Cash & Liquidity ManagementPaymentsThe PSD and the European Payments Landscape

The PSD and the European Payments Landscape

The payments landscape in the EU has been difficult for the regulators to manage. Despite the introduction of the single currency, the fact that different countries were operating independent payments systems was considered ineffective and inefficient, highlighted in March 2000 by the Lisbon Agenda. The resulting recommendations formed the basis of the Payment Services Directive (PSD), which is targeting a competitive and integrated European payments landscape.

The PSD is designed to generate competition in the European payment market by removing barriers to entry, guaranteeing fair market access and improving the transparency of payment service information across the 27 EU member states from November 2009. The aim is to reduce the number of payment systems and banks in the region and promote a constant, Europe-wide method for managing and processing payments. The PSD provides a number of rules about the rights and obligations linked to the provision and use of payment services.

Despite the best intentions of the European Parliament (EP) and its vision of harmonised payments across the EU, the reality is somewhat different. Each country must take the recommendations and requirements of the PSD and transpose them into their national laws; this process is highlighting differences and problems caused by each country having the choice of opting-out of certain elements of the PSD, therefore creating a bespoke system to meet their own requirements.

The permitted opt-outs were a necessary concession that the EP allowed in order to get the different countries to agree to the directive in the first place. However, this compromise may well have been a step too far. By allowing national opt-outs in the transposition of the PSD, the EP has diluted the uniformity of the directive itself.

If each country is developing its own ‘pick’n’mix’ approach to the PSD, it is likely there will be one or more that are viewed as easy targets for payment institutions that might not be able to set up elsewhere. However, it only takes one country effectively acting as the weakest link to cause problems for all other members.

In July 2008, a survey by Payment Systems Europe calculated that Europe’s major banks will spend up to €6bn preparing for the PSD – but until it has been fully transposed into law in each of the countries, it is difficult for them to know how best to proceed. They need to appreciate the challenges presented by the legal obligations and technical requirements of the PSD in relation to their current payment services, so that they understand what is involved in becoming compliant.

Cross-border Differences

The difficulty in achieving a consistent understanding of the scope of the PSD across the member countries is a significant challenge to its implementation, and may account for the lack of progress to date: most countries are in consultation mode, with only 15 months until the live date.

The PSD is long and complex – the directive itself extending to 36 pages – and is specific about what is and is not included within the framework. It only mandates electronic payments that are in euro or another member state currency, and where both the start and endpoint of the payment are within the EU. All other payments should fall outside the remit of the PSD. This means that paper-based payments, including cheques, are excluded, as are payments within a clearing system.

Banks also have to contend with what is called the ‘leg-out’. This refers to payments that don’t quite fit into the PSD remit, for example if the payment originates or ends outside the EU or if it is within the EU but not in euros or a member country currency. There is a creeping trend – borne out by the results of the UK’s consultation – to apply some or all PSD articles to leg-out payments. For the bank that is trying to make a payment these different approaches have the potential to cause a lot of problems.

In addition, Iceland, Liechtenstein and Norway, the three countries along with the EU and European Community (EC) in the European Economic Area (EEA), as well as Switzerland, which is outside both agreements, have also decided to meet the requirements of the PSD. However, even if they require incoming and outgoing payments to be PSD compliant, it doesn’t mean that the other EU countries will automatically include those countries in their plans and laws.

Turning the Vision into Reality

The PSD is supposed to go live in November 2009, but it is now the second half of 2008 and as of yet no country has completed the transposition into national law. At the very least having a final draft of the laws would greatly help banks in making the system changes required to ensure they are compliant – although until the PSD is in the statute books, they don’t know exactly what they actually have to do. The legal process timescales in many member countries mean that it is unlikely that all parties will meet the November 2009 go-live date.

There also appears to be inter-governmental consensus that no country should accelerate their implementation programme before November 2009. This avoids the risk of one country sending a payment that is covered by the PSD to a destination that hasn’t yet gone live, which has the potential to cause disruption and confusion.

Turning Up the Heat on IT Departments

The discussions around the PSD to date have centred on the higher-level policy and content issues, with little consideration given to the changes that banks will have to make to their IT infrastructures in order to become compliant. If the €6bn estimate is even close to accurate, the impact that it will have on banks’ IT departments is significant. Following in the wake of SEPA credit transfers (SCT) that went live in January 2008, the PSD has been an afterthought within many institutions until now. But many financial institutions are already past the planning deadline for 2009, which could stretch IT budgets even further. In those countries where the PSD hasn’t yet been transposed, it is even harder – banks have to plan, but they don’t properly know what they are planning for. They, therefore, have to take a closer look at all in-scope payment services in each country to ensure progress is made towards PSD compliance.

When the Lisbon Agenda set out its vision and plans for a standardised and harmonised payments infrastructure across the EU in 2000 it seemed a long way away. However, given that the date is getting closer, it still feels that the vision isn’t much closer to becoming a reality. The pressure is on the banks now, as the institutions that actually have to deliver the new services, to find some way of delivering on the promise of the PSD.

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