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The total view on SEPA and the PSD

At the payments conference I attended last week, a major theme was the Payment Services Directive (PSD) and Single Euro Payments Area (SEPA).

Summarising the PSD and SEPA areas makes for interesting reading, and builds upon the two entries I made last week about the show titled "SEPA may not happen", and "Quantifying views on SEPA".  This will also feed into our summer project, where the Financial Services Club is conducting research into bank,
corporate and national readiness for the implementation of SEPA and the
PSD.  If you are interested in participating or sponsoring this research, please contact admin@balatroltd.com.

Anyways, back to the overall industry views and, in the first major discussion about SEPA and the PSD, Daniela Umstätter – the National Expert in Retail Issues, Consumer Policy and Payment Systems for the DG Internal Market at the European Commission – said that they were “not very happy” with the lack of progress on migration to SEPA Credit Transfers.

“The financial crisis has had an impact, but we need SEPA now than ever because it will bring harmonisation and standards that will allow banks to realise cost efficiencies.”

Delegates seemed to agree, 50% of them having voted that the market crisis put more emphasis on achieving full migration to SEPA. Moreover, the majority (54%) felt current delivery channels and bank payment products were inadequate in the new Internet and mobile world.

The EC is working on two papers to help support the migration to SEPA: an Action Plan that addresses the issues raised by the financial crisis will be published soon, along with a separate consultation paper on a SEPA end date.

Wiebe Ruttenberg, Head of the Market Integration Division, European Central Bank, said an end date would give a great deal of clarity. An end date would likely be around 2013, which five years after the introduction of SCTs should fit into most financial institutions’ investment cycles. Seventy per cent of delegates said a single end date set by EU regulatory authorities was necessary in order to achieve migration from legacy payments instruments to SEPA instruments.

Ruttenberg mounted a sturdy defence of the PSD and SEPA, telling delegates that there was a change in payment behaviour ahead and that if instruments were not developed in the “right way” or aren’t adopted, banks will be like dinosaurs and will die out. “We need one European space for doing payments. Banks can build on the basic SCT, SDD and SEPA Cards instruments, combining them with online, mobile and e-invoicing services. There is an expectation that banks will provide the most attractive service offerings for customers, if they don’t there are others who will step in.”

When challenged that SDDs would be inferior to existing domestic instruments, Ruttenberg said the ECB and EC’s assessment of the situation was that differences could be solved through Additional Optional Services. “We shouldn’t forget that SEPA is about European integration. We have a solution, and while not everyone is happy with it, it is a solution that can be offered on a European level.”

Ruttenberg also updated delegates on SCT volumes, which have risen to 2.9% since the migration on to SCTs by Slovenia’s new ACH. Subsequent speakers made play of the fact that one year on from their introduction SCT volumes were so low, speculating that at the current rate of growth it would take anything up to 100 years to get full adoption. However, Gilbert Lichter, Chief Executive EBA Clearing Co and Secretary General of the Euro Banking Association, said such critics ignored the network effect of growth. SCT traffic was growing at 15-20% per month, he said, and it would take a considerably shorter time to see full migration.

Gerard Hartsink, chairman of the European Payments Council said while the transposition of the PSD into national law was a concern of those who attended the most recent plenary session of the EPC, only Sweden had said it would not be ready. The industry was on track for the primary deliverables of the SDD and countries including Brazil, the US and Russia were interested in SEPA. “We will be delivering new services for customers based on better cooperation models, new standards, technology and infrastructure,” he said.

SEPA implementation

In particular, there are issues with the SEPA model.

This was illustrated by two questions put to delegates at the start of the IPS 2009 sessions on SEPA implementation, that received overwhelming agreement: we need to create new cooperative models with the involvement of all market participants – banks, users, suppliers and regulators (70%); and we need to widen our vision of the types of services and infrastructures we should provide, such as e-billing, e-invoicing and supply chain data (75%).

Rob Jonker, Senior Product Manager, Global Payments, Deutsche Bank said the SEPA business case for corporates was still very minor. Large corporates do view SEPA as part of a bigger picture and potentially strategic, but the lack of an end date was a problem.

Mario de Lorenzo, Director of Payments Systems, SIA-SSB, said banks’ payments architectures must evolve in order to optimise processes and reduce costs. Standards would enable innovative services to be developed that can increase revenues and reduce time to market.

A key message that emerged from the sessions on SEPA was the need for better communication between banks and corporates.

Ashley Dowson, Chairman of The SEPA Consultancy, said the leadership of the political agenda had “disappeared” during the past few years. “SEPA customers were excluded from discussions for too long and are now too vocal. There must be a balance between banks and their users. Banks need to stretch their budgets to provide the services that are required, but corporates mustn’t request certain services merely to antagonise banks.”

Martine Brachet, Head of Interbank Relationships, Payment Services Division, Société Générale reminded delegates that SDDs were very complex and “there will be many lessons to be learned in November when they become a reality”. She also assured delegates that the French banking community had begun work on SDDs, having recently received clarification about multilateral interchange fees (MIFs). “The French banking community felt it was better to undertake all of the necessary preparation for SDDs before doing things we maybe could not manage.” France has committed to introduce SDDs in November 2010.

The MIF issue was important when it came to SEPA for cards as well. Norbert Bielefeld, Deputy Director, Payments and Securities, European Savings Bank Group, World Savings Banks Institute, reminded delegates of the principles of MIFs. “Interchange was successful in building and developing the cards business. If one of the objectives of SEPA is to have market transformation, you cannot have that without continued innovation. It is very difficult to innovate without investment and without MIFs this will be a real challenge.”

SEPA was introducing a more cooperative approach in the payments industry said Manfred Schuck, Executive Advisor to the Board of Directors at Equens. “Before SEPA was introduced, we had more than 30 different local infrastructures servicing only national markets. There will be a network community in the future comprised of partners. I think the number of infrastructure providers that will survive can be counted on the fingers of one hand.”

Marc Niederkorn, Director, McKinsey and Co, said SEPA would happen – something that a year ago he would have said with more caution. “SEPA will encourage interesting new economic models because banks will need to cut costs and increase efficiency. I think we will see much more outsourcing of operations that are difficult to manage inhouse, which is good news for the banks that can propose centralisation and network management.”

Jad Khallouf, Chief Executive Officer, STET, said SEPA expectations had been mismanaged. “You have to face up to SEPA if you are to survive but it is a huge challenge. Corporates are not ready, not
only because of the lack of an end date. Like banks, they are striving to survive in the current economic turmoil.”

PSD Implementation

With the Payment Services Directive (PSD) due to come into effect from 1 November this year, Ruth Wandhofer, Head of Payments Strategy, EMEA Global Transaction Services, Citi, said there were still a number of challenges with the PSD, particularly for banks operating in more than one country across Europe.

“Most banks can tackle the customer communications aspect of the PSD at the last minute, but making the required system and procedure changes is more of a long-term project and some people are running slightly late on this.”

The overriding message that came out of the day was that the PSD cannot be reversed and financial institutions need to deal with it. As Dermot Turing, Partner, International Financial Institutions and Markets Group at Clifford Chance said: “It’s too late to argue about the content of the PSD. What law firms need to do now is help to interpret the PSD in a consistent way that minimises system and client-facing burdens.”

Daniela Umstätter, National Expert, Retail Issues, Consumer Policy and Payment Systems DG, European Commission said she was puzzled that uncertainty remained in the market about the transposition of the PSD into national law. “We are well on track with the PSD. Only one state, Sweden, has a problem with transposition and we will be helping them out. In general, the PSD is a fully harmonised directive, there is no room for interpretation and where there is, we are trying to solve it.”

John Burns, Senior Associate Retail Policy, Financial Services Authority had an uncompromising view: “The industry says complying with the PSD is difficult. We understand that, but the law is there and will have to be dealt with. Saying it is difficult doesn’t get us beyond what the law is.”

The PSD does present difficulties to banks, particularly those that operate in more than one country. Only the UK and Bulgaria have so far issued new payments laws based on the PSD. Concerns were raised about the treatment of leg-out transactions when no currency conversion was involved, what was meant by making funds immediately available, how to deal with late payments, charge codes for corporates, execution times for card payments and the impact of being non-compliant.

Bjorn Flismark, Senior Vice President, Global Transaction Services, SEB said the PSD changes a great deal for banks, imposing rules where previously they were used to doing “what they wanted or what they thought they could get away with”. Complying with D+1 on payments would require banks to consider new business models and how to charge customers in the future. “Those that have relied on float income in the past will be asking how they can replace this.” However, once systems have been changed “at a terrible cost”, banks will in the longer-term enjoy cheaper processing and simpler rules to live by.

Martin O’Donovan, Assistant Director, Policy and Technical, Association of Corporate Treasurers said from a corporate perspective, whether it takes one or three days for a payment to arrive is not crucial; having certainty is. The possibility of corporate opt-outs from certain provisions is being discussed among corporate treasurers and O’Donovan said many treasurers were taking stock of banking services and how they differ from country to country. “We are advising our members to ensure that they understand what they have so they can talk to banks in a meaningful way about opt-outs.”

Changes in law don’t make for a new market, it is business opportunities that do, Dr Thaer Sabri, Chief Executive, Electronic Money Association, reminded delegates. “If the PSD creates opportunities for a deluge of new payment institutions to come on to the market you would have to ask are these business opportunities that banks have left open? Money remitters, merchant acquirers and some third-party processors may all see opportunities in extending services. At the same time, some banks might hive-off their payments businesses and create specialist subsidiaries.”

Participants in the boot camp were left in little doubt that the PSD would have a significant impact on their payments operations. And as Burns pointed out, with countries outside the EU and EEA looking at the PSD, it may well be that in the future representatives from financial institutions elsewhere in the world will be mulling over the same questions.

Corporates and SEPA

There were mixed messages from corporate treasurers regarding their attitudes and readiness for SEPA and the PSD.

Raffi Basmadjian, Head of Group Cash Management and Head of IT for Group Treasury, France Telecom Group Treasury, said the firm was collecting BICs and IBANs, but with many millions of customers, this was proving to be a significant problem. However, he said SEPA would give France Telecom homogeneity within a group of standards and channels. “All treasury operations will be performed in the same way from one country to another.” The company’s next step is to centralise domestic collection systems with a collections factory and local payment systems into a payments factory. Andreas Resei, European Treasurer at Mondi Group, said SEPA could be a catalyst for larger treasury projects within the organisation.

Gianfranco Tabasso, Chief Executive of FMS Group on the other hand, said Italian corporates were not ready for SEPA and would not begin to get ready until there was an end date. “Large companies are aware of SEPA but are also waiting for the PSD transposition in order to change their customer contracts.”

Massimo Battistella, Manager of Accounts Receivables, Administration Services at Telecom Italia said he was concerned about the risk in SEPA instruments and some of their business models. “Italian corporates are working with the banking system to develop AOS in order to have instruments that better fit our requirements.”

Summary kindly provided by Informa, producer of the International Payments Summit

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.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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  • Two points stand out from the commentary on SEPA progress at last week’s International Payments Summit. Firstly, it is no surprise that seventy per cent of delegates said a single end date is crucial for the successful migration to SEPA instruments. In the context of an extremely volatile and uncertain economy, and without a deadline to aim for, banks and corporates are struggling to make a business case for a changeover. However, the important factor here is that this end date must be ‘agreed’. An imposed deadline and self-regulation by the banks have not worked to date. So given this previous experience of the market, there must be an agreed industry consensus, which is further highlighted by the result that seventy per cent of delegates felt we need to ‘create new cooperative models with the involvement of all market participants – banks, users, suppliers and regulators’.
    Secondly, the Additional Optional Services discussed by Ruttenberg will be instrumental in bringing the corporates on board, making customer migration to SEPA both painless and seamless. However, this must not be at the expense of Euro standardisation. SEPA instruments cannot be enhanced at the domestic level as this will cause market fragmentation – the opposite of what SEPA was designed to achieve. The fact is that SEPA started as a framework to benefit corporates and consumers but has morphed into an interbank framework that has been moulded primarily by the banks. We need an industry body to step in to play an important role in helping the banking industry formulate a business case for corporates’ SEPA migration and to achieve the consensus around the end-date. Is the EPC up to the job? The next 12 months should reveal not only whether this will be the case but also whether the migration to SEPA will be a success.

  • Two points stand out from the commentary on SEPA progress at last week’s International Payments Summit. Firstly, it is no surprise that seventy per cent of delegates said a single end date is crucial for the successful migration to SEPA instruments. In the context of an extremely volatile and uncertain economy, and without a deadline to aim for, banks and corporates are struggling to make a business case for a changeover. However, the important factor here is that this end date must be ‘agreed’. An imposed deadline and self-regulation by the banks have not worked to date. So given this previous experience of the market, there must be an agreed industry consensus, which is further highlighted by the result that seventy per cent of delegates felt we need to ‘create new cooperative models with the involvement of all market participants – banks, users, suppliers and regulators’.
    Secondly, the Additional Optional Services discussed by Ruttenberg will be instrumental in bringing the corporates on board, making customer migration to SEPA both painless and seamless. However, this must not be at the expense of Euro standardisation. SEPA instruments cannot be enhanced at the domestic level as this will cause market fragmentation – the opposite of what SEPA was designed to achieve. The fact is that SEPA started as a framework to benefit corporates and consumers but has morphed into an interbank framework that has been moulded primarily by the banks. We need an industry body to step in to play an important role in helping the banking industry formulate a business case for corporates’ SEPA migration and to achieve the consensus around the end-date. Is the EPC up to the job? The next 12 months should reveal not only whether this will be the case but also whether the migration to SEPA will be a success.

  • An end-date will certainly move SEPA forward, but to where? This has been going on for so long that I can barely remember the goals. Weren’t we supposed to get cross-Eurozone payments that are as cheap and efficient as domestic payments? Even though SEPA Credit Transfers have been live for a while, a cross-Eurozone payment from the UK (just checked on a couple of bank websites) still costs £15 – £20. That’s a far cry from a domestic payment, and it’s not as good as several alternative service providers – whose reach extend well beyond SEPA-land and hence have greater overall benefit to consumers and corporates.
    According to the FSClub’s ‘Quantifying people’s views on SEPA’, 47% of respondents (85% bankers 12% corporates) to the question ‘Who is going to benefit most from SEPA?’ thought that corporates would stand to gain most; with 33% voting for consumers. Are there any metrics and measurements as to what these benefits will actually be? IBANs are supposed to deliver industry-best practice STP – are they? Do corporates really want one service for SEPA-land payments and a different one for the rest of the world?
    Once the domestic ACH systems have been shut down, if the benefits don’t actually materialise, there’ll be no going back. Do we, as consumers and as corporates, get a vote? Are we convinced that ‘standardised’ equates to ‘better’? In today’s world, standards development and adoption moves far more slowly than innovation.
    If – as Paul says – SEPA has morphed into a project to integrate bank back offices, surely we need to revalidate that it is really on track to deliver the right outcome for consumers and corporates, before we allow it to become final and irrevocable. As we all know, networked infrastructures are nigh on impossible to change once established. Payments is a large element of Europe’s economics and SEPA needs to be done right – else Europe will be at a competitive disadvantage, which wasn’t where the Lisbon Strategy was aiming.

  • Chris Skinner

    Nice comments guys.
    The thing that we have to bear in mind is the dual objectives of:
    (a) let’s get standardisation; and
    (b) let’s get 27 countries in the loop.
    To my mind, these two objectives are in conflict as to achieve (b) you can’t have (a), and vice versa.
    This is why end-dates, etc aren’t there.
    Be interesting to see what’s happening a few months after November 1st though.
    Hopefully, a little bit more than an integrated bank’s back office.
    Chris