landscape faces fundamental change. SEPA will be created but not overnight. The consolidation and re-positioning of domestic ACHs to PE-ACHs and the investment to build new systems such as TARGET-2 and PEDD make it rather unlikely that the real SEPA, as desired by the EU, will be achieved by 2010. Several factors can contribute to a smooth transition, such as the elimination of the current uncertainty on co-existence, the use of IBAN and BIC in domestic schemes, the use of PEDD as a domestic system and avoiding extended co-existence of domestic and pan-European systems with the implied difficulty of multiple products fulfilling the same customer needs. To achieve market acceptance, the new pan-European systems will have to be superior to, or at least on a par with, to the existing domestic ones.
Considering all the above, one cannot but favour a quick introduction of pan-European products and standards and the abolition of domestic ones. The banking industry, however, cannot realise SEPA on its own; all stakeholders need to co-operate not confront. As economies of scale prevail in the payments industry, investment in multiple PE-ACHs should be weighed carefully as the smaller systems are less likely to survive in the medium term. Finally, if self-regulation in the banking industry fails, it is pretty clear that EU regulators will step in.