SEPA Migration - With an End Date
There are currently large differences across Europe in terms of efficiency in payments and service level being offered to customers. In some countries, many transactions are paper-based while in other countries most of them are handled electronically. The purpose of the single euro payments area (SEPA) is to eliminate the fragmentation of payment instruments and processing standards, and introduce a truly single market. But fragmentation across Europe also makes it difficult to implement SEPA payments.
The introduction of SEPA must support less-developed markets, yet at the same time allow migration for the most advanced countries. This is a major challenge. The migration to SEPA will happen over a number of years starting earlier this year. The process must be well planned to avoid unnecessary problems for stakeholders, yet at the same time it has to be decisive to reach full migration.
SEPA is a challenging project for the banking industry. Over time it will also affect all citizens, corporates and public authorities in Europe. The creation of the euro was a great achievement, but SEPA is necessary if we wish to have a modern, sophisticated and efficient payment market for the euro.
Without SEPA, it will not be possible for the users of payment services to fully reap the benefits of a common currency and an integrated internal market. In addition, the new legislation, the Payment Services Directive (PSD), is in the process of being transposed into national legislation.
The PSD will come into force on 1 November 2009 and will help revolutionise the payment market by providing a uniform legal framework for all payment services and payments across Europe, be they euro or non-euro transactions in national or SEPA formats.
All stakeholders will be affected to some extent and some may react negatively. It is necessary to limit the migration period by deciding an end date. That way the message from the European Commission (EC) becomes: “Migration means that all domestic and cross-border euro payments will move to the new SEPA formats and payment instruments. The end goal with the migration to SEPA is that all legacy payments instruments will have disappeared.”
SEPA has been introduced through self-regulation by the European banking industry. The European Payments Council (EPC) was established in 2002 as the organisation to deliver the necessary rulebooks and other conditions, such as scheme management. SEPA began in January 2008 with the delivery and launch of the SEPA Cards Framework and SEPA Credit Transfers (SCT). The SEPA Direct Debit (SDD) will be launched in November 2009 when the PSD comes into force.
The move to SEPA is strongly encouraged by the European authorities, in particular the European Central Bank (ECB) and the EC. The understanding between the EPC, the ECB and the EC is that the move to SEPA is through self-regulation, rather than regulation, by the European banking industry. In practice, this means that banks do not have much of a choice – SEPA must be delivered.
But the problem is that other stakeholders, such as corporates and public authorities do have a choice at the present. They can decide, for whatever reason, that SEPA is of no interest to them. A situation could develop where the banking industry is ready, but where large and/or important stakeholders decide to stand on the sideline. This is clearly a development that is neither acceptable nor sustainable.
Such a scenario would force the banking industry to support dual systems for an unlimited period of time with huge cost implications and the benefits of SEPA would not be realised, neither for banks nor for other stakeholders. Such a development could put the whole SEPA project in jeopardy.
If we compare the situation with the introduction of euro notes and coins, this process was very strongly pursued by ECB and the national central banks. The change was mandatory and, after a period, legacy notes and coins ceased to be legal tender. As a result, the introduction went smoothly and even faster than expected. Without this mandatory process, we would have had dual currency circulation for a long time.
There are lessons to be learnt from the euro changeover for when we plan SEPA migration. The most important point is that if people are given choice, they may prefer to remain with the existing (well known) domestic service; without a choice, they will be forced to comply. This is the nature of compulsion and it can be put to good use to support the migration to SEPA. It will align the interest of all the stakeholders, such as corporates and public authorities.
It is often said that the SEPA products are not as good as the products that exist in domestic markets and this is used as an explanation or excuse why there is no interest to move to SEPA. The first version of the SCT Scheme Rulebook contains a core and basic product, which mainly is used for cross-border payments.
The new SCT Scheme Rulebook 3.2, approved at the EPC Plenary in June, contains a number of improvements that will support the migration of domestic payments, such as salary and pension payments and other payment specifications. This new rulebook comes into force in February 2009. Some communities may have additional requirements that are not included in the rulebook and then it is possible to use additional optional services (AOS) to cater for these additional needs. The conclusion is that migration of national payments to SEPA payments will be facilitated with the new rulebook.
The SDD scheme must also be in place before a large-scale migration can start. At the same EPC Plenary, the SEPA Core Direct Debit Scheme Rulebook 3.1 and the SEPA Business-to-business Direct Debit Scheme Rulebook 1.0 were approved. The SDD will be launched in November 2009. The SDD is a fully electronic direct debit service that is based on a mandate signed by the debtor. All the mandate-related information must be properly recorded in electronic form and will be used when collection of funds takes place.
The migration from current domestic direct debit schemes to SDD poses a particular challenge in relation to existing mandates. The question is whether existing mandates can be migrated to the new SDD without signing a new mandate, i.e. reuse existing mandates. This would be very advantageous for all creditors since it would remove the need to have new mandates signed by all debtors. There may be, however, a few problems in this respect.
The first relates to the PSD. The transposition into national legislation is now taking place. It would be ideal if Member States could adopt legislation that would allow for the migration of old mandates to the new SDD. This would save a lot of time and money for the creditors. In the event that migration of mandates is not possible, the costs would in the end have to be borne by the debtors.
The second problem might be that the current mandates at national level do not hold all the information that is necessary according to the SDD Scheme Rulebook. Asking the debtor to provide the missing information could eventually solve this problem. This would of course mean a rather costly exercise, but it may be preferable to signing completely new mandates.
It is however important that the SDD Scheme Rulebook is fully respected in relation to mandates, as well as all other rules to avoid the development of ‘mini-SEPAs’.
The intention is that customers should be able to freely choose banks based on what service the bank offers. There should be no local variations, except as allowed for under the rules for AOS. Such services which may be offered in a community will be fully disclosed on the EPC website. Through these rules, it will be ensured that SEPA will indeed create a transparent and level playing field without any entry barriers at national level.
The SEPA payment instruments are based on the new ISO 20022 XML standard, which is used in the EPC scheme rulebooks. The adoption of the XML standard will have benefits in the long term. The same standard and type of payment can be used for a domestic or a cross-border payment. For banks, this will mean opportunity to further streamline operations. But the new formats could also lead to a much higher level of straight-through processing (STP). When migration starts from domestic payments to SEPA payments, it is necessary to continue with the very high level of STP that normally is associated with domestic markets.
The new formats will also accelerate the move towards e-SEPA since new electronic services will be delivered using the new formats. This is where one of the true benefits of SEPA lies and where a lot of opportunities exist.
Competition will increase through SEPA and PSD. This will mean new opportunities and threats for banks. Banks that adopt and start offering services based on the new SEPA payment instruments will have opportunities to compete for new customers. The whole idea behind SEPA is to create a level playing field and to increase competition. In this game, there will be winners and losers. Banks that do not position themselves as SEPA banks run a severe risk of losing customers.
The discussion on an end date for migration is ongoing and there are diverging views as could be expected. Some argue that the market forces should decide migration and that no one should be forced to move. Others see a very strong need for an end date.
The timetable adopted by the EPC of a migration to SEPA within 2008-2010, effectively making the move to SEPA irreversible by 2010, is no longer credible. Due to the delayed launch of the SDD scheme and the delay of the PSD, the timetable for migration needs to be revised. A more realistic end date for migration must be chosen and there is some consensus around the end of 2012.
The advantage of having an official end date is that it sends a strong signal to all stakeholders, banks, corporates, governments and local authorities, and private customers. The signal is:”SEPA is coming and everybody must adopt SEPA. Doing nothing is not an option since legacy payment services will not be available anymore from a certain date.”
An end date removes the first mover disadvantage and makes it possible for banks to adopt a long-term SEPA strategy. It also supports an exit strategy for legacy payments. Moreover, an end date forces all major stakeholders, i.e. corporates, governments, tax authorities, local municipalities, to adopt and implement a SEPA strategy.
It will become necessary for all these stakeholders to decide when they are going to move to SEPA, not if. That is a very important difference. Just waiting will no longer be an option. An end date will force all stakeholders to set aside a budget for the migration. In some cases, the move to SEPA could be a complex and time-consuming process, including IT changes and/or upgrades, therefore an end date should be set some years in advance. However at the same time, it is important that this end date is decided upon now.
An end date strengthens the confidence in SEPA and helps to progress the migration to the benefit of all stakeholders.