Written by David Adams
The European Payments Council (EPC) recently said that inconsistencies between the European Commission’s objectives threaten to hamper SEPA progress. David Adams reports
Great ideas drive the advance of civilisation. Unfortunately, some ideas take a hell of a long time to get off the drawing board. One might think of Leonardo Da Vinci’s 15th century ‘helicopter’ sketches, for example, but in fact the Chinese were building bamboo toys capable of vertical flight in 400BC - 1,800 years before Da Vinci and more than 2,200 years before the first helicopter took to the skies.
It is not actually 2,200 years since work began on the Single Euro Payments Area (SEPA), but it sometimes feels that way. It might yet prove to be a great idea: it could offer banks and their corporate and public sector customers big efficiency and cost savings through system and process consolidation. But the route to completing the project has been torturous, delayed again and again by political, legal and commercial problems. There have been technical challenges, but these have not proved overly problematic and certainly not so logistically draining as having to maintain dual SEPA and non-SEPA systems. And the end is still not in sight.
Although the SEPA Credit Transfer (SCT) scheme was relatively straightforward to implement and launched in January 2008, SEPA Direct Debit (SDD) involved more
complex, expensive changes, creating an entirely new payments method to replace direct debit schemes across Europe. It launched in late 2009. Since November 2010 all banks across the EU have had to be at least “reachable” for SEPA Core Direct Debit, by the terms of the EU Regulation on cross-border payments.
Meanwhile, transposition into national laws of the Payment Services Directive (PSD), designed to increase pan-European competition in the payments industry, is now complete across all EU Member States in the Eurozone (although also well behind schedule). The PSD is an important legal support for SEPA, but does not provide incentives or compulsion for banks or corporates to use SEPA tools.
Instead, SEPA supporters are putting their trust in the forthcoming EU regulation to establish technical requirements for credit transfers and direct debits in euros. Its final wording remains the subject of debate between the European Commission (EC), the European Central Bank (ECB), the European Parliament and the Economic and Financial Affairs Council (ECOFIN). The hope for the European Payments Council (EPC), the bank-led body which has designed the SEPA rules and frameworks and driven the project, is that the regulation will provide a mandated end date for the use of legacy payments instruments and migration to SEPA.
In May 2011 the third Progress Report on migration was published by the European Commission Directorate General (DG) Internal Market and Services. SCT migration had reached only 15.7 per cent; while SDD usage rates in the Euro area stood at just 0.09 per cent (according to figures from February 2011). The lack of progress is such that some market players are pulling back: in August 2011 payment services provider Vocalink announced a phased withdrawal of its Euro clearing and settlement mechanism (CSM) and SEPA value- added services.
On the bright side, the Progress Report showed high adoption rates in Luxembourg (89.9 per cent), Cyprus (59.2 per cent) and Slovenia (40.1 per cent): while Belgium and Spain had also achieved SCT adoption rates of 23.4 per cent and 17 per cent. The report also noted reasonable progress in public sector adoption in Austria, Belgium, Finland, France and Spain, which is significant, because public sector organisations are such high volume payment service users.
From the EPC’s perspective, the Commission is not being entirely helpful. Each of the EPC’s summer newsletters for 2010 and 2011 have featured strongly worded articles from its chairman, Gerard Hartsink, criticising the Commission. In his July 2011 article, Hartsink expressed frustration over investigations into SEPA’s proposals for card and online payments by the EC DG Competition. Hartsink wrote that the EPC has developed SEPA’s rules and frameworks along the lines requested by ECOFIN, the European Parliament, the Commission’s DG Internal Market and Services and the European Central Bank (ECB); but that this is being hampered by inconsistencies between EC policies for market integration and payment innovation on one hand and competition on the other. In his July 2010 article he had castigated the Commission for a change in approach to SEPA, embarking on a course that encourages the establishment of competing yet interoperable payment schemes, rather than promoting the standardisation at the heart of the original SEPA concept. The Commission was exploring this possibility on the grounds that regulatory endorsement of SCT and SDD could create, in effect, a monopoly for the EPC.
Hartsink’s most recent article stressed that the EPC is committed to compliance with competition law, but that further discussions between DG Internal Market and Services, DG Information Society and DG Competition; and between the EC and the EPC are needed. On behalf of the EPC he urged them to develop a shared understanding before the next meeting of the SEPA Council, in December 2011.
Hartsink tells FStech that the EPC received a reply from the Commission in response within three weeks. “We made a statement with concrete examples (of the inconsistencies),” he says. “But if we understand their feedback correctly there are no inconsistencies! Either we do not understand them, or they do not understand us!”
State of frustration
“I think everyone can understand the frustration,” says Dieter Prang, senior vice-president and managing director at Fundtech EMEA Frankfurt, a technology provider which has developed its Integration Suite to help financial companies cope with the interim, dual system imposed upon the sector by SEPA’s half-finished state. “But I think this is Europe, so you always have some competing objectives. I don’t believe it’s really hindered progress.”
Wilco Dado, head of global payments, global transaction services, at RBS, wonders whether the apparent change in strategy at the Commission is a consequence of wider economic events. “When the EC launched SEPA 10 years ago self-regulation was fully acceptable,” he points out. “After the banking crisis people don’t believe in self-regulation. The world has changed, so the reaction of the EC is understandable.”
Chris Pickles, head of industry initiatives, global banking and financial markets at BT, believes SEPA has always been perceived by some corporates, EU administrators and legislators as a banking industry reform, rather than a change made with the interests of Europe’s citizens in mind. He thinks that in recent years the Commission has slowly gained a better understanding of how the financial sector actually works; and that this has led to a recalibration of the SEPA concept.
Consequently, he says, many banks are questioning the validity of their payment services business models. “Banks are working out whether they actually want to be in payments at all,” he says. “If you look at the payments systems that are emerging, like (Dutch online bank-account-to-bank-account payment service) iDeal, does that have to be run by banks? And with the current Euro crisis, the structural problems banks have and the regulatory pressure coming down upon them - putting all those things together gives you some reasons for them not doing anything (about SEPA).”
Pickles predicts the appearance of more commercial payment services propositions from a range of providers over the next few years. Some interesting initiatives are already in operation, like EBA Clearing’s MyBank solution, which allows online shoppers to authorise payments to online retailers through their online banking portals without entering any financial details. It is open to authorised SEPA payment service providers, supports SCT and SDD and allows integration with other payment schemes and services. In the longer term the system may also support other currencies besides the Euro.
“My point of view is that the Commission is actually a promoter of the interests of individual citizens of Europe, probably more so than many of the national governments - which is ironic when you think about how much we complain about Europe,” says Pickles. “They’re looking at investor protection, best execution and fair competition. The banks are asking how they make money out of this.”
In the meantime of course, the Euro itself has had, well, a pretty bad year. “We’re very involved with SEPA, but at a time when people are questioning the continued existence of the Euro it’s hard to imagine anyone committing to SEPA migration,” admits Fundtech executive vice-president and chief marketing officer George Ravich.
Yet Hartsink does not believe preparations have been hampered in any significant way by the Eurozone crisis. “The payment systems are up and running and from a business perspective (SEPA) still makes sense,” he insists.
Even so, it’s clear that building momentum behind SEPA, constructing a legal, regulatory and technical framework and a compelling business case, has proved crushingly difficult. Maybe the new regulation will change things. “The end date regulation will change the market,” says Hartsink.
But there’s no guarantee of that, particularly in the current economic and political environment. It may be that in the end SEPA will be overwhelmed by events - an idea altered so much by economic circumstance and technical advances that the original concept becomes irrelevant. We shall see. Eventually.