Introduction and Summary
The Single Euro Payments Area (SEPA) Project was conceived through a high-powered political process and has been loosely backed by EU Regulations. Breathing life into the concept demanded the wholehearted commitment of both the private and public sectors to drive the original SEPA vision to its fruition. The banking industry’s role, under the mandate of the European authorities, was to design and develop a single set of harmonised SEPA payment schemes.
For many, a single obstacle has been preventing the completion of SEPA: that is the political failure to take decisive regulatory action by defining a mandatory end date for the migration of domestic legacy payment schemes to the set of SEPA payment schemes now implemented.
The long and winding journey to SEPA seems to have been never ending. The SEPA Credit Transfer (SCT) scheme was introduced on 28th January 2008 and the SEPA Direct Debit (SDD) Scheme on 2nd November 2009. Since then not a lot has happened, other than the mandating under EU Law (Regulation 924/2009) that all banks in the euro area are reachable for cross-border direct debits with effect from 1st November 2010. Notwithstanding this further step towards SEPA, the traffic using both the SDD and SCT schemes has remained abysmally low. As of October 2010, only 9.6% of all credit transfers in the euro area were executed using a pan-european payment instrument.
The last year has seemed for many stakeholders to be akin to a “phoney” war. The impasse to the successful completion of SEPA was increasingly perceived as being caused by the political hiatus and this rightly created frustrations and resentments amongst those that had worked so hard and invested so much for its success.
All remained quiet on the SEPA payments front until 16th December 2010. The European Commission had previously outlined its concept and rationale for a SEPA Regulation on End Date in March and June 2010, which included a proposed approach and attendant concepts at some variance from the original SEPA Vision.
In its Proposal for a Regulation [com (2010) 775 final], announced on 16th December, the European Commission seized the initiative by not only setting mandatory migration end dates but taking the opportunity to address a number of other issues in furtherance of what it sees as its SEPA goals, against certain policy objectives. Will the Proposal for Regulation actually solve all of the problems of SEPA and ensure its success?
The three key documents which framed the Proposal for a Regulation are the Working Paper on SEPA migration end-date issued by the Commission on 2nd June 2010, the various responses received from organisations as part of the consultation process and the Commission’s Staff Working Document [SEC (2010) 1584 final] outlining its impact assessment of the progress made to achieve SEPA.
A popular myth is that SEPA is a banking industry-led and market-driven initiative. In fact, SEPA was spawned officially in the Year 2000 at a meeting of EU Finance Ministers which led to the promulgation of the Lisbon Agenda, a significant developmental action plan to make the EU the most dynamic economy in the world.
Enshrined as an integral part of that plan was the concept of moving money as cheaply, reliably and quickly from one corner of the EU to another with the same ease as is done within most member states: this was seen as the essential precursor to reap the full benefits of the single market and to position the EU as the pre-eminent, knowledge-based economy on the world stage.
At the end of the following year, the infamous EU Regulation 2560/2001, on cross border payments in euro was adopted by the European Parliament and the Council. The Regulation was adopted with quite unprecedented speed and, in the view of many, with indecent haste. It was clearly designed to galvanise the European banking industry into action. The Regulation prohibited banks from imposing different fees and charges for cross-border payments and ATM transactions than banks levy domestically. As such, it brought into sharp focus the authorities’ desire for SEPA to be created: indeed, the authorities were unambiguous in communicating the leading role which banks were expected to play in the design and development process of EU wide payment schemes and in promoting standardization.
How was SEPA brought Forward?
The European banks had a stark choice: either to play a full role and work together to deliver the SEPA concept as favoured by the Authorities or to sit back and await a regulatory imposition and all that that might entail. As we know, the European banking industry decided on a practical and pragmatic way forward. Better to adopt a self-regulatory approach than be hind-bound by the inflexibility, bureaucracy and slow pace of a regulatory approach. The threat of regulation and perhaps draconian regulation thus quickly focused banks’ minds and narrowed the industry’s options. The positive notion was that by voluntary action the European banking industry could put its full weight behind the SEPA vision and shape and deliver the harmonised EU wide payment schemes and standards, which were seen as critical to make SEPA a reality.
The SEPA Project was run by the European Payments Council (EPC) with integrity and with all the rigour that such a massive change management programme demanded. Yes, at times the SEPA project stalled in its momentum and on occasion the project was deflected by political interests. But, that is as would be expected given the size and complexity of the Project and the many conflicting interests, including the public interest, involved in the process.
Rallying an industry of some 8,000 banks behind a Project, driven by EU policy makers, when the business return and potential market demand for SEPA payment schemes was unclear, was no mean task. With the roll-out of the SEPA payment schemes the banks in Europe are the first in the world to deploy a new global format – the ISO 20022 message standards – for mass euro payments.
Any suggestion that self-regulation has failed and that it did not deliver on SEPA is misplaced. Self-regulation has worked particularly in the design phase of the SEPA payment schemes, but it could not be expected to deliver in areas outside of its control such as building political consensus and setting mandatory end dates for the legacy domestic payment schemes.
What has been delivered?
SEPA was openly purported by the industry to be a voluntary initiative but many banks in fact perceived it, at least initially, as just another compliance issue – albeit a very costly one, with a sub-optimal business case to boot. “Why are we doing this” was a common viewpoint expressed by senior bankers.
Despite this, the key ingredients of the SEPA Project have been delivered, at least in the banks’ perspective. Sadly, the SEPA payment offerings so far delivered by banks appear anachronistic when viewed against the services being provided by, for example, internet banking and faster payments in the UK. This must be an overarching reason behind the failure of corporates to embrace the SEPA payment schemes. Bankers must also be questioning now whether their significant investment in the SEPA Project was worth the substantive cost and effort involved!
Various studies have quantified the economic and societal benefits which SEPA could bring to the wider EU, and this fact should not be in doubt nor dispute. According to the European Commission, SEPA holds a market potential of up to €300 billion over six years with a significant up-side for bank customers provided that migration to SEPA is completed swiftly (see Commission’s Staff Working Document on Summary of Impact Assessment SEC (2010) 1583 final). Interestingly, the Commission states that a protracted migration to SEPA would result in an overall loss of £43 billion for the economy over six years.
So why was completion of the project being delayed? Why risk these optimum benefits not being achieved? The Commission’s Impact Assessment attempts to address these questions by focussing on the reasons for slow migration to SEPA and attaches blame to both the demand and supply side. It does not refer to the political vacuum in which all payment stakeholders have found themselves for some considerable time. And what impact will the Commission’s Proposal for a Regulation have on future SEPA investment? It seems clear that the Commission’s fundamental change in approach can only but have had a negative impact on future SEPA investment by banks. Having said that, it is clear the banking industry strongly favours a market-led rather than Commission-led approach to the development of future enhancements to SEPA Schemes and/or technical standards.
Are the SEPA Schemes Fit for Purpose?
A major criticism faced by the EPC has been that it did not consult adequately the many stakeholders to the payments industry at an early enough stage in the design phase of the Rulebooks being crafted for the SCT and SDD Schemes.
The widely-held contention, particularly amongst Corporates, is that the EPC worked behind closed doors and drafted the Rulebooks without appropriate input from major end user customers. At their most negative, Corporates have suggested that the EPC failed to take on board their business needs and ignored their representations for change to the Rulebooks.
Suggestions that the EPCs approach to consultation was a token gesture are disingenuous. The fact is that the EPC is obliged to evaluate, through transparent and predictable change management processes, the feasibility of any changes to the schemes proposed by stakeholders. Indeed, proposed changes are subject to a three month public consultation process. Interestingly, the EPC last released new versions of the SCT and SDD Scheme Rulebooks on 1st November 2010.
A reasonable person could thus be forgiven for assuming that the key concerns and issues raised by the main stakeholder groups have been accommodated by now by the EPC in the various releases or, at worst, represent changes pending the next release.
Anecdotal evidence suggests that the new schemes exhibit high quality and reliability so that is not a factor contributing to their lack of usage in critical mass volume terms. The easy conclusion is the one put out by EPC: domestic payment schemes are being perpetuated and bank customers have little or no motivation to make the transition to the new payment schemes, as was the authorities’ vision and plan.
The Authorities’ Quandary
The mere existence of new payment schemes will not drive the demand of bank customers to use the schemes. A new payment scheme must meet the business needs of customers. If it does not, they will not use it no matter if they are incentivized or attempts are made to cajole them into using it. And here in lies the quandary confronting the banks and the authorities. By regulating and setting a binding end date to domestic legacy euro DD and CT Schemes will this be in itself the pivotal tipping event to persuade customers to move from domestic legacy schemes to the SEPA Schemes? If not, what more needs to be done?
SEPA is the vision of European public policy makers. Their vision is clearly in the public interest and SEPA is a public good. But, as the demand for the SEPA Schemes was not a market driven phenomenon but in some senses artificially driven, bank customers must be fully convinced of the benefit to be derived from using these schemes. Only then can they embrace it and commit to the necessary changes – which are not insubstantial.
The EPC has long been convinced of the indispensability of setting a realistic, binding end date to make SEPA a reality. The huge costs of running both domestic legacy payment schemes in all EU countries and the SEPA payment schemes is a compelling enough reason from the banks’ viewpoint to make setting an end-date self evident. But, that is not the central issue from the end users’ perspective! If the SEPA payment schemes do not meet their business needs, they will not migrate, and why should they? An SME or utility which has only domestic customers finds it difficult to rationalize the cost and effort of changing to SEPA formats for little tangible benefit! Setting an end-date will not change these deeply held views but intensive public information and customer education campaigns at EU and national level must strive to ensure that everyone understands the benefits of SEPA and what will be lost if SEPA is not achieved. A novel approach would be for the Commission to demonstrate as an inducement to users how the prize of SEPA might be shared amongst communities and the various stakeholders. Alternatively, it must be clear to all that the cost of failure will also require to be met. All stakeholders must fully understand “what’s in it for me if we do and what happens if we don’t”. These are the critical unanswered questions.
The EU Commission’s Response
Early in 2010, in response to calls for the need to set an end date, the European Commission indicated that it would introduce a formal proposal for a Regulation establishing an end date. However, in its Working Paper of 2nd June 2010 on SEPA Migration End-Date, the Commission introduced a new vision of SEPA and injected some accompanying new concepts into the melting point including the idea of new competing credit transfer and direct debit schemes compliant with certain defined “essential requirements”.
The Commission also envisaged interoperability between schemes. These notions diverge significantly from the original SEPA vision and payment scheme deliverables.
It is noteworthy that some 58 organisations chose to comment on the content and direction of the Commission’s Working Paper. Many of these submissions share the same issues and concerns.
One of these related to the Commission’s desire to include in the Proposal for a Regulation the enforcement of a principle of non-discrimination between users of payment services by legislating for cross border access to payment accounts. Whilst there may be issues around payment account opening, commentators including, inter alia, HM Treasury and the UK Payments Council argued that the Regulation dealing with SEPA Migration end-date is not the appropriate place to address these matters. Interestingly, the issue of Payment Account opening, which is clearly tangential, has not been included in the Proposal for a Regulation.
The Commission’s approach to Payment Account opening was supported by a number of powerful organisations including a Joint Submission from Euro Commerce, the European Consumers’ Organisation, the European Association of Corporate Treasurers and UEAPME and in a submission from the European Association of Payment Service Providers for Merchants. Clearly, the issue will remain firmly on the Commission’s radar and may be the object of separate, forthcoming legislation.
What seriously disturbed and concerned the EPC about the Commission’s new vision and attendant concepts is that they may produce a radically different outcome to that envisaged when SEPA was originally conceived by those same public policy makers. (See the EPC Response to the Working Paper on SEPA migration end-date by the Commission services of June 2nd 2010). The EPC stated that the “essential requirements” approach of the Commission “would abandon, in consequence, the original SEPA Vision aimed at creating one domestic euro payments market where there would be no differentiation between domestic and cross border euro payment transactions anymore. Instead the Commission now seems to be content with mandating cross-border reach for euro credit transfers and direct debits based on multiple (old and new) interoperable payment schemes (a mini SEPA or less)”. So what has changed in the intervening period for the Commission to risk unintended consequences from an about-turn which could imperil SEPA?
The anguish and disappointment of bankers are clear: the industry thought it was delivering as desired by the public policy makers only to be confronted at the eleventh hour with what appears to be a last ditch, rear guard action.
The position on SEPA which has emerged from the Commission may well stem from perceived competition concerns, although this is not entirely clear or it may be in response to the conflicting opinions which have emerged about the SEPA payment schemes from other vested yet equally justified interests.
Competing Payment Schemes?
What must be disturbing from the EPCs perspective is that the Commission now regards the SEPA Schemes developed by EPC, with the Commission’s encouragement, support and approval, as representing a “private monopoly” (see European Commission Discussion Paper on SEPA migration end-dates of March 2010 PSMEG/002/10, section 2.1 (15), page 3).
Here, the Commission seems to miss the point of how a Payment Scheme operates and fails to distinguish between infrastructure, scheme and products. Banks co-operate in developing infrastructure and business rules and compete strenuously in the delivery of products and services to customers. Is this misunderstanding underlying the Commission’s concerns?
If the Commission’s concerns stem from consumer protection issues then surely it has forgotten the huge legislative framework which it has put in place with the Payment Services Directive (PSD). [Directive 2007/64/EC]. This provides more than adequate protection to consumers from using payment services in SEPA by standardising conditions and rights for payment services offered in the market. It also gives the necessary comfort to the Commission knowing that it is in situ.
The EPC should not be wholly surprised by this last minute change in direction by the Commission. In 2008, DG Competition launched an enquiry into SEPA on competition grounds. The EPCs position was defended strenuously and DG Competition’s concerns were shown to be unfounded. This underlying hint of concern about SEPA from a competition perspective may never have completely gone away and it may be that DG Competition regards its 2008 Case as open but as yet unproven.
The Commission’s idea of competing payment schemes in SEPA may mask other significant concerns that the Commission is yet to make public. But, competing payment schemes of the type favoured by the Commission would serve to fragment rather than integrate the market. As such, it will defeat the announced policy objectives of the Commission. Furthermore, significant investments have been made by banks and their corporate customers in good faith and on the basis of a widely- promulgated, shared understanding and expectations.