Why is Technical Interoperability Vital for SEPA?

The European Commission (EC) and the European Central Bank (ECB) have high ambitions for the single euro payments area (SEPA). They expect SEPA to create a competitive market space in which banks in the eurozone compete for services that they build around standardised payment products, such as SEPA Direct Debit, Credit Transfer and Debit Cards. And if it were up to the EC and ECB, e-invoicing would also be included in this.

For payment processing, the aim is for the parties involved to compete for the volumes of (transactions based on) the same standardised payment products, and for the banks to have a free choice between several processors. In that way, market forces will lead to a healthy processing industry; not monopolised and much more consolidated than the current national landscape.

Once they have materialised, these ambitions will have a major impact on all aspects of payment processing, whether related to business, products, market technology or governance.

Lack of Interoperability will Lead to Proprietary Solutions

SEPA is supposed to introduce the ability to seamlessly make and receive payments. This includes transfers made to accounts outside the area directly covered by the executing payments institution or processor, hence involving two or more parties in succession to successfully execute payment transactions across Europe. ‘Interoperability’ refers to the ability to be systematically and consistently accessible to other payment institutions and processors.

Standards in the European Payments Council (EPC) Rulebooks and the CSM framework lay the foundation but do not on their own provide for the required interoperability. If left to the discretion of the market and its individual players, the CSM framework and Rulebooks leave room for different implementations of technical details, which are likely to translate into many proprietary solutions for interoperability between market players. This will:

• complicate operational processing for basic and additional services requiring multiple party interoperability (e.g. direct debit, e-invoicing, STP, clearing and settlement).
• complicate basic SEPA product scheme elements such as the consistent handling of exceptions and inquiries; and, in turn, result in longer time intervals.
• increase switching and link-up costs for individual participants, payment institutions and processors.
• make the market less accessible and transparent for SEPA users.
• in practice, create technical and economic barriers for infrastructures and banks in markets dominated by incumbent(s), potentially slowing down the migration of domestic schemes to SEPA.
• hamper payment processors and payment institutions in providing reach other than via a central PEACH.
• hamper the introduction of future services or general improvements at scheme level (e.g. e-invoicing and faster payments).

Realising SEPA Product Scheme Goals through Common Technical Interoperability

In Interpay’s view, a necessary part of the answer in solving the SEPA challenge on interoperability is to regard end-to-end payment processing as a logical network model in which the participants involved are free entities, while using the same, i.e. common, open technical standards aimed at interoperability to share processes and exchange payment information among each other. In that way, in SEPA, banks and other payment institutions will be able to send payments directly to or receive payments from other payment institutions or indirectly through intermediary payment processors.

Common (generally adopted) technical interoperability for the exchange of process and transaction information for payment processing purposes is a prerequisite for realizing SEPA. Technical interoperability is at the heart of any solution for an efficient payment processing market function and will not be realised without the industry-wide (mandatory) adoption of a common set of standards and practices.

If all parties use the same interoperability, a seamless payment processing environment will be created at an operational level. Common technical interoperability will cater for seamless, safe and controllable end-to-end payments, facilitating operational processing for various services that require multiple party interoperability (e.g. direct debit, e-invoicing, STP and additional processing services). Market-wide interoperability will be able to cater for multiple types of payment value chains. In order for payments in SEPA to be efficient, it is essential that common technology standards and practices are agreed. So which standards are we talking about? (see box below.)

The standards we are talking about here should technically support interoperability through number/routing management for information and settlement streams, technical and message protocols and authentication, and for facilitating billing and value added services. Moreover, these standards will have to be available to banks and commercial processors as well as to other parties with a vested interest in payment processing.

Creating a Level Playing Field through Common Technical Interoperability

The EC and ECB expect the payment industry to develop common instruments, standards, procedures and infrastructures. They therefore see interoperability as a top priority. The processing industry is a networked environment in which all parties involved have a shared interest in creating the fabric to allow SEPA to function properly. The EC therefore expects that a cooperative approach will allow the adoption of common standards for transferring payments across systems and processing agents.

For competition between payment processors to be possible on a level playing field, there is a need for common technical interoperability that enables payment processors to easily connect to or switch processing partners. At the same time, common technical interoperability allows the payment processor to be able to reach new markets, currently shielded by proprietary interoperability solutions (often created by those same payment processors together with their user communities!). In short, technical interoperability creates the conditions for increased competition and hence for faster consolidation.

Combined with low switching costs as a result of common technical interoperability standards, the market will be constantly facing inherent arbitration for inefficiencies and market barriers. Every payment institution can now arrange for its own commercial processing relationships to realise optimal processing capabilities and reachability. It is truly up to the individual banks or processors to compete for transaction volume on the basis of their own capabilities. These could consist of portfolio, price, reliability, service levels, or any other valued differentiator.

With common technical interoperability in place, individual payment institutions and processors will be able to:

• set up interoperability flexibly for low costs.
• use multiple solutions to cater for reachability and processing needs.
• use multiple payment value chains.
• possess, if desired, a multi-supplier processing model delivering flexibility for banks in a competitive processing environment.

Complementing the SEPA Frameworks for Common Technical Interoperability

Establishing a framework adhering to overall SEPA goals – in terms of both the product scheme and the market – to be used by payment processors and payment institutions on the basis of technical interoperability ensures industry-wide acceptance, use and compliance. The framework should set out a common denominator for interoperability between participants and may therefore be seen as a minimum standard to be supported. It needs to include the technical standards and specifications that form the basis for common technical interoperability.

By adopting an interoperability framework for all stakeholders involved in payment processing, technological and business interoperability are effectively defined and standardised. After creating a true level playing field in this way, payment institutions and payment processors can enter the competitive marketplace and can compete (or cooperate) effectively for payment processing volumes on the basis of their own unique selling points and capabilities.

The interoperability framework should build on, complement, and fill in some details of the standards as laid down in the EPC Rulebooks, the UNIFI Data Model and message set, and the PE-ACH/CSM framework. Creating conditions for business interoperability for the industry by complementing the technical interoperability (created by the standards of the EPC documents) will define the basis conditions to attain this in order to arrange for the full SEPA product quality that banks and public authorities want to achieve.

Receiver Capability Needed to Secure Technical Interoperability

To be able to reap the full benefits of the many-to-many network model, the connectivity receiver capability is being introduced. Connectivity receiver capability means there is always one option for connectivity available. Parties may agree on a particular option, but it is not necessary to use this option if they jointly find that a different option is more suitable. Receiver capability will spark convergence while generating co-existence with other connectivity and message sets.

The connectivity receiver capability can be used when two parties with a payment processing function want to exchange payments. It can also be used by a bank as the originator bank to connect to a destination bank or to a party with a payment processing function. The receiver capability allows for better competition on the infrastructure layer while opening up the market for any viable value chain model.

Payment institutions and processors will be able to arrange for reachability and processing through voluntary commercial agreements. These arrangements will be at the discretion of the players involved.

Open Approach to Promote both Collective and Individual Participant Interests

Open standards guarantee that no single market participant or group can shield the market by having greater access to the standards or can misuse the process of the evolution, compliancy or governance of standards to limit the use of and/or access to the standards by others. In this framework, there should not be any restriction in the use of the standards to any party or the combination of participants wanting to cooperate for payment processing purposes.

The standards used in the framework should be made available for payment institutions as well as payment processors and other participants, such as corporates or other legal participants with a vested interest in payment processing. We advocate the

Independent Body to Administer Open Standard Developments

An independent approach can be established by an independent body that designs and ratifies standards and protocols and arranges for compliance. Preferably this body should be part of the existing or anticipated bodies that will govern SEPA. The responsibilities of the standards body could include the following:

1. Safeguarding the open character of the standards.
2. Being responsible for the timely development of the standards.
3. Rationalising the available standards by selecting the best technologies and introducing mechanisms to eliminate duplication and manage conflicts among standards developers.
4. Increasing compliance with the use of these open standards.

It is essential that the interests of all relevant stakeholders are appropriately represented in the governance structure, which is responsible for defining and maintaining standards and compliance with those standards. It must include an effective, workable, transparent and unambiguous decision-making process. Relevant stakeholders will be banks and processors, but could also include SEPA users.

Conclusion

Common technical interoperability benefits the entire payment industry as it creates flexibility for banks and their customers and also creates a competitive and innovative processing arena that delivers high quality and economic processing.

In our opinion, the basis for interoperability should be laid down in an extension of the SEPA framework and should be used by all participants involved in payment processing to facilitate end-to-end payment processing within SEPA. Wherever possible, this framework should define mandatory rather than optional ways of working with technical interoperability for payment processing.

The framework extension will provide these participants with the prerequisites to both operationally interoperate as well as to commercially compete, while meeting the technological and economical challenges in the European payment landscape. The aim will be technical and business neutrality that caters for a level playing field at the business level.

Now, before SEPA is effectively introduced in 2008, the payment industry has a chance to arrange mechanisms to facilitate interoperability/reachability for the financial community as a whole and to prevent possible lock-in with proprietary solutions.

If you wish to comment on this article, email [email protected]