Appeared in Financial Services Technology on January 5, 2009
Monday, January 05, 2009
Nine years ago, the European Union set out a plan to create an internal market for financial services by 2010. The first steps towards turning the idea into reality included removing differences in costs of Eurozone cross-border card payments, ATM withdrawals and credit transfers to ensure that bank customers see no practical difference between domestic and cross-border transactions. As such, the concept of the Single Euro Payments Area started as a framework to benefit corporates and consumers but since those early days has morphed into an interbank framework that has been moulded primarily by the banks with little guidance from the European Central Bank, the European Commission or any other regulatory body.
Most parties now agree that SEPA migration - both in terms of uptake of SEPA Credit Transfers which went live earlier this year and preparation for SEPA Direct Debits which are due to launch in November 2009 - has been disappointing to date. It is clear that action needs to be taken so that a business case can be built for corporates to migrate to SEPA and also so that banks receive greater guidance and support in their SEPA planning.
In recent years, the initial enthusiasm among banks, authorities and especially the corporates for the SEPA project has slowed down. This has become particularly evident as the introduction of SEPA Credit Transfers (SCTs) early last year went largely unnoticed. In fact, the SCT take-up stands at less than two per cent of transactions as corporates continue to rely on the domestic payment systems. What’s more, in December 2008 the French Banking Federation (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.
Banks across the European Union are concerned about how the new services will be paid for, as for example the Commission has said MasterCard's interchange fee on its cross-border credit cards and Maestro debit cards violated EU competition rules. 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 from the ECB is not satisfactory for the French banks which say the move has "destabilised" their planned SEPA business models and see the issue as a long-term one which demands a long-term answer. That is not yet forthcoming.
It is clear that greater clarity is still required around many aspects of SEPA. The ECB does however, recognise the current challenges associated with SEPA implementation and migration. 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 ten 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 launch of the new SEPA Direct Debit (SDD) payments instruments set for November 2009.
It is now abundantly clear that new impetus is required to ensure the successful implementation of SEPA and, building on the ECB’s recommendations, I would suggest that there are three main areas which need to be urgently addressed. First of all, the ECB itself has recognised that the European Payments Council, 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 SWIFT, which has an improving 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, which 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 change-over onto the new SEPA instruments. This has been clearly witnessed through the poor take-up of the SCT services and these lessons must be learnt before the SEPA Direct Debit go-live later in 2009. 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.
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, 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 Euro standardisation.
It is becoming increasingly obvious that self-regulation by the banks with regard to SEPA may well have delivered all it can. However, appropriate levels of regulation might just be the right ingredient needed to help move along SEPA implementation and help paint a clearer picture for the financial services industry and its corporate customers of the benefits of migrating to SEPA. Benign regulation is often more welcome by the banks than they care to acknowledge.
By Paul Styles, business solutions manager, ACI Worldwide (EMEA) Ltd