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Are SEPA and the PSD completely broken?

I’m at a conference focused upon the Single Euro Payments Area (SEPA),
the Payment Services Directive (PSD) and e-invoicing all of this week,
and what a strained affair it has proven to be so far.

All day yesterday we had discussions about whether we need an end-date
for SEPA or not; how the PSD has 30 flavours and Additional Optional
Services are really annoying; the fact that interchange fees for direct
debits are being introduced is killing the whole essence of SEPA; that
SEPA and the PSD are broken, so how do we fix them.

And there were discussions from corporates who seemed to be saying:
“when you guys (the banks) have your act together and have worked out
wwhat SEPA is and what it can do for us, then we’ll talk to you about
it but, for now, we’re not changing anything as you don’t seem to agree
on what it is”.  This related to SEPA Direct Debits, D+1 versus D+3 and
all that stuff.

My own walk away is that SEPA and the PSD are becoming completely
irrelevant … now there’s a contentious point, but I can justify it and
will blog about that later this week.

For now, I thought there was an interesting debate about how to get
SEPA to work between three heads of payments from some of the larger
transactional banks: Peter Hazou (PH) of Unicredit Group, Robert
Heisterborg (RH) of ING and Rajesh Mehta (RM) from Citi.

Here’s my take on the dialogue, which is not word-for-word but the essence of each speaker’s views:

PH: SEPA is the right thing to do. Even though it’s a political agenda,
it is the right agenda for the banking system. For example, the best
part of yesterday was the corporate panel, who said “tell me when
you’ve got this ready and let’s go”. That’s why it is the right thing
to do, because it will bring customers value. For example,
multinational banks have lots of things, like payment factories and
areas they want to promote, and cross-border processes are critical to
these. This is why this is good. Where do we go from here? Well, there
is a model for how this could work. The USA. The USA has 50 states with
different tax rates, Federal Reserve zones and regulations. These are
50 separate member states, but there is 1 completely national payments
system for cards and payments. That’s the model of how this could work.

RH: Peter refers to the USA as one market, but the USA has 150 years of
one currency and one language, and needed a Civil War to gain this
agreement. We have only had one currency for ten years so, to put this
in perspective, we are not doing so bad. So let’s do some time
travelling to ten years ahead. How will 2018 look? 100’s of billions of
SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs) moving
around the EU. Corporations who have centralised treasuries for Europe.
The integration of fiscal and financial infrastructures for all member
states in the Eurozone. B2B and B2C will see some innovations around
mobile phones and the internet, but there will still be countries with
very heavy cash users. Cash is still out there. But most people will be
consolidating and checking their accounts on the net in the evenings
with emandates and related services.

This is all well and good, but SEPA is about getting the standards for
Bank-to-Bank straight. What we are missing are the products and
services for those banks. It is as though we are moving from analogue
to digital TV. As a user, you don’t know the difference until you use
interactive TV services or HDTV. In banking, is this the same? No. This
is because, in the SEPA environment, we are missing some of the pieces
and, in particular, the killer application. What we need is the Blu-Ray
disk or iPod for payments. This is the challenge in this environment.
How can we innovate in this highly regulated environment we work within
and create some new business models.

RM: Let’s not lose the SEPA opportunity as we go through this crisis in
banking in 2008. We need to look for standardisation, centralisation
and consolidation. These are the major drivers here, and this is not
just for efficiency and cost savings, but also for liquidity, risk
management and the certainty of forecasting for settlement.

To get there though, we need critical mass and this critical mass will come from 4 dimensions:

1. Scale;
2. Pervasiveness through SDDs and the PSD; 
3. Standards by using ISO20022 and the SEPA rulebooks, and from other
regions are looking to do this such as the Middle East and Africa who
want to leverage our SEPA model, so this will build even more scale;
4. The elimination of domestic legacy systems by getting rid of local ACHs and CSDs

There was then various dialogue about these views, with the net:net
being that SEPA started as a compliance push and needs some demand pull
to be successful. As Robert Heisterborg says, there needs to be an iPod
for SEPA Payments. Is this the SDD? Probably not, especially with the
issues over interchange fees, but there needs to be something.

It could be the example of the Netherlands and Belgium governments, who
have made it mandatory to use SEPA instruments when responding to
government Requests for Proposal (RFPs). That would cover 40% of all
payments in those countries for a start, if all government payments
were processed through SEPA instruments.

From the corporate and retailer perspective however, there is a double
whammy with costs for the new SEPA systems on one side whilst having to
interact with the old national systems on the other. So retailers need
to have a carrot to use the new systems and a stick to get off the old

Someone piped up by saying that Priority Payments should have been the
answer for creating demand, but the EPC threw this out … that comment
was not really responded to effectively.

My own feeling is that Priority Payments are a good thing for those
banks and countries ready to provide such a service. For those
countries that are currently operating on D+5 or worse, or that aren’t
even gearing up for a PSD transposition in 2009 – and yes, there are
some – they would be seriously disadvantaged by Priority Payments. They
should not be, as the EBA offer Prieuro for this, but it would cause
issues between domestic and cross-border payments possibly.  Therefore,
even though this makes perfect business sense, that’s why the EPC did
not take this forward.

And that’s the real story about why SEPA and the PSD has stalled.

Too many national, political, financial and industry issues around the
cost-benefit of SEPA and the PSD, and too little interest in agreeing
upon demand-driven products and services that offer value out of this

A harsh assessment I’m sure, but one that certainly has been corroborated by this conference.

For example, half way through, I asked the 100 or so delegates (mainly
bankers and solutions providers) how different this year’s SEPA
conference is to last years. The blunt question was: “has this
conference shown any progress for the SEPA and PSD agenda over the last

No-one raised their hand.

Not one.

No-one thought there was anything new.

I then asked how different next year’s conference will be. Do they think that much will have changed by this time next year?

Less than 5% of the audience raised hands.

In other words, no-one thinks that much has happened in the last year,
and no-one believes much will happen in the next year, even with the
PSD transpositions and implementation of SDDs.

That's pretty awful, but here's the positive note.

SEPA and the PSD are fixing our pipes and plumbing for payments to bring them into the 21st century.

The fact that this is a massive task to fix, means that it is slow.

It will happen though … it will just take a lot longer than all of us wish.

This means that SEPA and the PSD are not broken irrevocably, just bent a bit.

The project now needs a new impetus to carry it forward.

What it really needs is some demand focused product innovation.

If we could see the innovations of products and services to get
corporates, citizens and governments to come on board and start using
SEPA instruments, then we would start to see the end of this tunnel.

That's the missing part that came out of this discussion.

Where are the SEPA product innovations and value-added services that
banks are generating on the back of SEPA instruments, to attract
corporates into the cross-border transactions that will maximise the
reasons for doing this?

That's my challenge to those involved in this project.

About Chris M Skinner

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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