Pan-European commerce should be as easy as switching on a light bulb but this is not yet true because of complex paper trails and incomplete automation. Modern, straight-through processing of purchasing, ordering, invoicing, payments and financing is frustrated by paper-based processes and disjointed attempts at automation. As part of the EU’s modernisation agenda, the single euro payments area (SEPA) could be the catalyst to create a European environment where commerce can move as easily as electricity through integrated systems. This integration needs to be based on common standards that enable open access to the service provider of choice for any individual user. Once these standards are in place, doing business anywhere in Europe will be as easy for any company as turning on a light.
Each commercial transaction includes a payment to pay for products and services delivered. A well-designed payment process enables commerce to flow efficiently, both within a country’s boundaries and when crossing borders. In Europe, however, there is currently a regime of 25 national payments markets with divergent legal conditions and widely differing prices and speed of delivery. This denies EU citizens the efficiencies to be gained through a consolidated payments processing system. It obliges excessive use of cash and cheques and sustains differences between national payment infrastructures, price and service levels. Reform will yield administrative savings and a seamless payment experience for consumers and merchants across the EU. Smaller enterprises in particular will then benefit from harmonised services as their banks import best practices from across the EU, with cross-border payments made as easy and cheap as those within their home country.
Complementing the EU Payments Directive and Bank-led Payment Schemes
The EU Commission and the European Central Bank have embarked on a laudable mission to harmonise electronic payment processing in Europe based on user requirements. This summer, the EU Commission is finalising the negotiations about an EU Payments Directive. This Directive is likely to clear away the legal barriers blocking the introduction of the Single Euro Payments Area (SEPA) in a manner that satisfies users of payment services.
Through the European Payment Council (EPC), the banks are working on implementing a single European payments market. In March 2006, the EPC finalised a set of European payment schemes for core and basic services covering direct debits and credit transfers, a framework for card transactions and a framework for cash to be used by the banking industry to offer their customers in 2008. The focus of the EPC is on inter-bank arrangements that enable banks to process payments in a uniform manner between themselves. However, the EPC has not engaged with users of payment services in its design efforts and has not delivered a design that is focused on meeting user requirements.
The TWIST SEPA white paper complements the work done by the EPC within the context of the legal framework envisaged by the EU Commission. The white paper is designed to feed the debate on how payment services should be developed to meet the needs of corporates, when transferring funds and the underlying data to counterparties in particular within European countries and across Europe. These corporates form a relevant group of stakeholders for SEPA given that changes to payment processes are likely to cause a noticeable impact on business processes and complex system infrastructures of corporate users. Furthermore, in most European countries, banks generate more revenues from corporates (including merchants) for their payment services than from consumers. This means that changes in payment services and the associated costs are likely to have a higher impact on corporate users than on consumers.
High-level Corporate Requirements for Payment Services
Corporate users of payment services have a range of high-level requirements that can be summarised as follows:
- To have free choice to access payment services available in the market for all payments, whether domestic or cross-border, throughout the EU. This means that corporates should be able to change payment services providers with minimum cost to themselves or their counterparties.
- To implement open standards that enable end-to-end, cross border supply chain automation within the EU, between large and small organisations, including government agencies. This should include the potential for ensuring that there is a clear link between the payment and underlying logistical information, such as product identifiers and tracking information (e.g. radio frequency identification included in invoices). Implicit in this requirement is a need for a robust liability model.
- To implement automated controls and to be able to audit these efficiently to meet regulatory requirements, such as bank reporting, Sarbanes-Oxley (SOX) and anti-money laundering (AML) in a standardised manner in multiple countries.
- To have ownership of their own identities and attributes, and be able to utilise these identities and attributes in all their transactions and information exchanges across the EU. This should enable corporates to exercise clear management control of their own data in accordance with EU law, and should enable efficient solutions for ‘know your customer’ requirements.
- Reflecting the Commission’s guidelines and delivering lower costs, to obtain from payment service providers the transparent pricing and billing, coupled with more efficient and immediately reconcilable transaction reporting services.
- To have the ability to migrate existing corporate systems to the new standards without significant effort beyond testing when these services are brought to market.
Deliverables to Ensure an Attractive Payments Market for Corporates
The best condition for user requirements to be delivered is the existence of an open market. A key characteristic of an open market is that users have freedom of choice. Freedom to specify and choose services they wish to use, freedom to choose entry points for accessing these services, freedom to assess and choose service providers and last, but not least, freedom to change service providers. The current inter-bank focus on the design by the EPC may provide a set of harmonised services but it does not guarantee an open payments market based on freedom of choice for its users. The following deliverables are recommended to be added to the portfolio of deliverables agreed by the European banking community.
1. To create a more competitive market place for payments and remove a number of steps in the process, corporates should be able to access the payment chain at the most cost effective point. In essence, this would mean that a corporate could decide to separate some of the processing currently performed by its bank(s) and either do it itself, or outsource to another service provider. Those banks that prefer to have the option to pass certain operational risks and/or costs of payment processing to ACHs or other service providers may welcome such flexibility.
In order to truly enjoy the ability to seamlessly switch to the best choice service provider, a customer should be able to send transactions to any SEPA bank and get the same, predictable business result. In support of this, all payment service providers in SEPA should therefore deliver standardised access to users:
- Provide services with the same standardised message standards;
- Use the same standardised customer interface and network standards;
- Use the same standardised customer identification and message encryption standards; and
- Be able to deliver payments and related data to any account holding bank within SEPA.
2. As part of the bank’s ability to outsource to an ACH the fulfilment of customer payment instructions, the customer would potentially need direct access to such ACHs or other bank-owned and non-bank owned payment service providers, using the same standards as those detailed above. However, the contractual relationships could remain between the bank and the corporate customer in this case as long as the bank offers a value adding service in being the contractor/aggregator for clients.
3. Since it is unlikely that any service provider will be able to reach 100 per cent of the accounts directly, throughout the 25 affected countries, this implies a requirement for banks and ACHs to develop an inter-operable solution capable of delivering payments and accompanying data to those destinations not within their direct reach.
4. In addition to the standardised access and predictability of service provision, an essential enabler for corporates to gain the ability to switch to the best choice service provider, would be to make bank accounts portable within SEPA. This would mean that a participant could switch their account to a new payment service provider, without having to undergo the mammoth administrative exercise generally experienced today, where a new account is opened and all the related payment, direct debit, collection and invoicing information has to be updated and communicated to the relevant parties. In fact, instruction mandates such as direct debits, wages/salary or benefits payments and so forth, applied on a portable account would simply transfer to the new service provider. This requirement is analogous to that in the world of telephony, where a customer wishing to change his mobile service provider can simply transfer his mobile number to the new provider.
5. TWIST encourages companies to improve their control by implementing standardised, highly automated processes. As far as possible, the standards should not just focus on the normal business operations, but also extend to routine types of exceptions. Examples are the payment status messages that have been developed within the ISO ISTH payment kernel and TWIST dispute management messages for electronic invoicing.
6. If we are to realize the ‘choice of entry point’ mentioned above, we will require an infrastructure capable of supporting an efficient operation over a wide range of operating postures and service solutions. To avoid serious operational risk, such an infrastructure must represent no more than an evolutionary change from today’s systems, while being positioned to cater for the anticipated high rates of innovation and evolution. Critically, under the requirements of SEPA, none of the participants has the option to wait. While the benefits of the architecture described here will be crucial to corporates, it also provides immediate and consequential benefits throughout the EU community, and therefore deserves special attention.
In this environment, an open architecture is best suited to meet the needs of the community and all of the participants. The essential characteristic of an open architecture is that all candidate users have access to the specifications and therefore a choice in technology solution. Because multiple open architectures may evolve, we seek open architectures with broad extensibility and exhibiting robust composition.
7. For an open architecture model with interoperability, extensibility and robust composition, the development of architectures needs to be managed and controlled within standards development organisations that are fully independent from operational service providers or technical infrastructures.
8. Management of identities and the related attributes is a key enabler to realising corporate requirements, both for operational security and for new and innovative service offerings. Current payment mechanisms generally adequately address needs related to controlling access to networks, to data, and to processes. To achieve our overall goals, however, including end-to-end automation across the whole supply chain, and flexibility in clearing and settlement, our interests extend to capabilities concerning secure, compliant, and privacy-protected interoperability across trust domains.
In this new world, we believe that it is a key requirement that the identity owner, and not the service providers, be able to realise ultimate control over their own data within the trust network. This conclusion is driven by the increasingly pressing need for capabilities to select new partners, to alter payment flows, designate and update authorisers, to designate or move accounts, and to inform customers of pricing and terms and offer them actionable choice, possibly in real time. Identity services are crucial to each of these.
Implementation and Migration
Transition to any new form of payments model is going to be costly and time consuming. This is mitigated by the fact that technology has moved on and offers new opportunities to isolate change from core systems and deliver new services cost effectively. So great are these costs and difficulties, however, that such technology must be chosen so as to offer corporates direct leverage in areas far beyond payments, extending into other core operations and well into direct services to customers and their partners. It should also enable banks and other service providers to generate new revenues through the introduction of new services that have value to their customers.
The key areas where implementation work is required are in the provision of directory services and other universally available services for the delivery of identity and attribute information and the assurance of trust and management of risk, to a degree appropriate for the specific transaction. It is this area that will require the greatest thought and development before the full benefits of the new open architecture can be realised.
We therefore expect that the transition will happen over a period of time, but can be realised within the SEPA timeframe (2010) in a number of cycles dictated by the market both from a corporate and financial institution viewpoint. Corporates will not only need to show demand for the new more open services but actually need to enhance their capabilities to take advantage of them. At the same time, they will need to engage with banks in a way that builds benefits rather than simply increasing price-based competition. Corporates will need to be proactive in developing new propositions that offer benefits to financial institutions and drive positive change.
At the same time, banks are already looking at how they can enhance the strategic architectures they are implementing for payments, to be more component- or service-based, as well as enhancing flexibility and giving them the ability to move to this new model without major change to their core systems. Key to their desire for change will again be the ability to recognise and deliver benefit to their stakeholders rather than just incurring further cost.
To read the full TWIST SEPA white paper, please visit www.twiststandards.org
or if you wish to comment on this article, email sepa@gtnews.com