The Impact of SEPA on the Irish Payments Industry
A post-single euro payments area (SEPA) Ireland will be an attractive market for payments providers with greater competition as entry barriers are removed. Irish businesses will be able to make payments electronically rather than by cheque and enjoy a richer range of services. The use of cash by consumers will drop significantly, replaced by convenient and innovative electronic alternatives.
Post-SEPA, the current domestic clearing arrangements will be consigned to history, cheques will be almost obsolete, the cards market will be transformed by both new entrants and new technology and the volume of cash-based transactions will be significantly lower, and falling. Of even more importance is that customers are likely to have access to a far richer suite of related value added payments services while also enjoying very competitive pricing. The marketplace will become far less national and much more European, and the current players may not all still exist! SEPA will be the primary driver of this change.
One of the primary objectives of SEPA – that Europe will become a huge domestic market for euro payments – will obviously impact most on those member states that have adopted the euro as their national currency. Ireland, traditionally always very committed to European matters, was one of the first member states to complete and submit a National SEPA Implementation Plan to the EPC in December 2005. Included in that plan was not just a commitment to develop and launch SEPA-compliant products for 1 January 2008, but to deliver the migration of national payment schemes to SEPA schemes. A target date of October 2009 for this national migration was subsequently set by the Irish Payments Services Organisation (IPSO).
Ireland, unlike most other European countries, does not operate a domestic automated clearing house (ACH). Instead it relies on a system of bilateral arrangements between members, with electronic files being exchanged daily and settlement taking place at the Central Bank of Ireland. While there are some set-up and maintenance costs associated with this system, one notable attraction is that banks do not charge each other for transactions processed. The migration of current domestic payment traffic to a SEPA and pan-European ACH (PE-ACH) environment will therefore present a significant financial challenge to participants to continue to offer, and indeed enhance, services to its customers in an economic and efficient way.
A decision not to enhance the existing bilateral arrangements to cater for SEPA credits transfers means that from as early as January 2008, payments between customers of Irish banks could be settled on mainland Europe rather than locally. It will be interesting to see if all current domestic traffic will migrate to a PE-ACH solution or if at least some bilateral deals are agreed between the larger domestic players.
Of course the identity of these domestic players may continue to change. Two of the main clearing banks have been taken over by non-Irish parent institutions in recent years. With the continuing trend for consolidation in the industry, the continued high level of economic growth and the attractive high level of banking profits in Ireland, the remaining indigenous players could well become targets for multinational players looking to increase their geographic spread across Europe. This could have a significant impact on clearing arrangements, as local solutions, such as bilateral arrangements, would be less likely to be attractive to large volume participants of PE-ACH clearing arrangements who would be availed of bulk discounts for their payment processing. Such a scenario would likely result in all transactions being processed through a PE-ACH.
Ireland is currently one of the highest users of cash per capita in the EU. It is also the third largest user of cheques per capita of the euro countries after France and Portugal.1 Consistent with the aspirations of SEPA – that participants should enjoy the economic and other benefits of more efficient payments – Ireland has established a National Payments Implementation Programme that aspires to convert as many cash and paper transactions as possible to electronic payments. The advent of SEPA is regarded as a potential catalyst for advancing this aspiration. As businesses in particular see the benefits of efficient electronic payments, and the expected valued added services that will evolve, it is reasonable to assume that there will be a natural migration away from cheque and cash usage.
Consolidation at European level, and increased completion at local level, should see a significant enhancement to the range and value of payments services being offered to businesses. International businesses, in particular, will see the immediate benefits, once products such as the SEPA Credit Transfer and the SEPA Direct Debit are introduced, as it will enhance their cross-border payment options. In particular, the benefits of the SEPA direct debit would be obvious for a multinational biller, such as a mobile operator, who will ultimately be able to issue direct debits to all its eurozone customers from one single originating bank, located in any of the SEPA countries.
For domestic businesses, however, there may be some painful costs to bear before the expected benefits of a fully developed SEPA can be realised. The scale benefits of SEPA will not be achievable until there has been a significant shift of domestic payments to SEPA schemes. Migration from the existing domestic standards to the SEPA equivalents will require changes to the financial systems of businesses, which will inevitably carry a cost. The Irish banks and their business customers will need to work closely together to ensure that this migration takes place as smoothly and economically as possible.
While the later than expected arrival of the Payments Services Directive (PSD) may ultimately challenge the timeframe of the National Implementation Plan, a successful migration to SEPA will ultimately deliver increased value in payments services for Irish businesses.
From a consumer perspective, such migration may take a bit longer. Significant change in consumer behaviour is generally slow, particularly with financial services, but the payments business in Ireland has a couple of further complications.
Firstly, card products are subject to an annual government duty charge of €10 a year for debit and ATM cards (€20 for a combination card) and €40 for credit cards. This is seen as a ‘tax on plastic’ and is widely regarded as encouraging the use of cash transactions as well as discouraging consumers from either using a card product at all, or discouraging the use of multiple cards from competitive providers. It also seems to have a dampening effect on innovation in the cards business with very slow if any progress relative to European counterparts in areas such as prepaid cards, contactless cards, card-based micro-payments and mobile card payments.
A second factor is that there is a relatively large section of the adult population without bank accounts, currently estimated at 11%.2 These issues are likely to have been resolved by the time that SEPA is fully deployed. A review of the stamp duty issue, in the light of the expected and welcomed increase in competition in financial services within the country and across the Community, should see this resolved. Significant progress will also have been made in relation to bank accounts, as institutions such as the post office and credit unions increase the range of financial services that they provide to their customers, including money transmission accounts. There is also a significant effort being made by the State to deliver social welfare and other payments electronically, which should close this gap further.
Ireland will be an attractive and exciting place for the payments business in the post-SEPA environment. The current rate of corporation tax for trading income is 12.5% – considerably lower than most of the rest of Europe. Economic growth in the country ran at 6% in 2006 (its highest level since 2002) and the 2007 growth is forecast currently about 5.5%. Although this is expected to decline to about 4% in 2008 and 3.5% for subsequent years, this still remains considerably ahead of growth predictions for Europe as a whole.
All these factors make Ireland a very attractive market for both mainstream financial institutions, niche players and other payments services providers. The provisions of the proposed PSD will make it easier for non-banks to compete with the established payments service providers, leading to greater competition. The trend for consolidation in the financial services sector is likely to lead to participation by multinational players, further enhancing the competitive environment.
Payment service providers, although likely to be facing ever-increasing competition for customer business, should be able to generate attractive returns for the provision of efficient, attractive and innovative payments products and services. Consumers, both business and personal, can look forward to the benefits of this increased competition, leading to greater choice, efficiency, security and more importantly value, following the implementation of, and transition to, SEPA. Businesses can expect to be conducting most, if not all, of their payments business electronically, not just domestically, but across all SEPA countries. Personal consumers can expect a significant reduction in their cash transactions, driven by the delivery of convenience, security and value through the innovative use of technology.
The challenge of SEPA is for the Irish banks to provide these services to their customers before the competition does.
1 IPSO Annual Review 2005/06
2 IPSO Survey August 2006