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SEPA: to interchange or not to interchange

were plenty of discussions at the European Parliament about SEPA, but
most of the discussions narrowed down to the current top-of-mind issues
related to card and interchange fees.  With the decision on MasterCard’s Interchange fees about to be handed down, here’s a flavour of the discussion as presented in two speeches.

The first is from Neelie Kroes, the Dutch Commissioner for Competition
Policy.  The second is from Peter Ayliffe, CEO and President of VISA
Europe.  Also, please note, this is my best summation of their words
and not an accurate or total transcript of their speech, e.g. I have
put some poetic license into my recording.


Neelie Kroes, European Commissioner for Competition Policy

“SEPA will kick off in less than a month. Once it is a reality 500 million people
across Europe will be able to make payment and cash withdrawals with the same
ease and convenience as in their home country. SEPA demanded a great deal of work over the past few years and I would
like to congratulate the industry for this. It is worth fighting for. As a
liberal I am very much in favour of a bottom-up self-regulatory process. There is a risk here though, as it is asking
for two-way traffic and this has to be delivered through the EC rules.

"For some time now, I have been concerned
that some of the arrangements in the SEPA framework, as proposed by the banking
community, may not be suitable to reach these goals. These concerns are not only shared by the ECB
but all the national competition authorities.

"SEPA will change the way payments are
performed in all EC Member States and we need to ensure this is done correctly,
in particular with payment cards. With
Charlie McCreevy, I am discussing this with the EPC and we will take out time
for that.

"The most pressing concern is the migration
of cards to the SEPA world. That
migration is for the 1st January and that’s a fact, and I don’t want to see
low-cost national card schemes being replaced by more expensive payment card
schemes using SEPA. We had some
experience when introducing the euro that some took advantage to raise prices
in this way. We cannot afford to see
this happening again, and we will not allow that to be the case as if fees have
been raised to retailers, guess who pays those feeds in the end – the customer
– and that is not what we have in mind.

"The big schemes appear attractive during a
period of uncertainty, when trying to work out what it means to be
SEPA-compliant. The SEPA cards framework
has not detailed rules for card payments, just a basic three options for
attaining SEPA compliance. These options
mean that the SEPA compliance only works if they apply to all 31 countries of
the EU/EEA and only one debit and one credit card scheme achieves this.

"This means migrating to one of the
international brands is very attractive, and difficult for market forces to
create alternative solutions. But
retailers and consumers are more worried that with less choice they will pay
more under SEPA than they do now. Banks
feel compelled to move to international schemes and abandon national, and
cheaper, low-cost schemes. This will
deliver a European monopoly or, at best, a duopoly. This means less competition and not more,
with all the negative knock-on effects. That is something I am not willing to let happen.

"The key elements of SEPA should be coverage
of the 31 states. The banks should then
consider whether joining one or another scheme makes sense to them. The banks should determine therefore which
SEPA states, and how many, should be covered by their scheme. By doing it this way, banks can use market
forces to decide upon the schemes without dismantling national schemes.

"Any efficient national scheme can so become
SEPA compliant, provided it is technologically and commercially capable of
admitting banks from other states within the SEPA area. This will allow many national and regional
systems to develop into SEPA complaint systems to the benefit of consumers and
merchants alike.

"The EPC and other stakeholders will continue
their work on ground-breaking initiatives. However the market does not just need standards as another area of
concern relates to the governance of the EPC. Currently only banks and banking members can join the EPC. Other processors and stakeholders are excluded. As it is currently drafted the SEPA Cards
Framework (SCF) denies access to non-bank payments schemes, and so that needs
to be addressed. Other stakeholders –
consumer and corporate groups – should also have access, as these are the
groups who SEPA is meant to ultimately benefit.

"Multilateral interchange fees (MIF) are also
key. We want this to provide the
industry with a solid competition, rather than the MIFs of MasterCard. We are going to introduce a balancing fee for
direct debit payments. The introduction of such a MIF in countries where there
is high direct debit use, and currently no MIF, would make this wrong. The justification for keeping it once
migration has been achieved would be very difficult to see.

"Without any doubt, SEPA is an excellent
pro-competitive project. That is why the
ECB and EC warmly support SEPA. But we
need to be vigilant that the objectives are achieved and not delivered with
less competition and less choice. No

"We owe it to European consumers that the process
has a simple outcome that is cheap, secure and efficient payment systems."

enough, I took some exception to some of Neelie’s comments, especially
those about national schemes being encouraged to compete with
MasterCard and Visa.  This is purely because I thought SEPA was all
about economies of scale, volume efficiencies and processing costs
being reduced.  By promoting more national schemes, this is the
opposite of what SEPA is meant to be doing. 

example, if you look at the Credit Transfer and Direct Debit space, we
have tried really hard to get rid of 27 national schemes (and more) and
reduce this to a few PEACHs.  So why is she promoting the idea of 27
national card schemes (or more).  It doesn’t make sense.

think, to be honest, it’s the fear of the monopolistic tendencies of
MasterCard and VISA dominating the euro card processing structures.  So
what did Peter Ayliffe, CEO and President of VISA Europe, have to say
in response?


Peter Ayliffe, CEO and President of VISA Europe

want to discuss three key things.  First, Visa Europe’s role.  Second,
the biggest challenge.  Third, the solutions to that challenge.

the governance of SEPA and Visa’s role.  We take this very seriously,
e.g. Visa has changed our structure globally, Visa inc, but we have not
changed Visa EU where we are still a cooperative and independent,
member-managed scheme.  This means we are a truly EU structure and
processor.  That’s a governance structure we feel is right for EU
payments going forward. 

"We want to design something in SEPA
that lives up to its potential.  That means don’t take the cards we
have today and replace them with something that just says, “This is
SEPA-compliant”.   So we’re looking to replace costly and inefficient
payments schemes like cash instead.  Why are we so passionate about
that?  Because there are new technologies being introduced. 

liken it to the first time I was encouraged by my kids to try an iPod.
I was fairly resistant.    Why do I need something new?  So I bought
one and it’s only when you buy one that you realise the benefits: no
longer do I need to carry loads of discs around, losing discs and their
cases, not being able to find the CD I want to play, etc. 

what we need to do with SEPA – create cards that are more than just
SEPA cards, but cards that really bring the new technologies alive.
Therefore, I want eSEPA – electronic payments plus.  Revolving credits,
cashbacks, SMS texting and alerts, etc.  I think SEPA is a real
improvement opportunity. 

"We’ve been SEPA-compliant since
01/01/06.  We’ve also split the need to process through us as well.
For the first time, what banks are starting to do is look at the EMV
chip technologies and leverage their capabilities, e.g. Barclays
OnePulse Oyster, Credit and Debit and Contactless card.  Moving on, we
announced that this is all now available on the mobile as well.  To me,
it’s these things that really bring SEPA alive and encourage the use of
new payments.  We can make that happen through  issuers, acquirers,
processors and vendors four-party model and nothing has been more
successful than this.

"We now have 343 million Visa cards and 8
million retailers using it.  Cards are more convenient, secure and
cheaper than cash. But here’s the rub – what’s the threat?  What can
stop us from really developing the cards payments infrastructure across
the EU? 

"The whole four-part system relies on interchange.
Without it, the whole system collapses.  You cannot remove it from the
equation.  If you want SEPA to be a success you must have interchange.
This is the biggest threat to a successful SEPA cards future."


particularly then went on to attack any governments that interfered
with interchange, such as the Australian and Danish examples where
governments tried to restructure things and failed.  He reckons that
interchange only works with the four parties involved, that the
industry has tried lots of alternatives and failed, and that the
European Commission would be stupid to even try to change it.

The best response to this view came from an audience member who stated:

"You sound like the aircraft industry.  The cartels of SwissAir,
Sabena, British Airways, Aer Lingus, KLM, Air France, Lufthansa and
company all claimed their business model and structure would collapse
if the industry was deregulated and changed.  Guess what?   The
industry was deregulated and their model did collapse, but only because
more efficient operators came in, such as Easyjet and Ryanair and
more.  This is your fear: that non-bank payments processors will eat
your lunch.  Well, that’s the idea isn’t it?"

On that note, we all went away and ate someone’s lunch.  Rock on. 

About Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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