2009: A Good Year for Corporate Users of Payment Services
The single euro payments area (SEPA) project had its point of no return for banks in early 2008 with the go-live of SEPA Credit Transfers (SCT). 2009 is likely to create more interest for corporate users of payment services to change processes and systems. The most important driver for such change is the implementation of the Payment Services Directive (PSD) on 1 November 2009, which includes measures that are beneficial for corporates and oblige banks to offer updated services for any EU currency in each of the 29 EU Member States affected by the payment regulation.
Regulatory and economic pressure is leading to more stakeholder engagement in the roll out of harmonised payment services in the EU. This is not unique to the EU. For example, the Australians are on a similar trajectory having created a list of user expectations for payment service users (customers and providers). Corporate users of payment services will likely benefit from proactively engaging with their banks in 2009, using the Australian list of user requirements for payment services as a starting point for their discussion.
The need to improve payment services is not unique to Europe. In many countries and regions, such as Japan, China, the Middle East and Australia, there are projects under way that aim to upgrade payment services to meet modern requirements. In Australia, for example, the Australian Payments Clearing Association (APCA) published an Australian roadmap for low value payments in December 2008. This roadmap includes a high level vision of Australian low value payments leading out to 2018, as well as a shorter-term industry solution path for the next few years to work towards.
Most interestingly, from the start of the project the need to actively engage payment service users was acknowledged. In the view of the Australians, ‘the vision’ starts with a set of high level expectations from payment system users, both customers and participants. These establish the success criteria for future evolution. Continuing their collaboration with stakeholders, the Australians are now moving to upgrade their payment services based on user input and to embrace international standards in the next two to three years.
The Australian Payments Clearing Association (APCA) identified a comprehensive list of high-level expectations of customers of users of payment services. The items are similar to those expressed in Europe over the course of the last decade.
High-level expectations of customers of payment services:
Reliability
Security
Efficiency
Convenience
High-level expectations of participants in the payments system (payment service providers who are also users of inter-bank payment systems):
Business potential
Global alignment
Risk management
In Europe, when it comes to the upgrade of payment services, the banks have placed much emphasis on the SEPA project. This is a project co-ordinated by the European banks as a form of self-regulation to meet the strong demand of regulators to realise an efficient and open internal market and finalise the introduction of the euro in the EU in its electronic form.
Some speculated in recent months that the banking crisis could diminish the drive of banking regulators for SEPA implementation. No signs of this yet. On the contrary, in its 6th SEPA progress report in November 2008, the Eurosystem, consisting of the European Central Bank and the central banks of the Member States, restates: “[…] its role as a catalyst for change”. It recognises that: “SEPA is not just a business project, but is also closely linked to the political ambition to move towards a more integrated, competitive and innovative Europe.” So the Eurosystem, which effectively is the guardian of the euro project in the EU, remains tireless in pursuing SEPA roll out. The Eurosystem recognises, however, that “motivation for the project has been fading away among market participants, and that the constructive spirit of the preparation phase has turned into a downbeat attitude.”
The Eurosystem response is to focus more on stakeholders of payment services. The Eurosystem wants the market to overcome its current weariness and to ensure the success of SEPA, urging action of: “[…] all relevant stakeholders, such as corporates, public administrations, merchants and consumers.” “[…] The full benefits of SEPA will only be reached if SEPA responds to customer needs. It has strongly embraced agenda items of large payment users in SEPA such as the ability to pass remittance information end-to-end, the application of message standardisation in the customer-to-bank domain, seamless migration from paper-based direct debit mandates to electronic mandates, and, in general, the engagement of customers in driving the SEPA project.”
Arguable more influential than the SEPA project, which primarily covers the processing of euro payments between banks, is the PSD. This directive, which comes into effect in November, sets detailed requirements for the end-to-end electronic processing of payments in any EU currency anywhere in the EU.
The European Commission (EC) worked pro-actively in 2008 with national legislators to ensure an orderly and co-ordinated transposition of the PSD. As a result, many Member States intend to transpose the PSD well before the deadline and all Member States have agreed on 1 November 2009 as a common date for the entry into force of their respective domestic laws. This means that 29 countries in the EU will have a common legal basis for the national and cross-border processing of credit transfers, direct debits and cards by the end of this year.
All elements listed in the seven categories identified by the Australians are covered by the PSD. The directive is particularly friendly to bank customers. A number of clauses stipulate the information that banks are obliged to provide to their customers before executing payment transactions, effectively enhancing the transparency of service provision. One example is the obligation to inform up front the maximum processing time for a payment; another example that is particularly beneficial for small companies is the need for banks to disclose exchange rates that will be applied to cross-currency payments before execution of the payment order. Today, many banks don’t inform exchange rates until after execution of the order.
Furthermore, the PSD stipulates that unless explicitly agreed, banks can’t deduct charges from the amount transferred by the payer to the payee, which improves the transparency of service offerings and service charges. There are also clear obligations of banks for the correct processing of payments, without the ability for these banks to pass on the costs of incorrectly processed payments to their customers. This processing rules harmonisation benefits companies that operate cross border in the EU. For instance, the PSD leads to a maximum of eight weeks for revocation of direct debits anywhere in Europe. But maybe most importantly for companies, from January 2012 onwards, there is a maximum of one day to execute payments across the EU. Until the end of 2011, bank and bank customer can still agree on a maximum of three business days for processing payments; value dating beyond these processing limitations becomes unlawful.
The EU’s DG Competition, DG Internal Market and the Eurosystem are jointly putting pressure on the banks to pressure to comply with the PSD and, in particular, its harmonisation rules for direct debits. In exchange for pressing on with implementation, banks will, for a predefined period, be allowed to retain existing mechanisms of interbank processing charges for direct debits. That only applies to the 25% of the market where such interchange fees are currently applied.
The PSD is not the only EU regulation that affects payment markets. An example is the Anti-Money Laundering (AML) Directive that affects financial services provision in general. But from a payment services user point of view, two regulations stand out: Regulation 2560 and the e-Money Directive. In 2008, the EC not only worked on aligned transposition of the PSD but also on the internal alignment of these two other regulations with the PSD.
In October 2008, the EC formally adopted a proposal to update Regulation 2560 for 1 November 2009, coinciding with the implementation of the PSD. Regulation 2560 currently stipulates that charges for cross-border EU credit transfers in euros can’t be higher than charges for in-country credit transfers. The EU Parliament and Council of Ministers are expected to accept the Commission’s proposals to extend this regulation to direct debits, for EU Member States to appoint bodies to effectively deal with complaints from bank customers and deal with disputes, and to phase out by 1 January 2012 the balance-of-payments statistical reporting obligations imposed on payment service providers. All three components are very welcome for corporate users of payment services. In particular, corporates lobbied for many years to remove the need for balance-of-payment reports within the EU and in recent years obtained support from banks in this matter.
At the same time, the EC adopted a proposal for revising the current rules governing the conditions for issuing electronic money in the EU. The revised rules aim to facilitate market entrance and contribute to developing this industry further. For instance, the definition of money remitters was updated to be consistent with the definition of payment services providers in the PSD. The new definition covers e-money held on payment devices in the holder’s possession (pre-paid cards or electronic purse) or stored remotely at a server (network or software money). The result is that service providers other than banks can become regulated payment service providers. These will have the regulatory support and capabilities to compete with banks from November 2009 onwards with innovative solutions at low cost.
It has been a long journey, but in 2009 corporate users of payment services should have long awaited improvements offered to them. In spite of the banking crisis, many banks that had not invested in compliance with SEPA and the PSD have put the necessary budgets in place for 2009. The banks that have already invested in compliance will wish to see returns on their investment as quickly as possible. Such returns are linked to the level of uptake of SEPA-compliant services by bank customers and the related opportunity to decommission expensive legacy systems and processes. Therefore, the banks will start approaching their corporate customers with proposals to change their processes and systems.
What can corporate users of these European payment services do in response? First of all, corporates should realise that the legal framework being put in place benefits them and has a deadline for implementation by the banks. Bank customers can invoke their rights for service offering transparency, improved information and reduced settlement times irrespective of the individual product service designs banks come up with. The specific design of SEPA products only applies to the eurozone and is not captured in any regulation. Therefore, corporate users of payment services in the EU are in a comfortable position – they have no obligations but will be requested by their banks to change processes and systems.
As a result, increased dialogue between corporate customers with their multiple banks about process designs and system upgrades are likely to ensue in 2009. Corporates will probably be interested in changing their processes and systems, particularly given the multiple potential benefits for them. But corporates can also request standardised change implementation for multiple bank providers. If such requests are not met, they can simply postpone implementation due to an alleged lack of business case for change.
Corporate customers can also proactively ask for harmonised and PSD-updated services in tenders for payment services. How can they ensure they ask for the right thing and do not push banks towards proprietary and expensive offerings? A good starting point can be a joint review with individual bank providers of the Australian list of high-level requirements. This list covers many of the items embedded in the PSD and points to fairly common requirements across the globe.
Service providers must listen to their corporate clients. In 2009, banks in 29 European countries need to start proactively responding to long-standing corporate customer demands. The EU regulators have created the necessary level playing field and continue to push the banks towards harmonised and improved service levels. For PSD-enabled services, individual firms can now require transparent charges, better information and – with increased competition – improvements in reliability, security, efficiency and convenience of payment services. All individual companies need to do to benefit is ask, as their counterparts have done and continue to do in Australia …