Payments Industry Regulatory Update in 2010
It is clear that the industry has made some progress in 2009 on the migration towards full single euro payments area (SEPA) implementation but there have been hiccups along the way. While the French banking community declared that it was planning to make SDD available only from November 2010, to counter this, the EU has set a deadline of November 2010 for all eurozone banks to be reachable by SDD. And it is still unclear whether direct debit mandates in some countries, notably Germany, need to be renewed for migration to SDD. In addition, the latest figures from the European Payments Council (EPC) show that only around 2,600 of Europe’s 8,000 banking institutions were ready for the launch of the SDD core scheme on 2 November 2009.
On top of this, the transposition of the Payment Services Directive (PSD – the EU legislation that underpins SEPA) into national law has been piecemeal, with some countries moving towards PSD implementation at a different speed compared to the rest of Europe and with variations in interpreting the legal text. Only 15 of the 27 EU member states were able to meet the November 2009 deadline and three countries will have missed it by more than three months. So what is causing the delays to a scheme that aims to bring greater efficiency and integration and make banks’ and corporates’ lives easier?
SEPA has been high on the banking industry’s agenda for some time. Since the concept was first announced, much has been written about the perceived challenges facing what is, after all, an ambitious scheme. It is not hard to find significant barriers to the success of the scheme: the absence of a fixed end-date for legacy systems means that the scheme lacks impetus, the debate over interchange fees continues and there are concerns that some countries may introduce an interchange fee in the future. Some, such as the French End User Committee, are also troubled by security concerns, believing that the system could be open to fraud, as banks do not check the validity of accounts when sending direct debits.
However, perhaps the biggest hurdle to overcome is a general lack of understanding and awareness in the market about SEPA, which has led to many organisations failing to see a business case for migration.
An Experian Payments survey of UK corporates across the finance, telecoms, insurance, public sector, utilities, charity and retail sectors in 2009 found that complying with changes in payments regulation, such as the migration to SEPA and the PSD, was a priority for 40% of the large corporates surveyed. Nevertheless, corporates are struggling to see the business case for SEPA migration at a time when concerns such as life after the recession are higher on the agenda.
A survey of European banks by Treasury Management International magazine back in 2007 about the impact of SEPA on their corporate customers identified a number of issues. The top three were:
While the use of IBAN and BIC is not currently mandatory for domestic payments, the SEPA end-date, which is expected to fall between 2012 and 2015, means that the new formats will become the standard for all domestic and cross-border payments across the European Union. However, some countries, such as Italy, have moved earlier and now use only IBAN for their domestic transactions.
The use of IBAN and BIC will have an enormous impact on those organisations with extensive customer and supplier bases. As banks do not plan to provide a service to convert domestic details, organisations will need to seek out their own solution to this problem, if the SEPA end-date is to be observed.
This is particularly important, as banks can reject payments that do not include valid IBAN and BIC data. Furthermore, submitting payment instructions that are invalid, incorrect, incomplete or not in the correct format may result in increased costs for cross-border payments and collections – as much as €80 per incorrect transaction. Incorrect payment instructions will also have repercussions for a corporate’s business continuity, liquidity, cash management and business risk, affecting supplier and employee relationships.
The ability to efficiently validate and convert bank account data will not only allow banks’ corporate customers to avoid these costs, but also to improve their straight-through processing (STP) rates through reduced errors in payment submissions, improved payment efficiency and reduced investigation costs for errors. In addition, the corporates will be able to identify invalid records that require further or correct information to be obtained or verified, including invalid account numbers and closed bank branches.
Some progress has been made on this front. For example, NVB, the Netherlands’ Banking Association, and Sociale Verzekeringsbank (SVB), a Netherlands-based social security organisation, have been at the forefront of enabling not only banks but also the banks’ customers to convert their old account data formats into the new ones. Other banking communities such as BVB in Belgium have also started to provide their own conversion services and a similar initiative is currently underway in Austria. However, banking associations, as well as the banks, are tackling conversion to the new data formats on a national basis, which means they are still not looking at their SEPA relationships, outside of their domestic markets, effectively defeating the raison d’être for the scheme.
Looking beyond Europe’s borders, the payments industry is moving towards greater international collaboration. Consider the ISO 20022 payment initiation format as an example. While ISO 20022 is associated with SEPA as the scheme’s core message standard, it incorporates payment initiation and reporting capabilities of several leading standards bodies into a single, unified standard and is increasingly being incorporated into financial applications at banks and corporations worldwide. For banks based in the US, this development has provided a reason to join the IBAN project, as it reduces the number of standards that have to be maintained; one of the wider benefits that the European payments community should enjoy as part of its migration to SEPA.
While a single, global payment initiation format is still some time away, as the US looks to move to IBANs, the industry could learn valuable lessons from Europe and should be looking at converting its data in time, setting clear guidelines and communicating the benefits to avoid confusion or low awareness among corporates and banks in the region.
In many ways, Europe is leading the way for greater economic integration and regional efficiency through payments standardisation. As APEC calls for greater economic co-operation in the Asia-Pacific region and the Middle East considers a SEPA of its own, we should not be too harsh on a European scheme that is as ambitious as it is challenging.
SEPA is bringing markets closer together and increasing cross-border opportunities for corporate organisations and banks alike. Ultimately, the scheme will help corporates to improve their end-to-end STP rates, reduce processing and transaction costs and expand into new markets. Those corporates that need to make payments to and receive payments from the European Economic Area (EEA) will benefit from this more standardised approach to payment transactions. However, only when the issues around BIC and IBAN data conversion and global messaging formats such as ISO20022 are smoothed out, can corporates fully take advantage of the benefits of SEPA.
It is clear that the migration to SEPA and the new data formats has not been delivered with the consistency and timeliness that we had all hoped for but other regions such as the US can learn from our challenges and set-backs. 2010 will hopefully signal the turning point for SEPA, when an end-date for legacy payments systems is set, the interchange fees debate is resolved and fraud concerns can be put to rest through sensible technology implementations. I am optimistic that an end-date for SEPA will be set within the next six months, perhaps 2012 for SEPA Credit Transfer (SCT) and 2014 for SDD.
While SEPA has already taken off, it has not yet reached cruising altitude. We would all like to know when this bumpy ride will be over, and hope that 2010 will see a definite end-date set for migration.