Is Outside Regulation the Answer to a Stagnating SEPA?
At the time of its conception all those years ago, the European Union’s single euro payments area (SEPA) project was heralded as the next major step towards closer European integration, after the introduction of the euro. The vision was to allow customers to make non-cash euro payments to any beneficiary located anywhere in the euro area using a single bank account and a single set of payment instruments. All retail payments in euro would thereby become ‘domestic’ and there would no longer be any differentiation between national and cross-border payments within the region. A year after the first phase of the project – SEPA Credit Transfers (SCTs) – went live it is clear that significant progress has been made since the EU set out its initial plans. That said, however, it is widely recognised that the success of SEPA is currently hanging in the balance due to a number of factors, not least the recent announcement by the French Banking Federation (FBF) that its members have suspended work on the SEPA project. So, what measures can be put in place to save this important EU banking project?
Most parties now agree that SEPA migration – both in terms of uptake of SCTs and preparation for SEPA Direct Debits (SDDs) which are due to launch in November this year – has been disappointing to date. In fact, the SCT take-up stands at less than 2% of transactions as corporates continue to rely on the domestic payment systems. The main problem is that corporates have no incentive or business case to move from their existing payment instruments to the new systems and formats required under SEPA.
SEPA received another blow in December 2008 when the FBF announced that its members have suspended work on SEPA pending clarification from European authorities on interchange fees, for services that banks supply to each other. “As long as these rules are not clarified, the French banks, like many European banks, cannot start the work on the timetable because like all businesses, banks need to know their economic and legal risks,” said a statement from the FBF.
And, it is not just the French banks that have these concerns. Financial institutions across the European Union are worried about how the new services will be paid for. The Commission’s decision that MasterCard’s interchange fee on its cross-border credit cards and Maestro debit cards violates EU competition rules is just one example that is fanning the flames of uncertainty for financial institutions. The Commission and the European Central Bank (ECB) have stated that banks could use an interchange fee on direct debits but only for an ‘interim period’ and if it was justified. This short-term proposal regarding the multilateral interchange fee (MIF) from the ECB is not satisfactory for the French banks that say the move has ‘destabilised’ their planned SEPA business models and believe the issue demands a long-term answer; that is not yet forthcoming.
It is clear that new impetus is required to ensure banks receive greater guidance and support in their SEPA planning and so that a business case can be built for corporates’ migration to SEPA.
In my opinion, there are four main areas that need to be urgently addressed. First of all, the ECB itself has recognised that the European Payments Council (EPC), which is effectively the banks’ answer to self-regulation, has made considerable progress but “there is still considerable room for improvement as regards involving the full range of stakeholders.” As such, an industry body needs to bring together all stakeholders to move the European payment industry and all its end-users to the next critical stage along the path to a full SEPA environment. This industry body could be represented by an organisation such as SWIFT, which has a track record of bringing together the banks, the market infrastructures and, more importantly, the corporates, to agree practical ways forward involving the setting of standards and formats acceptable to all parties – all in a realistic business context.
The time could well be right for SWIFT to play a role in reversing the present situation and, as an ‘external’ body, it could have an important role to play in helping the banking industry formulate a business case for corporates’ SEPA migration. Such an approach would also help avoid the ‘mini-SEPA’ dreaded by the regulators, where significant regional or country-specific variations exist that contradict SEPA’s original purpose. It might also achieve one of the other items on the ECB’s wish list: more innovation in payment systems spurred on by SEPA.
Secondly, it is important to set an end date for the retirement of the legacy payment instruments. Many in the industry have been discussing the need for a SEPA deadline for some time, and the ECB now acknowledges that this is a requirement and ‘will work on the modalities – self-regulation or regulation – as well as the end date itself’. Against the current economic backdrop and without a cut-off point to aim for, the banks and corporates are struggling to make the business case for a changeover onto the new SEPA instruments. This has been clearly witnessed through the poor take-up of the SCT services. Without such a deadline, the current ‘domestic’ payment traffic has little incentive to move to adopt the SEPA standards and instruments, which will otherwise largely be restricted to the cross-border transactions. These lessons must be learnt before the SDD launch later this year.
Thirdly, there must be further discussion of how the basic SEPA product can be enhanced without creating market fragmentation – the very antithesis of SEPA. It is widely accepted that the SEPA instruments fall short of many domestic products in terms of sophistication and functionality. Moreover, so-called ‘additional optional services’ need to be offered in order to bring the corporates on board. However, the SEPA instruments cannot be enhanced at the domestic level – there has to be European standardisation.
Finally, banks need to collaborate with each other more if SEPA is to be a success. This should not just mean the elite, market-leading banks – a broader church is required. In fact, SEPA to one side, most industry initiatives, and the UK’s Faster Payments is a good example, would benefit from greater bank-to-bank collaboration. And it should be clearly understood that SEPA cannot be only a banking project – all the stakeholders need to be committed to the task.
These current challenges associated with SEPA implementation and migration are being recognised by the ECB. In fact, its frustration at the lack of progress towards SEPA has forced it to revisit its fifth SEPA progress report from July 2007. The ECB’s recently published sixth SEPA progress report welcomes the efforts made so far around SEPA implementation but understands and emphasises that work ‘urgently remains to be done’ to ensure the success of the Europe-wide project. The report contains a list of 10 necessary steps for SEPA migration including the development of a European card scheme to challenge the dominance of MasterCard’s Maestro system and clarification of the rules governing the November launch of the new SDD payment instruments.
Perhaps the key to overcoming the present SEPA impasse is to recognise that self-regulation by the banks with regard to SEPA may well have delivered all it can. SEPA is a welcome development within the industry and should ultimately make the lives of banks, corporates and consumers easier. However, appropriate levels of regulation, administered perhaps by a body such as SWIFT, might just be the right ingredient to ensure that SEPA delivers on its promises. For those that remember, the banks’ Heathrow Group stepped in to an industry vacuum some years ago for the sake of the euro in its infancy – perhaps it’s an appropriate time for SWIFT, or some other body, to attempt the same for SEPA.