EPC's Perspective on SEPA: Progress and Challenges
The realisation of the single euro payments area (SEPA) is essential in achieving the vision of the European community as committed to in the Lisbon Accord of 2000 by the heads of state and governments to make the EU the ‘most competitive and knowledge driven economy by 2010’. The European authorities have supported the self-regulatory initiative by the payments industry, which in return responded positively by forming the European Payments Council (EPC) in 2002. This initiative was also a consequence of Regulation 2560/2001 on cross-border charges that eliminated the difference in charges between domestic and cross-border payments in the European Union.
The vision of the payments industry was released in 2002 and was subsequently incorporated into the preamble of the charter of the EPC, being that the members: “Share the common vision that euroland payments are domestic payments; join forces to implement this vision for the benefit of customers, industry and banks and accordingly launch our single payments area.”
The EPC has continuously met its commitments and delivery as worded in the Roadmap, delivering to the industry the frameworks, business rules and standards for SEPA. It is now time for the individual banks to honour that commitment and to make that commitment a reality for their customers.
In December 2004, the EPC Plenary approved its Roadmap 2004-2010, where it agreed that: ‘SEPA will be the area where citizens, companies and other economic actors will be able to make and receive payments in euro within Europe, whether between, or within national boundaries, under the same basic conditions, rights and obligations, regardless of their location’.
The content of the Roadmap was reviewed in the first quarter of 2005 by all EPC members and by all banking communities, in particular in the euro area. To ensure the commitment and support of the entire banking community, the Roadmap was also reviewed by new and national banking communities, to ensure that non-members also supported the objectives, scope, deliverables, timelines and roles of SEPA and the national banking communities.
Based on the feedback of the members and national banking communities, the EPC Plenary concluded that the EPC Roadmap was indeed supported and approved as stated in the EPC Crown Plaza Declaration of 17 March 2005 with the focus on the primary EPC deliverables:
“We will deliver the two new pan-euro payment schemes for electronic credit transfer and for direct debits. We will also design a cards framework to define a single market for cards. The scheme rulebooks and the cards framework definition will be delivered by end 2005, and the services will be operational by January 2008.
We know from feedback from the community in the eurozone that by the beginning of 2008 the vast majority of banks will offer these new pan-euro services to their customers. We are also convinced that a critical mass of transactions will naturally migrate to these payment instruments by 2010 such that SEPA will be irreversible through the operation of market forces and network effects.
SEPA will be delivered by the banking industry in close conjunction with all stakeholder communities (consumers, SMEs, merchants, corporates and government bodies) and supportive public authorities. The community of European banks is strongly committed to this ambitious programme of action, based on self-regulation and a full recognition of the role of market forces and competition.”
The EPC Plenary has met the expectations of the regulators so far for the January 2008 deliverables for credit transfers, direct debits and for cards. The Euro Banking Association is handling the deliverable of value-added service priority payments.
Next to the primary deliverables of the EPC Roadmap, complementary deliverables (e.g. cash, e-payments and mobile payments) were approved. It is worth stressing that the EPC has primarily a design, support and monitoring role. It is up to banks and their national communities to take the lead in implementation and migration plans.
The EPC pursued a strategy to replace the current euro credit transfer and direct debit instruments with SEPA instruments. The business rules and standards are set out in version 2.1 of the Rulebooks issued in September 2006 and are complimented by the Implementation Guidelines version 2.1 issued in September 2006.
Version 2.2 is planned for approval at the EPC Plenary of December 2006. This version adds an upgraded chapter 6 regarding the scheme management functions of version 2.1. Version 2.2 will be the basis for the January 2008 deliverables of banks as committed in the EPC Declaration of 17 March 2005.
The EPC Plenary decided in December 2005 to formulate an additional proposal for a second mandate flow option (mandate flow of the debtor to the debtor bank) and for a business-to-business direct debit scheme. These two optional features were approved at the EPC Plenary of September 2006. These features will be included in version 3.0 of the SEPA Direct Debit Rulebook and in the Implementation Guidelines, which will be presented for consultation at the EPC Plenary of December 2006 with final approval in March 2007.
The Rulebooks mainly cover the business rules and standards for the bank-to-bank space with the data standards from customer-to-customer, and are the basis for the value propositions of banks for their customers. Banks compete with their value propositions for core and for value- added payments services.
The legal model for SEPA credit transfer and SEPA direct debits are based on ‘adherence agreements’ of banks and of payments institutions participating in the two schemes, with the scheme management entity (SME). The EPC Plenary supported a legal model, to make the SME, a function of the EPC AISBL (a Belgian legal entity) in the interests of the participants of the schemes.
The EPC strategy for cards is an adaptation strategy. It was decided to develop the SEPA Cards Framework, approved by the EPC Plenary in March 2006, with high-level principles and rules for banks, card schemes and card processors. This will enable European customers to use general-purpose cards to make and receive payments and cash withdrawals in euros throughout SEPA with the same ease and convenience as they do in their home country.
Banks are expected to deliver SEPA Cards Framework (SCF) compliant services from January 2008 to their customers (consumers and merchants) and to ensure that payments scheme(s) in which they participate become SCF compliant.
The ECB (Eurosystem) made it clear in its last Progress Report in February 2006 that more standardisation is expected for the different parts of the card payments process. The EPC responded positively by approving a document for further standardisation of the card payments process.
While banks, card schemes and processors are reviewing their options; the ECB (Eurosystem) reviewed the current status of these strategic dialogues. Jointly with the European Commission, they expressed their concerns that there might not be sufficient scheme competition left in the end game.
DG Competition and the European Commission organised an inquiry into the competition of the current cards payments market in the European Union. Their findings were presented for consultation. A position paper from the Commission, in particular covering interchange arrangements, is expected before 2007.
SEPA credit transfers, SEPA direct debits and SEPA cards transactions need to be cleared and settled in an efficient way. The settlements will be executed in central bank money via Target 2. The new Eurosystem platform will be implemented in all euro markets from November 2007 until beginning 2008.
The EPC developed a Clearing and Settlement Framework/PE-ACH, which allowed five clearing venues for banks. Some banks prefer to continue with their bilateral clearing whereas others are strong defenders of the pan-European automatic clearing house (PE-ACH) model. A PE-ACH offers pan-European reachability for euro clearing services to all banks.
The EPC strategy regarding cash is twofold: first, reduce the costs of cash processing and, second, re-position the payments instrument cash. The single euro cash area (SECA) Framework was approved by the EPC Plenary in March 2006 and is focused on reducing the processing costs of cash. A study by McKinsey, published in 2005, made it clear that banks are losing at least €21bn in cash in nine of the EU25 markets. For this reason, the EPC decided to publish a document with options to reduce this loss based on the lessons learned from repositioning cash in some European markets.
Limited progress has been made regarding the next steps of these two payment channels. These emerging markets are fragmented with many proprietary solutions. More and more non-banking companies offer payments services based on these payment channels. It makes sense that banks agree on the business rules and standards for these payment channels. The number of users and the services delivered by mobiles and by e-commerce is growing fast.
Borderless solutions are required to meet the need of consumers and merchants. The EPC Plenary expects to receive a proposal in December 2006 for the next steps of these two payment channels.
Communication on the benefits of SEPA for all stakeholders and society is essential for successful migration to SEPA. It is the intention of the European Commission and the ECB (Eurosystem) to intensify the communication in close co-operation with the banking industry. The EPC developed a communication document ‘Making SEPA a reality’ with a dual purpose: first, for banks and their marketing communication and, secondly, for national banking associations for their dialogues with stakeholders in their communities.
The EPC does not have a specific communication role within national communities; these tasks are taken care of by the national public authorities and the national banking associations.
The EPC’s design deliverables, such as the SEPA credit transfer rulebook and SEPA direct debit rulebook, were reviewed, approved and supported by corporates and their national and European associations, such as the European Association of Corporate Treasurers (EACT). The EACT supports the approved version of the rulebooks, but expects that in the next version more functionality for direct debits will become available.
The EPC gave the European Commission and the ECB (Eurosystem) several opportunities to provide their feedback and for additional requirements for public administrations on these rulebooks.
The Governing Council of the ECB and the European Commission expect that banks will be able to deliver SEPA payments services to their customers from January 2008. The EPC Plenary made it clear in its Declaration of 17 March 2005 that banks are committed to delivering these services. Banks are designing these value propositions for their customers.
Banks and national communities are leading the way in realising the implementation. The EPC will supply the support and tools to monitor this implementation as stated in its mandate. Several initiatives have been taken by the EPC to reduce the coordination risks of the implementation in the euro countries, such as the creation of a ‘Testing Framework’, and a ‘Directory for operational readiness’ document for the January 2008 deliverables. Support through a National Implementation Managers Forum is also planned.
The Governing Council of the ECB and the European Commission made it clear in the joint statement of 4 May 2006 that public administrations should be the first ‘launch’ customers for the new SEPA payments services. The public procurement rules in the European Union are based on the principle that not only national providers are expected to give an answer to a tender of public administration for payments services. This approach may lead to a better deal for the benefit of the tax payers.
Several bankers and banking associations have expressed concern about the speed of customers’ acceptance of SEPA. The EACT reiterated after its September 2006 Board meeting its strong support for the introduction of SEPA in line with the timetable agreed by the European authorities and the EPC. While corporates and merchant organisations have confirmed that they see the economic benefits of SEPA, the position of public administrations is not yet clear.
Several consumer organisations have said that they support the SEPA payment instruments, provided these instruments are as easy to use, safe and efficient as what they are used to. The change for consumers is limited. Overall, the new SEPA payment instruments are an upgrade of current payment instruments with the additional feature of reachability to all bank accounts in the euro area. The introduction of mobile telephones, Internet and the euro was far greater significance for consumers than the replacement of the current payment instruments by SEPA payment instruments.
The realisation of SEPA requires harmonisation of legislation by public authorities and harmonisation of business rules and standards by the industry.
In December 2005, the European Commission published its proposal on the Payment Services Directive (PSD). A lot of market participants, including the EPC, gave their comments on this proposal. The European Parliament reviewed 642 amendments. The European Parliament and the Council of the European Union are expected to pass the proposal for a PSD of the European Commission in one reading before January 2007.
Bankers should not underestimate the impact of the PSD. Not all banks realise that the PSD will also apply to their current payments services for all currencies of the European Community (EU25) and not only to the new SEPA payments services.
Over time all customers – corporates, public administrations and consumers – are expected to benefit from SEPA. So far, a convincing study on the macro, meso (for corporates and for banks) and micro study is not yet available. McKinsey clarified in its study ‘European Payment Profit Pool Analysis’ of June 2005 the importance of payments for the suppliers’ side. At least 24% of banking revenues and 34% of the banking cost and 9% of the profits are related to payments.
The study also clarified that there are structural differences in the revenue models and for the instrument mix in the euro area. In some markets in the euro area customers pay more than others or markets where the consumers are paying relatively more than corporates and vice versa.
The EPC will not take any position on the revenue models of banks, because this is beyond its mandate and in conflict with the correct behaviour required by the competition rules.
It is expected that the interest revenues and interchange commission will be put under more and more pressure, which requires banks to refine their fee structure. Several regulators have expressed their support for such a development, because it gives more transparency to the customer and reduces the volatility of profits, and therefore the risks of banks.
Banks gave their full commitment to SEPA and empowered the EPC to make it happen, and now, in union, we must turn our SEPA vision into reality.