SEPA: Impact on Infrastructure and Competition
The current payments infrastructure in Europe is outdated and reflects the days when Europe was divided into national states and the payment infrastructure was orientated around a central bank in each country and neighbouring clearing banks. Payments cross border to another country had to be routed via a network of correspondent banks. This structure is pretty much intact and it is therefore important that EU countries develop a new payments infrastructure based on the fact that integration in trade has advanced so much.
The payments infrastructure in many countries is lagging behind trade in goods and services leading to inefficiencies in the internal market and higher costs for consumers; the single euro payments area (SEPA) is therefore welcomed. This new payments infrastructure, however, must be based on an appropriate regulation and there are important issues related to the conditions of infrastructure access that must be resolved if the new payments infrastructure is to be successful.
The competition issues related to infrastructure access are well known in today’s market. For example, one operator often has a dual function: ownership and operation of infrastructure that is necessary for other market participants to use and, at the same time, selling services in competition with other market participants. The incumbent operator might charge prices for access to the infrastructure, which means that competitors in the downstream market are put at a competitive disadvantage. This might occur even if the incumbent’s company downstream meets the same prices as its competitors. An economic loss in the incumbent’s downstream company is more than offset by the profits in its upstream company.
Over the past few decades, widespread infrastructure reform has taken place in most EU countries. The telecoms sector is perhaps the clearest example of these reforms. Old public utilities in most countries have been transformed into modern companies that compete with other telecom companies selling a variety of services. In most cases, the old public utilities that were transformed into public companies still own the telephone cables that constituted the infrastructure.
When the EU telephone market was reformed, EU regulation acknowledged this problem and a specific sector regulation was laid down in the E-com Directive. In order to deal with the anticipated competition problems, an ex-ante regulation was developed and implemented. The E-com Directive stipulates that, under certain circumstances, the sector regulator has the authority to decide on prices for infrastructure access if there is an incumbent that has significant market power. These prices should be cost-based and aimed at safeguarding fair access to the infrastructure for competitors. The sector regulator might also decide on other matters if there are competition problems.
For a bank to be able to compete in a wide range of services, the execution of payments is vital. This means that the market conditions in payment services have an important bearing on the market conditions in the banking sector generally. The way payment services are operated often differs from other infrastructure markets in the sense that it is not operated by a public utility. Instead, it is often operated by a number of banks that jointly own and set the conditions for access to this infrastructure. As the European payment infrastructure is in a state of major structural reform, these basic problems need to be resolved in an appropriate way.
Many competition authorities have experienced problems related to the payment infrastructure. Recently, the European Commission carried out an enquiry into the financial sector that placed an emphasis on payment services. More or less simultaneously, the European Competition Authority (ECA) released a report that covered the payment systems in the EU countries. This shows that as SEPA is being developed there are important decisions being made among the competition authorities that should be factored into the conditions for SEPA and the accompanying directive.
The Swedish Competition Authority published a report in January 2006 based on a request from the Swedish government. The report dealt with the issue of whether access to payment infrastructure constituted a problem for small banks to compete with the major clearing banks and whether competition was impeded by the payment infrastructure.
The main conclusion in the report was that the current infrastructure has not hindered development where the market shares of the major four banks have diminished somewhat. However, the report concluded that there are still a number of problems in specific parts of the payment services market where problems linger. One result is that although the operation of a new company offering ATM services ought to be profitable, Sweden has the least number of ATMs per inhabitant in the EU.
Another problem is the governance structure in the Swedish banking giro. The four major banks have the majority of shares in the banking giro at the same time as being the main customers of its services. Other banks and financial institutions, however, need to use the banking giro and issues regarding volume rebates and other conditions are sensitive and might have significant effects on competition. The issues raised in the report are how to deal with conflicts of interests in this payment infrastructure.
The ECA report, to be published shortly, starts with a broad overview of the payment systems and retail banking markets in the member countries. The report mainly focuses on consumer mobility, access to payment systems and SEPA. In the area of consumer mobility issues, the report raises issues related to switching costs and transparency for consumers. With regard to issues of access to payment systems the report looks at membership criteria to payment schemes and governance issues.
SEPA will mean a radical change for the current infrastructure so it is crucial to get the structure and accompanying regulation right. If this is not done correctly, it will take a long time to repair and the consequences for consumers and businesses in the EU will be considerable. It is important that the regulation SEPA is based on is adequate and that competition issues are dealt with appropriately. The following issues are ones that I consider to be crucial:
It is also important that the competitive pressure within SEPA is sufficient. This will happen if not only banks but also other service providers can make new entry into the payments services markets and therefore provide adequate consumer choice. If this is not the case, regulation must be used as a counter measure and intensified in order to make sure that SEPA relies on a cost-based business model. This would, however, create a less business-oriented model but one of public intervention.
On the other hand, if there is sufficient competitive pressure in SEPA, we can rely on a value-based business model where prices are set on normal business conditions. This is, of course, the avenue to take but only if the conditions are met. We can all benefit from this and now is the time for businesses and politicians to realize that this is the big issue at stake.