SEPA: Business Opportunities Despite Direct Debit Delay
The ambitious plan to create a single euro payments area (SEPA) across the 27 European nations has run into trouble nine months before it is due to be implemented. The problem? Legislation – namely, the Payments Services Directive (PSD).
The PSD replaces domestic legislation concerning instruments such as direct debit and credit payments. It was due to be passed last year, however, the European Union (EU) has failed to pass the directive in time to allow the SEPA implementation of these instruments on 1 January 2008.
Credit and debit card payments are likely to go ahead on time, however, according to Gerard Hartsink, chairman of the European Payments Council (EPC), responsible for drafting the rules around a SEPA direct debit scheme, it is likely to be at least Q4 of 2008 before the additional instruments can be implemented. Full replacement of domestic systems in the eurozone may also not meet their 2010 deadline.
At present, under the German presidency of the EU, it is possible that the PSD will be passed in one sitting in April 2007; following an 18-month period of transposition of EU law into domestic legislation within member states, implementation could take place at the end of 2008. However, whether the PSD is passed in one sitting remains to be seen.
This set back may not altogether be a bad thing. European banks have had breathing space to take stock of the implications of SEPA and remain confident in the benefits of the new systems, in terms of creating new business and delivering a far more dynamic commercial framework across the EU – with a wider geographic area delivering fast and cheap domestic payments products and services.
Anticipated growth in volumes and improved STP rates mean that around 60% of banks believe that these savings will improve their income.1 For others, however, the future is less certain, as the implementation costs may outstrip the benefits for some of the smaller players, meaning a period of consolidation in the payments industry is possible. Currently, over 70% of banks see the improvements in STP rates as one of the main critical requirements for a successful SEPA. And, given that payments only account for 10% of EU bank profits and 75% of their costs, it is little wonder that the pressure is on.
SEPA itself has clear benefits for businesses and consumers. Large and even medium sized corporates are going to benefit from the elimination of cross-border charges, and consumers will be able to control their finances from one country. Think of any pan-European or global retailer with whom you might deal with regularly, cross-border payments for them present a huge cost and a barrier to efficient business practice. Additionally, by improving and growing the availability of electronic payments instruments, and eliminating expensive methods, such as cash and cheques, consumers will themselves continue to grow volumes.
At this time, the SEPA rulebook version 2.0 regarding debit and credit payments looks largely at overall systems and processes rather than specific technologies. The second iteration of the rulebook drafted by the EPC establishes the connectivity from a business (or originator) directly to a bank – in the UK, this goes to the national automated clearing house (ACH), Voca. The bank then passes the transaction to be cleared and in theory this could be done by any scheme-approved ACH. This introduces the element of competition across margins, and more competitive pricing structures that will allow huge volume processors to achieve major savings.
As a vendor of transaction processing systems, we are acutely aware of the need to monitor the system requirements that will be laid down for SEPA. At present, France and Germany have rejected the connectivity model in Europe suggested by the EPC. There is significant consolidation and change in the ACH industry, and discussion on how mandates will be managed and processed is hotting up. However, as a key stakeholder group, systems vendors have largely not been consulted adequately from the outset and there has been little opportunity for this group to provide its feedback. It is our firm belief that scheme compliance, and the strict enforcement of it, will be the key factor of SEPA’s direct debit and credit offerings.
Overall, the public in the UK firmly believe in the use of direct debits – demonstrated by the huge levels of usage – and this is certainly underpinned by the Direct Debit Guarantee. Without public acceptance and support, the volumes will not come through to make the system sustainable at the outset and therefore much more work is needed on this.
SEPA addresses some major issues that the EU understood some time ago had to be tackled head on. In an impact assessment undertaken by the EU as part of the PSD, the following issues were highlighted.
With over 231 billion payments being made a year (up to 3% of GDP) – and cash is used for as much as 70% of these transactions – SEPA should enable greater reductions in the use of cash and reductions in the cost of managing cash.
The establishment of a single currency with wide ranges of payments infrastructures and systems has been an issue and SEPA will enable full consolidation of these with common standards. The wide variations in charges from country to country should also be ironed out by competitive practice and fully standardised cost transparencies. The wide variety of processing cycles will also be eliminated and replaced by a single cycle making the system highly attractive too.
There is now a lack of efficient competition and level playing field in the payments market, in that the payments industry is a network industry and a certain degree of co-operation between competitors is necessary (e.g. to establish common standards) in order for the system to function efficiently. However, the Commission received many complaints from new market entrants in the non-bank sector about substantial barriers to entry to the payments market and a less than level playing field. New players are often faced with difficulties when trying to join existing national payment systems and infrastructures, which are a prerequisite in order to be able to compete.
Lastly, a fragmented legal framework for payment services means that efficient national payment services and systems are not available on a cross-border basis due to legal and technical barriers. For instance, direct debits, which are a common and cost-efficient service to pay for utilities, are not available for payments in different countries. Similarly, most of the popular and cheap national debit cards do not operate across borders. This will all change.
In the coming weeks, more will become clear about the timing of SEPA and how it will be managed. The benefits to European banks, businesses and consumers – along with reduced costs, payments cycles, improved STP rates and an increase in automated payments through encouraging e-payments – are all factors likely to make SEPA worth waiting for (at least for a little bit longer!).
1 According to research from i-flex