Possibilities for Unified European Payments and Clearing
A. From the EBA perspective, no. However, some banks may have been surprised by the reduction in the timeline. For example, the ECB has been quite emphatic about wanting to see a mechanism for pan-European direct debits launched by the end of 2007. It has also made clear that it wants SEPA to be available to EU citizens (including corporates) at least on an optional basis by 1 January 2008, with the complete infrastructure ready by 2010. The ECB wants low value payment functionality across that SEPA to be provided by, at most, a handful of pan-European ACHs (PE-ACHs) – perhaps even only one.
A. I think the banks have made an effort already, but the ECB and EU Commission feel that progress to date has been far too slow. As a result, I think there is a very real danger that regulation may result. The ECB and the Commission may assume the precedent of the cross-border charges for euro payments where the banks only started to respond once the regulation arrived.
A. I think it has been something of a wake-up call and some ACHs are definitely starting to react. In some cases, ACHs in EU countries that have not yet adopted the euro are in a technically strong position to provide at least part of a PE-ACH, but because they have not yet adopted the euro, there are political implications. As a result, we have seen some non-euro country ACHs looking to form development partnerships with countries that have adopted the currency.
There is something of a balancing act here. While the ECB has made plain its desire for a healthy level of competition in this space, one doesn’t want to end up replacing multiple national ACHs with multiple product ACHs. Apart from the interface and technology costs, banks obviously don’t want to suffer the inefficiency of having to maintain multiple liquidity pools across a large number of ACHs.
As a result, I think we may see some sort of hub and spoke arrangement emerging. A few product-specific operations will link into a central hub that provides a single settlement and control mechanism. Obviously, as the creator and operator of STEP2, EBA CLEARING would like to take that central hub role.
A. I can envisage checks and cards as discrete functions, and while the EBA would obviously like to see direct debits handled centrally, it is nevertheless a business that could operate as a spoke.
A. I think there has to be an element of first mover advantage for the EBA CLEARING as regards STEP2. At present traffic volume on the system is quite low, because it only includes cross-border payment traffic. However, the scalability of the infrastructure and the fact that several of the central banks are already using STEP2 puts it in a strong position as a contender.
A. I think this is partly because high value clearing simply had to be in place for the launch of the euro. The ECB presumably felt that high value clearing was the top priority, and low value clearing (because it was low value) was seen as less urgent. In terms of systems development time, it is also worth noting that EURO1 had something of a head start, since it essentially evolved out of the existing ECU Clearing and Settlement System.
A. Indeed both of the current systems TARGET and EURO1 can handle low value payments. There are no value restrictions for either system. However the nature of low value payments tends not to be urgent and so pricing will probably drive a bank’s routing decision. In TARGET the current lowest pricing tier is 80 cents per payment while in EURO1 the highest pricing tier is 15 cents.
TARGET2 is now being developed and the pricing has yet to be formally announced. In the meantime a pricing range of 20-60 cents has been mentioned. Clearly as a public sector solution TARGET must respect the free market practices required for SEPA.
A. Hypothetically that might be so – but not in practice. It is certainly a point that the ECB is aware of, and while I think the central banks may be quite aggressive in soliciting high value activity, this will not be allowed to extend into the low value space. The ECB has made it very evident that a level playing field must be maintained and that it has absolutely no intention of abusing its privileged dual position as both regulator and operator.
A. I think some sort of phased approach rather than a ‘big bang’ would be better. For example, participants (both banks and their clients) will need time to familiarize themselves with the new payment formats. It is therefore possible we will see the old and new systems running in tandem for a while.
The ECB certainly wants to know how the European payments industry intends to handle this and has asked to see plans on how it will be achieved before the end of 2005. The European Payments Council is also well aware of this migration issue and already has both credit and debit working groups that are working on it.
However, ultimately I think the solution could (and perhaps should) be determined by the wishes of banks’ customers, rather than the banks themselves.
A. One area that has certainly been recognized, but is not perhaps widely appreciated is the question of legal framework. A common legal structure is an essential prerequisite for a PE-ACH, and the lack of such a structure is without doubt the reason why there is still no pan-European direct debit mechanism.
Producing such a legal structure that will apply across 25 member states is not a trivial matter. However, the EU Commission has now published the draft for such a structure (the ‘New Legal Framework’) and put it out for consultation.
The objective of the Single Euro Payment Area is to enable euro payments to be made across the entire eurozone as securely, quickly and efficiently as payments within national borders. Differences between the levels of service for domestic and cross-border retail payments are to be eliminated by 2010.
Note: The ideas expressed in this summary do not necessarily represent those of Bank of America. Bank of America takes no responsibility for the accuracy or completeness of this information.