Reaching the PSD Milestone
On 27 March 2007, European finance ministers in the Economic and Financial Affairs Council (ECOFIN) reached an agreement on the compromise text for the Payment Services Directive (PSD). The PSD is a piece of European Commission (EC) regulation aimed at providing the legal foundation necessary to establish the single euro payments area (SEPA). Each member state has its own rules on payments and the EC estimates that making payments across such a fragmented market costs in the range of 2-3% of GDP and that the elimination of such disparities and barriers could result in annual savings of around €28bn for the EU economy.
This agreement is a key milestone and a considerable achievement in what has been a painful process. Initiated well over two and a half years ago, it has included five draft documents and has led to a proposal being published in December 2006 with the aim of establishing a harmonized legal framework for an integrated European payments market.
The PSD covers a wide range of payment methods: credit and debit cards at POS and ATM cash withdrawals, electronic bank transfers, direct debits, standing orders, and any other payment means. As it stands, the regulation will require further interpretation by member countries and by the payment schemes and associations to be applicable consistently across all intended payment methods. Effective compliance will not only require a re-working of all customer agreements, but in the vast majority of cases there will also be the need for significant infrastructure changes.
On this latter point the PSD seems to provide a general framework that does not take into account the characteristics and significant differences between payment methods. For example, the ‘clear and succinct harmonized information requirements’ included in Title 3 of the PSD document should not pose significant problems for most payment methods, such as direct debits and bank transfers, but will represent a difficult challenge for the payment cards industry. In this case, much will depend on the interpretation of the concept of ‘good time’ required by the PSD to provide the payer (cardholder) with the specific information listed in article 27: ‘transaction information subsequent acceptance’ of the payment order for execution.
Unless this ‘good timing’ communication requirement can be addressed by the issuance of the monthly statement, and the transaction information can be fixed by the copy-voucher printed by the POS terminal, another major operating and infrastructure overhaul will be required for cards, POS terminals, and ATMs. All this at a point in time when even the EMV migration has not yet been completed.
There are a number of other points with similar far-reaching implications and feasibility constraints that will keep the industry busy up until the implementation deadline of 1 November 2009, if not longer.
Apart from the challenges of implementation, the final version of the PSD includes quite a lot of changes and compromises from its earlier drafts. It introduces the concept of a ‘payment institution’ as an organization that can provide payment services despite not being a bank. This has been the subject of much debate among the member countries and a European north-south divide seems to be developing.
The points of compromise include ‘the possibility of waiving certain provisions for small payment institutions for smaller payments institutions, activities that a payment institution may undertake with particular regards to the provision of credit’,1 and ‘the capital requirements for payment institutions’.
In particular, this latter point has been the subject of much debate, with the more liberal countries, such as the UK and Sweden,2 pushing for a lighter regulatory touch, in order to stimulate the innovative use of payments and credit, while France, Spain, and Italy want to protect more traditional banking industries. This will make it difficult for small organizations, such as the many informal remittance networks, to enter a regulated regime but will not stop the larger organizations, such as the multinational corporations, disintermediating their payment providers by gaining direct access to exchanges and other operators like mobile providers in order to develop retail payments solutions.
All in all, the aim of the EC, which is to establish a modern and harmonized legal framework for an integrated payments market in the EU, has not completely failed to meet expectations and should help to put an end to the patchwork of national regimes currently in use. Much has yet to be seen about how each member state will translate the PSD into their respective domestic market but it is hoped that the lowering of cross-border barriers to entry will drive further consolidation and the shake-up of banking markets that have much to gain in terms of competitiveness and efficiency, especially in some southern European countries.
I believe that the PSD is a key milestone in the establishment of the EC’s objectives but much work is still required, not just for implementation from the banking and payments community, but also from a regulatory stand point in order to truly foster and achieve the sought after competitiveness and transparency in the European banking and payments industry.
Needless to say, I hope that further layers of regulation will stem from the PSD and take into account the characteristics and operational peculiarities of each payment method to enable speed and consistency of implementation.
1 Press Release – 2792nd Council meeting Economic and Financial Affairs; Brussels, 27 March 2007
2 Finextra – EU ministers agree on payment services directive framework – 27 March 07