SEPA for Cards
Using your card while travelling abroad for business or holiday purposes is already quite common today.1 But, admittedly, the card is more often used for cash withdrawals at ATMs than for paying at the till in a local supermarket or souvenir shop or in the taxi on the way to your hotel.
Two reasons account for this. First, acceptance by merchants of a non-domestic card brand is not as universal as the card industry sometimes claims, even if the card is co-branded with a major international brand. Secondly, acceptance of cards, in particular in some countries, is still quite low; meaning the percentage of merchants who accept only cash is still quite high in many countries in the euro area.
It may surprise you that the Eurosystem believes that a single euro payments area (SEPA) for cards is needed urgently and comprehensively to overcome low card use in the euro area. Studies have shown that card payments can be more cost efficient than cheques or cash. However, to really replace cash by cards (which is also the objective of the banking industry itself) card payments need to be made even more efficient and convenient. Moreover, SEPA for cards, and SEPA for credit transfers and direct debit, will complete the introduction of the euro, as the euro will from 1 January 2008 be a full-fledged currency in cash and in electronic payments.
One of the more recent studies, the World Payments Report 2006 prepared by CapGemini, ABN AMRO and the European Financial Management and Marketing Association (EFMA), provides figures showing the increase in terms of volume of non-cash payment transactions in Europe. The increase may differ from one country to another, but it shows, in any case, that cashless instruments are gaining in acceptance and usage.
It is a pity that in the figure above three countries are left out, which have an even higher volume of non-cash payment transactions, especially of card payments. In Finland and Denmark, people use their cards 1.5 times more often than the inhabitants of the first group (i.e. The Netherlands, France, Austria, UK and Sweden). In Norway, people use their cards twice as often. This shows the growth potential of the cards market.
Cash Versus Cards
The use of cash was also covered in the World Payments Report 2006. The report concludes that there are no signs of a fall in the use of cash, which remains the preferred means of payment among European citizens. However, would preferences remain unchanged if prices of payment instruments became cost-based? In 1981, Norwegian banks started to charge for the use of cheques. At this stage no universal payment card system was in place. As a consequence, the use of cash increased considerably. In 1992, when a common card system was put in place, and charges for ATM withdrawals were increased, the number of card transactions started to grow (from 100 million transactions in 1992 to 700 million transactions in 2005).
Moreover, the number of cash transactions started to drop. The experience in Norway is an indication that cards can become a replacement for cash as long as they become a more convenient payment instrument than cash and charges for payment instruments are cost-based. Hence, the banking industry faces the challenge of delivering a highly efficient and user-friendly cards market in SEPA.
As stated in the Eurosystem’s Fourth Progress Report on SEPA, any cardholder should be able to use his or her card in any ATM or POS, at a reasonable cost, without differentiation based on the country of issuance well in advance of 2010. Often, the message from the European Central Bank (ECB) on cards has been misunderstood and has been seen as an obligation for merchants to accept all cards despite the costs this might entail. This is certainly not our objective: merchants should only accept a card if this is in their own interest, but technical conditions allowing acceptance should be in place. It is in the interest of the banking industry to provide its customers with interesting business proposals and a secure and efficient mechanism to conduct card transactions within SEPA with the goal to expand acceptance.
Standardisation
An important aspect is standardisation. In this respect, it is welcomed that the banking industry, which has organised itself in the European Payments Council (EPC), has delivered a plan to focus on the identification of appropriate technical standards for cards. I encourage the EPC to set up a clear timeframe for this work, which is compatible with the timetable of the SEPA project, and to guarantee that the proposed standardisation will be open and future-minded. Standardisation will also lead to SEPA terminals, which can be developed, tested and approved for the whole euro area. Competition at euro area scale and lower production costs will make terminals less costly for merchants, and change the tipping point for accepting cards to the better.
Separation of Scheme and Processing
Another very relevant aspect is the separation of scheme and processing. The separation of card scheme governance and processing is an issue that has also been understood by the EPC and is therefore addressed in the SEPA Cards Framework. This is a crucial issue to be addressed in order to foster competition between card processors, also leading to lesser costs for the merchant when accepting cards.
In this context, interchange fees are of course also a crucial topic. There is currently some uncertainty concerning interchange fees. The Sector Enquiry of the European Commission provided interesting information on the issue. It is clear that the current levels of interchange fees do not seem sustainable. I am aware that the data used has been contested, but the overall pattern seems to be reliable. I expect that the Commission will clarify the interchange fee issue as soon as possible, preferably in the format of common rules for all schemes instead of decisions in individual cases. In the meantime, banks should not take strategic decisions about their future based on the current level of interchange fees. Lower interchange fees will lead to lower merchant service charges, contributing further to increased card acceptance.
Interests of Stakeholders
The European Commission and the ECB have an important role in keeping up the momentum in the bank-led process and in ensuring that the interests of all stakeholders are incorporated. The ECB and the national central banks also monitor the implementation of SEPA. In order to learn about the trends in the decisions of the different banking communities concerning a SEPA for cards, the Eurosystem, together with national banking associations, conducted a survey with national and international card schemes. Based on this survey, a report has been discussed in the ECB Governing Council. The report, published on 20 November 2006, clarifies a series of public policy provisions that are designed to ensure that SEPA migration does not lead to a deterioration of conditions for cardholders and merchants. These include the need for each card scheme to define and publicly disclose a medium to long-term strategy which is consistent with the objectives of SEPA; to protect confidentiality of personal data; to contribute to the design of standards with a clear commitment for implementation on time; to have a strategy on how to reduce fraud, especially cross-border fraud; and to foster competition.
Conclusion
SEPA will be an important contribution to the financial integration of Europe. By creating a competitive environment and by exploiting economies of scale, the goals of the Lisbon Agenda of promoting productivity, growth and employment within Europe will be supported. SEPA is not just about euro area standardisation, it is also about the future of the retail payment market in Europe. Banks can profit from SEPA if they adopt forward-looking innovative strategies. Moreover, progress in information and communication technology can be used to offer customers convenient, secure and efficient services that make their life easier and allow them to free up resources which they can use elsewhere.
The banking industry should continue its work on making cards and other cashless payment instruments more efficient. SEPA is not only a matter of adapting existing instruments to the new environment. Banks should make use of SEPA to modernise current service offers and to benefit from the economies of scale that SEPA entails. SEPA provides a unique opportunity that should not be missed. In a true SEPA for cards, cards will be accepted by almost every merchant, paving the way for an increased use of the cards, which provide a safe, reliable, efficient and easy-to-use method of payment for many payment situations, and can be more cost-efficient than cheques or cash.