SEPA: The New Order
This article is based on the speech made by Mark Garvin at EBA Day on 4/5 June 2007 in Rome, Italy.
One year on from our meeting in Frankfurt, I believe we are on the brink of a new order in the payments industry in Europe, and leadership remains an issue.
Obviously, much has happened in the past 12 months, and we can see one clear sign of change looking around us today. Attendance at the EBA’s conference last year surpassed some very high expectations, and we are here in Rome in even greater numbers. Clearly, we agree on the significance of this occasion. We come to Rome because this is the premier opportunity for collective discussion and action in our industry in Europe. We come with an understanding of the need for leadership, and of the challenges that a new order of things will mean for banks, for regulators, and for clients.
In the past year, we have made real progress towards making the single euro payments area (SEPA) a reality. The sheer volume of documents issued by the European Payments Council (EPC) demonstrates that the industry has worked hard to produce schemes and to support implementation guidelines. Because of this effort, SEPA products can be introduced within the agreed timeframe from January 2008. Many of you here today are part of this effort, and your accomplishment is great.
And just over a month ago, the European Parliament accepted the Payment Services Directive (PSD) in a single reading. This adoption represents a major victory for the entire industry. Many of you worked tirelessly in public and behind the scenes to make this law’s passage now assured. But unfortunately, we cannot overlook the unintended consequences of the delays in passing the Directive. Instead of the target of 2008, SEPA direct debits, for example, will not reach the market until late 2009 – more than one year behind the original schedule.
This dissonance between the national adoption of the PSD and the unfortunately delayed implementation of direct debits creates some uncertainty – there is a real possibility that some countries or banks will decide to offer SEPA direct debits at least on a domestic basis before Europe as a whole is ready to offer this service. This will lead to confusion over what can be offered across Europe with any assurance of reach. And as we are all aware, reachability is critical to the success of true pan-European SEPA services.
On a broader note, we all know that we operate in a heavily regulated industry, and we are always eager to avoid adding to this burden. Our collective work, in co-operation with the Commission and national governments, has largely removed the threat of additional payments regulation – at least for now. We have had the chance to make our own bed, but will we continue to pursue the goals of SEPA with the same vigor?
There is still some uncertainty that needs to be resolved. Does being compliant with the SEPA rulebooks constitute implementation? Does mass usage of the new schemes? Undoubtedly, implementation will mean different things to different people. In a sense, we have no choice but to move forward – but how far and how fast? We have all been focused on the impending realities of a SEPA marketplace, but before we simply move on to ponder next year’s budget, I think we as an industry need to step back and ask, “What does implementation really mean? What is the end game?”
For some of us, the end game is just achieving a return on our investment in SEPA – either through offering new services or gaining more clients. And some day, benefiting from increased efficiency. But is that the real end game? And are we all even heading towards the same goal? We seem to be in the early stages of the emergence of a two or even three speed European payment system – one where different banks have quite different visions for their markets. Low gear banks may define their end game as mere compliance. So-called ‘simple compliance’ – the ability to receive and send SEPA payments, direct debits and card transactions will, of course, prove nothing of the sort. Research shows that there remain a number of banks that are doing the bare minimum to prepare for SEPA. Should such a large contingent be of concern? Or should we accept that many European banks have neither the capability nor the desire to continue to break new ground in the payments space?
I do not believe that many of these low gear banks are here today. After all, you don’t need to come to a conference like this to achieve simple compliance; you only need a copy of the SEPA documentation! To date, top gear banks have been at the forefront of the SEPA agenda. After all, the EPC, the EBA, and other governance schemes show us that issues simply do not move forward without a group of large financial institutions pushing for change. But now that the new order is beginning to take shape, the top gear banks find themselves faced with some significant decisions. Many of these decisions are more difficult than those facing low gear banks. But all banks should be asking themselves: What is our own end game in Europe? And for larger banks, the questions should include: Where are we steering our industry?
Think for a moment beyond this room, this city, beyond Europe. We are being watched by Asia, by the Middle East, by the Americas, to see how we execute the most complex integration strategy ever put forth in our industry. We are completing the rationalization of over 50 national payment systems, and in less than a decade. It took the US more than 20 years to create a true national payments platform. In this rapidly evolving sector, Europe has the chance to lead the way for the next generation. The Commission estimates that SEPA fully implemented will add 1% to the GDP of the eurozone. What might similar harmonization deliver for markets beyond Europe? The audacity of Europe’s vision for payments was, in retrospect, breathtaking. But now, if we aim low, for mere compliance, we will deny the benefits of a SEPA future, not just to our customers, but also to the global payments community. On the other hand, if we approach the next few years of SEPA implementation with the same collective sense of purpose that we have displayed in planning for this change, we will be able to look back in 10 years time and know that our actions marked the beginning of a profound transformation in how money moves around the world. It will be no less than the introduction of a new order.
A year ago, I shared some of our research on just how challenging these demands will be. Action to modernize our systems needs to be taken, not in five or 10 years, but today. Thus, the end game for us must not be simply SEPA implementation, but leveraging SEPA as a way to modernize our payment systems in order to meet our customers’ future needs.
Let me address just three areas where the challenges of a new order also provide opportunity for the higher gear banks:
I will then briefly explain why we continue to believe that governance is essential to realizing a bolder vision.
This term is used with increasing regularity, and the EBA embraces it in its new mission statement. In Europe, we more frequently refer to e-invoicing, which is but one element of financial supply chain management. The European Commission has pointed to e-invoicing as a means for realizing significant efficiencies for business customers, and JPMorgan agrees. The European Association of Corporate Treasurers’ (EACT’s) CAST project has estimated savings of €243bn in the business-to-business space alone. Indeed, during a recent JPMorgan forum, our corporate customers told us very clearly that while they see SEPA as primarily a bank issue, e-invoicing was of real interest to them as it could deliver quantifiable cost savings. The fact is that when SEPA products reach the market, they will not immediately provide the means of realizing the efficiencies and savings being quoted. Further work will be needed.
Today, we have no globally understood or applied standards – at any level – for e-invoices. No commonly understood framework. But within Europe, we have clearly identified legal, tax and political barriers. It is essential for everyone to understand the common basis for industry developments on which individual banks’ (and non banks’) competitive services can be built. JPMorgan fully appreciates the potential opportunities within this landscape and the need to develop basic standards. But this must not come at the expense of creating an environment that is too rigid to allow the creativity and innovation necessary to meet the commercial needs of our customers. Our European industry bodies will be key fora for discussing this, but we cannot achieve consensus alone. We need to involve other stakeholders – corporations, public administrations, e-invoice suppliers, and small businesses, among others. And we need to engage global bodies in this discussion to ensure that supplier countries are just as supportive of the eventual standard as buyer countries. E-invoicing represents a key area where continued bold leadership will be necessary to attain full implementation, mass adoption, and value for customers.
SEPA, at its heart, aims to deliver savings to customers across Europe. We in this industry know that the best way to drive costs down is to delineate the collaborative space as distinct from the competitive space. New services such as e-invoicing will not achieve traction without competition among banks to offer the service. Equally, if we cannot agree on common standards, customers will not benefit from competition among providers. But we in Europe need to think beyond the eurozone. To ensure that the full benefits of SEPA reach our customers, we must consider our actions in the context of the global marketplace in which we and our customers already do business. What good is an e-invoicing standard that is not used in Asia?
As for faster payments, there is criticism that it takes longer to make a payment across Europe than it does to send a parcel. This may be true today, but is clearly unsustainable as a business model, given the capabilities of modern technology. The PSD means that we will be moving into an environment where all payments have to be completed end to end by the close of business next day. Schemes such as Faster Payments in the UK and the EBA’s priority payment service offer the opportunity for even faster service offerings end to end – two hours and four hours respectively. Such intraday services provide opportunities for additional customer service and incremental revenues. And as we look around the world, it is clear that high value and low value schemes will no doubt converge one day.
How we position such services is very much a competitive issue. You may recall the analogy I made last year to the FedEx model. Federal Express charges €32 to have a letter delivered by 8am the next day between France and Germany, and just €3.5 to have the same letter delivered overnight, but later in the day. In the future, we can expect price to be a function of the speed of payment and level of security. Whether a bank offers such a faster payment service and how it is priced are competitive issues, but unless all banks are capable of processing receipts within the required timeframes, no bank will be able to claim it is leveraging the full potential of modern technology for payments processing.
Cards present a similar challenge. Cards will play an ever-increasing part in the European payments mix. Growth of 20% or more annually across all card payments is accelerating the trend away from cash and checks. The industry is closely monitoring the Sector Inquiry Report on retail banking recently published by DG Competition. Obviously Commissioner Kroes has her eye on the cards infrastructures, and this report reinforced the perception that the Commission expects change on this front. While legal actions already taken are likely to reach a conclusion in the coming months, the questions for the industry remain. Some of the Commission’s strongest language has been directed at the contentious issue of interchange fees. We at JPMorgan believe that some reasonable level of interchange is necessary to ensure that banks are able to issue cards at an attractive cost and with competitive benefits to consumers, corporates and the public sector. We also believe that any mandated changes to the approach on interchange should apply to all networks participating in card based payment schemes. But these positions alone do not resolve the concerns of the Commission.
Beyond the mere issue of SEPA compliance – for cards today represent a nearly SEPA-ready payment instrument – we will need to address the cards question as an industry. I do not know if the answer to the Commission’s questions is increased transparency, capped fees, or even a new pan-European infrastructure. One may question whether developing a pan-European scheme is the right direction in the rapidly evolving payments environment. Certainly, we should invest in global standards, enhance our product offerings and avoid unnecessary costs in the name of protecting national or regional networks. More dialogue with the public authorities, individually and collectively, will be required to develop a light touch solution that delivers benefits quickly to the end users. But we should not forget that a healthy cards business is essential if we are to move customers away from using cash and checks.
These are just three examples of critical areas that the industry must address to fully implement SEPA. And on each of these issues, we cannot act individually. The key to implementing these changes, and to continuing to lead the SEPA project remains governance. Simply put, without effective and purposeful governance, SEPA may reach the market, but no one – not banks, not governments and not customers – will realize the full potential of the post SEPA environment. Above all, only through proper governance, can we define the areas of competition and cooperation, hear the right voices from inside and outside of the industry, and continue to drive implementation and change.
So how should properly constituted governance structures look? Clearly, this is a question that must be answered differently depending on the problems a scheme seeks to solve. But based on our experience over the past decade in the payments industry, I believe we can draw some conclusions.
Firstly, the large banks must continue to assume their share of the burden. This has been the case in SEPA and I would only urge that my colleagues continue to shoulder this responsibility.
Secondly, beyond the responsibilities of large banks, governance in payments has witnessed over the past several years a transformation in the involvement of users. The birth of the UK’s Payments Council from the ashes of APACS is just one example. The new Payments Council aims to involve end users to an unprecedented degree and time will tell if this structure represents a best-in-class for 21st century governance schemes. What we can say now is that these changes will reverberate around Europe and around the world. Just last month, Commissioner McCreevy urged the private sector to, and I quote, “ensure that there are adequate governance structures in place to manage SEPA. The EPC is the only show in town as far as private sector governance of SEPA is concerned. It needs to better involve the users of payment services in its deliberations.”
I believe we ignore these words at our peril. Simply put, Europe should be leading the discussion of how to incorporate end users in the governing process, not trailing behind. Whether it is through an independent chair, independent directors, or an independent advisory group, we must open up the process to those who ultimately use the payments systems: our customers. The EPC is already having this dialogue. Should the EBA and its members also follow that model?
Ten years ago, the changes we are contemplating now seemed light years away. Think of how far we have come in the last year thanks to determined leadership in the public and private sectors. But look forward 3 years to 2010 – by then the euro will have an integrated and widely used payment system. Collective and continued effort under-pinned by sound governance processes will ensure the SEPA vision is implemented across Europe. But only through the bold actions of the top gear banks that seek to make the most of the opportunities that harmonization brings, will the true potential of SEPA be realized.
The potential to provide sustained commercial benefit to our customers and the European economy, strong revenue streams to those bold banks and a payments model that can be used globally – this is the real end-game. That – not merely compliant products – is the fullest realization of the SEPA vision.