Does the Payment Services Directive Bring Sufficient Harmonisation for SEPA?
The Payment Services Directive (PSD) has come a long way towards a harmonised payments area, having started in December 2005 with the European Commission presenting an initial draft, originally called ‘New Legal Framework’. A lot of hurdles have been jumped since then, from political discussions regarding supervision to industry stakeholders debating execution times, across varying groupings of member countries. The PSD is indeed a very complex undertaking with a final scope much wider than the originally targeted harmonisation required for a single payments area -regulation for non-banks in payments and enhancement of consumer protection was added to the pile. In retrospect, bank stakeholders should maybe have focussed less on execution times and more on keeping the consumer protection measures narrowly focused. The binding, non-optional parts of the PSD are treating corporates like consumers in many key areas, removing contractual options in wide use in many markets today. But there are voices doubting the success of the harmonisation brought about by the PSD and, in consequence, the success of the single euro payments area (SEPA).
Formal adoption of the PSD by the EU Council and the European Parliament happened in spring 2007, already too late to be implemented for a SEPA start in January 2008. Clearly this delay has been a blow for SEPA introduction – but it also gave time for refinement of direct debit schemes and rules. Now the deadline for EU Member States to transpose the PSD into domestic law is 1 November 2009. Today, all member states are on the way even though progress differs case by case. The European Commission is aware of the criticality and has installed a transposition group for the pan-European co-ordination to ensure a consistent roll-out of the PSD by the November 2009 deadline. Current reports are showing two-thirds will adopt the PSD by the third quarter of 2009, but in any case all countries are hoping that the PSD deadline on 1 November 2009 will hold.
So the legal implementation process is being monitored by the European Commission. However, despite the full harmonisation approach of the PSD, the text includes 23 optional provisions – sometimes misleadingly called ‘opt-outs’. They leave a certain margin of discretion to the member states. So the question remains: What impact will the optional provisions have and will they really put the success of SEPA on the line? Is the PSD reinforcing today´s fragmented national payments landscapes and undermine the development of a harmonised payments area? Or aren’t the PSD options rather a possibly regrettable but natural consequence and reflection of the current diversity across the European landscape? Do they really jeopardise the overall goals?
Revisiting the PSD creation process, quite different perspectives between the member states have been debated in many fields, e.g. regarding the regulatory regime for non-banking payment service providers. While UK and Sweden have a more liberal approach, France, Italy and Spain sought stricter rules, in particular regarding the granting of credit. As a consequence of these, and due to current national differences in payments the PSD permits the member states 23 options. Some important examples are:
The total of 23 options can be grouped in four clusters as shown in Figure 2.
The largest grouping, almost half of the options, primarily target regulations concerning payment institutions as new market participants – for existing banks this will have at most marginal initial impact. Around one third of the options are covering the payment instruments credit transfer, direct debit and cards These articles are focusing on increasing consumer protection and are merely add-ons to a given common denominator. Three items allow different limits for low-value/e-money payments on top of PSD minimum standards which will allow continued use of national instruments. Lastly microenterprises can be treated like consumers, also with just marginal impact.
Taking a step back regarding all the optional provisions: where are the overall harmonisation goals of the PSD at jeopardy? Covering all Member States the PSD will increase transparency and competition and take a huge step in resolving the current fragmentation. Surely the PSD is not perfect, the optimum might have less or no national options. But traditionally EU harmonisation is not a one-step-solution given the diverse starting points across the EU countries. It seems like voices calling for a very strict regulation tend to come from countries whose current environment is very close to the proposed regulations. By contrast, other voices from the same country would probably argue against strict regulations in other fields when their national tradition is quite different from the proposed new EU rules.
EU directives and their national transposition are well-established practice, as are optional provisions to enable a bridge between diverging national practices. A stronger harmonisation remains the target in many areas, including payments, but this will need more time and some experience with the current provisions.
But what is the potential impact of these options? Two main areas could bring challenges, illustrating a conflict with a fully harmonised payments area:
While these and similar challenges exist, the prime focus remains steady: a common harmonised ground to increase competition and dynamics in the European Union in line with the Lisbon Agenda.
Today, the payments landscape in Europe is absolutely heterogeneous with all its independent national laws and traditions. The PSD will bring substantial progress towards uniformity.
SEPA, with the PSD as its legal framework, will create pan-European payment instruments for domestic and EU-wide use.
However, one group of banks will really suffer from the PSD member states´ variations: large banks with a market presence in multiple EU countries. They will need to adapt and comply individually in each country – a single pan-European group-wide PSD implementation project will not be feasible. These banks will not reap the benefits they might have hoped for when implementing a directive harmonising across the EU. This will of course not be an issue at all for banks with purely national or regional focus, dealing with only one single national PSD legislation.
The PSD, with its 96 articles, is complex and difficult to manage for legislators, regulators and banks. It is a clear step to create a harmonised uniform payments area. Certainly the options exist and the PSD transposition should be actively managed as the European Commission is doing. Moreover, the focus of discussion on harmonisation should include other diverging factors like regulatory reporting of payments transactions which is rarely included this context.
Clearly the overall success of SEPA is not assured at this point in time – but the PSD options are not in the front line of potential stumbling blocks. Much more pressing issues for the PSD and SEPA adoption can arise, e.g. from the transition of existing national direct debit schemes to SEPA Direct Debits (SDD). When legacy national debit authorisations cannot be easily transformed to SEPA mandates, the transition will face a major, economically insurmountable hurdle. This issue by its very nature needs has to be solved nationally as each country has a different legal legacy in this field. So we would suggest this should be the main focus in current discussion of the PSD implementation. The set back for SDD would be tremendous if hundreds of millions of existing national debit authorisations were invalid under SEPA and needed to be replaced by the payee newly signing or fully authorising a SEPA mandate.
Key factors for SEPA’s success are the participation and active communication by the banks of their belief in a new chapter of the history of payments. Truly, there is a lot of work necessary in implementing the PSD and SEPA scheme rules – but those are more the banks’ ‘internal affairs’ than anything. But looking at the flip side of the coin: is everybody busy actively selling the new products? Payment users are mostly not interested in the regulatory framework but rather in their terms and conditions and the features banks will be offering in the new environment. The PSD is a major step towards a more uniform landscape, even if it may not be the ultimate step. So maybe a discussion on the possibilities and creative options for customers will be more fruitful – the time of debating and lamenting the PSD details in the industry should be over and make room for more customer-oriented questions.