In the past few months, there has been a significant amount of literature on the subject of the single euro payments area (SEPA). As with all EU initiatives, questions have been raised with regard to the commitment of various parties involved. Yet despite the fact that the live date for SEPA could be delayed, there is little doubt that this project is moving in the right direction. Indeed, the European Payments Council (EPC) plenary meeting in mid-December 2006 marked another important step towards laying the final groundwork of this vitally important initiative. In particular, Rulebook V2.2, outlining the business rules for making SEPA payments has now been agreed and the implementation guidelines for SEPA credit transfers (SCTs) and SEPA direct debits (SDDs) have also been approved.
Value of the PSD
Admittedly, the EU Payment Service Directive (PSD), which aims to set out the legal conditions under which any electronic payment service can be offered in the EU in euros and all other currencies, has yet to be finalised. However, the remaining sticking point, which centres on the legal stance of payment institutions, now appears to have been resolved and, as a result, it is expected that the PSD, under the German presidency, will be passed in the EU parliament by the end of first quarter 2007.
The passing of the PSD is of course a fundamental prerequisite for SEPA to take effect. However, the Directive does not become legally effective immediately as this has to be translated and passed as national law in each EU member state. This process usually takes up to 18 months. Although this does not pose a problem for SCTs, for SDDs, it is essential that the legal framework is enforced. As a result, in January 2008, while the SCT will be requested and used by customers with almost immediate effect, the demand and uptake for SDD will be somewhat slower.
Infrastructure for SEPA
With the legal foundation in place, the big players in the market will need to ensure that the payments industry operates within a highly efficient infrastructure. In this respect, an important element will be to urge banks to connect to a pan-European automated clearing house (PE-ACH). Currently, the European clearing environment comprises 39 independent clearing systems, different payment instruments with different clearing cycles and a variety of practices in terms of transaction details and references. This inefficient system is clearly not sustainable if Europe wishes to compete on a global basis.
Some steps have, however, already been taken with a view to improving efficiency with regards to clearing on a pan-European level. In fact, the European Banking Association (EBA), an industry forum of commercial banks including Deutsche Bank, has made a sizeable contribution to developing the infrastructure of EU financial markets. EBA Clearing has continually enhanced the euro clearing systems in close co-operation with its member banks under the supervision of the European Central Bank.
EURO 1, STEP1 and STEP2
The EBA Clearing has been particularly active with regard to the development of pan-European payment system initiatives. Having created the large-value payment system EURO1 and the low-value payment system STEP1, it is also responsible for the development of STEP2. The EBA recognised at an early stage the banks’ need to be able to offer their corporate and retail customers cross-border payment services in euros at cost and service levels comparable to domestic payment services. With the introduction of the EC Regulation 2560/2001 on cross-border euro payments, the need for a highly efficient bulk payments infrastructure became even more pressing. Against this background, it initiated the development of STEP2, the first pan-European automated clearing house PE-ACH, to help meet the banks’ requirements by providing them with a highly automated system that is capable of processing cross-border credit transfers within the EU at low cost.
STEP2 is the first PE-ACHfor bulk payments in euros. The CREDEURO service on STEP2 currentlyprocesses retail payments ofup to €50,000 per transaction. In accordance withthe requirements of EC Regulation 2560/2001, each payment instruction needs to bear, among others, the international bank account number (IBAN) of the beneficiary and the bank identifier code (BIC) of the beneficiary’s bank in order to comply with STEP2’s straight-through processing (STP) criteria. By executing CREDEURO-compliant cross-border credit transfers at low cost, STEP2 has been of vital importance to the European banking industry in its progressive migration towards SEPA.
Pilot phase
EBA Clearing is confident that it can achieve a broadly based PE-ACH that provides the full benefits of SEPA through an efficient, integrated and flexible service offering to a wide banking community. In view of launching the SCT service and the SDD service on the STEP2 platform in 2007, EBA Clearing has sent out invitations to its users to invite them to participate in the project as pilot banks. The pilot banks including Deutsche Bank will work together to properly adjust the upcoming EBA Clearing offerings to the EPC Rulebook and Implementation Guidelines as well as to the ISO20022 messaging standards. Furthermore, this co-operation should facilitate each pilot bank’s own implementation programme in view of its upcoming scheme adherence.
Each pilot bank will also be invited to participate in the testing activities that will take place in July/August 2007 and subsequently in the monthly joining windows in September, October and November 2007. EBA Clearing plans to be ready for live SCT and SEPA Debit Transfer operations in January 2008, in line with the commitments of the industry for SEPA.
Ensuring SEPA’s Success
Most of the elements that are needed to make SEPA a success are already in place. Yet for this to occur, all parties involved must show their commitment to pushing the initiative forward. This not only includes institutions on a political level, but importantly banks and corporates as well. As far as banks are concerned this means making investments in technology and infrastructure so they will be fully SEPA compliant as of 1 January 2008.
Deutsche Bank has already underlined its stance in this respect and is developing solutions while offering a pan-European platform for SEPA transactions, thereby affording process optimisation. At the same time, it has been working closely together with its corporate clients making sure that they are not only kept abreast of all developments, but that they also prepare at an early stage to ensure a smooth migration. Numerous clients have already collected the required IBAN numbers, BIC codes and updated databases accordingly so that when SEPA finally comes to fruition any potential cost savings can be realised immediately.
Looking forward over the next 12 to 18 months, it is clear that there is still a lot of work to be completed before SEPA goes live in 2008. Yet, this should not detract from the fact that much has already been accomplished. Indeed, whereas many European initiatives have faltered in the past due to a conflict of national interests, this is clearly not the case with SEPA. Within the EU there is a consensus that Europe must move forward and that compromises will have to be made in order to achieve this. The current payments landscape in Europe, characterised by fragmented markets, but also differences in legal framework, payment instruments and standards is simply not sustainable if Europe wishes to compete on a global level.
However, with the framework for the SEPA schemes finalised and the implementation of the PSD due to take place by the end of the first quarter, the most important elements in accomplishing the creation of a domestic payments market across the eurozone are now firmly in place.