Payments regulation: a summary of the latest views

I was lucky to chair this year's International Payments Summit in London, and a lot of talk was about regulation. 

The organisers are kind enough to summarise the debate so here's a snapshot from their 12-page conference summary report (if you want more, then come to next year's meeting ;-)  ... free places for Corporate Treasurers and Mid-Tier Banks):

According to 52% of the delegates at IPS, regulation was “increasing complexity and cost”.

For example, from January 2014 until March 2014 3,669 new regulatory requirements for banks had been introduced, said Graziella Capellini of Milan-based Nike Consulting said.   Of these 1,314 were issued by European regulators.  In this wave of regulation, banks were finding it difficult to identify new or revised requirements.

Risks of failing to comply with regulatory requirements were higher for international banks, which need a deeper understanding of the differences in transpositions.  One solution is to build an archive of regulation, identifying external requirements and ensuring the archive is kept up to date.

Discussions regarding European regulation in particular were overshadowed by the looming European Parliament elections in May.  Some of the issues discussed could be affected by a change in the make-up of the Parliament as legislation is sent back to MEPs for further debate.

There is plenty on the regulatory agenda: interchange fees on payment cards, money laundering, Basel III, the revision of Europe’s Payments Services Directive, which includes the prospect of third party providers (TPPs) gaining access to bank accounts, FATCA in the US, to name but a few.

The TPP move was subject of some debate, although its impact is unclear.

Dr Thaer Sabri of the Electronic Money Association said the consequences would be that banks and payment services providers will be compelled to provide account balance information to third parties.  This will create the ability for third parties to build services on top of bank services.

Kirstine Nilsson of Swedbank thought the TPP move was a positive one, bringing these players under the regulatory umbrella for the first time: “We welcome them into the payment process as an identified party that is regulated.  It will ensure that consumers continue to be protected,” she said.

Many of the players being brought into the regulatory environment are welcoming the moves because they will be able to play in other European markets via passporting rules, said Wolfgang Maschek of Western Union: “Competition will be more intense for bank-focused payment services because there are still many inefficiencies in this market, particularly across borders.

New players will be able to offer faster, cheaper and more transparent services.”  John Burns of Lloyds Banking Group said it was likely banks would have to re-engineer their online banking environments to allow for the TPP requirements.

The recommendations for a cap on interchange fees was welcomed by Richard Graham of the British Retail Consortium: “We have lobbied for a reduction of interchange fees because it is an archaic system that costs UK retailers more than £1 billion and fees just keep going up.  There is no incentive for banks to offer new ways to pay and the cap on fees is a way of making up for the mischief of excess fees by allowing other organisations to play in the payments space.  The PSD is aimed at encouraging new players into the payments space, which will be better for consumers and retailers.”  

In conversation with conference chairman Chris Skinner, Sylvie Matherat of Banque de France and Cathy Hayes of the Bank of England put forward the aims of their respective institutions.

Matherat addressed the idea that regulations were having unintended consequences by pointing out that there are also intended consequences in regulation:  “We want to change the way some business is conducted.  We want transparency on transactions, more capital than leverage, a price to be put on liquidity and less maturity transformation, for example.  We don’t want to kill off international banking, nor do we want to see market fragmentation.  We are nearly finished and we hope that the result will be much safer markets in the years to come.”

Hayes said in terms of systemically important payments systems, regulations were designed to ensure such systems are robust, resilient and reliable.  The outlook, she said, was good but there were many systems that had led to complexity and higher costs and also acted as a barrier to new entrants: “Regulation is a collaborative exercise – we don’t want to tell people what to do.  We want the industry to develop proposals based on what our objectives are.”  

Unsurprisingly, much of the discussion about regulation focused on the Single Euro Payments Area (SEPA).  The original deadline for migration of domestic credit transfers and direct debits to SEPA instruments was 1 February but this was extended by six months earlier this year.  The main complaint about the initiative was that national differences in interpretation of formats have created a series of ‘mini SEPAs’.

The comments of Jose Cuevas of Alstom summed up the views of many corporates: “I think we have lost a good opportunity and have instead created mini SEPAs.  Domestic schemes for SDDs are very different from one country to another, as each country tries to protect its own product.  The only way to move forward at the moment is to ensure that corporates are part of the decision making and that we can propose what we expect of SEPA.  At present, SEPA is an example of what happens if you mandate something but don’t follow the market and don’t listen to the customer.”  

Hans-Maarten van den Nouland of Merck had similar views: “We do not believe the myth that SEPA would deliver one format that would enable us to run everything out of our London office; this could not be done.  I thought I would get one flavour of ISO standard, but I didn’t.  Instead, there seems to be a local versus a European format.”   

Frank Seiler of Stada Arznemittel, however, reported on a positive SEPA experience, which has helped the pharmaceuticals company to centralise its treasury operations: “SEPA has helped us to centralise more and more and the payments on behalf of function has made life much easier.”   

Other SEPA issues raised during the Summit included interoperability problems between additional optional services and value added services; the persistence of local options – 24 legacy payments products are still used in France, for example; and while one bank may be SEPA ready, its counterpart in a transaction may not be.

James Lockyer of the UK Association of Corporate Treasurers wondered whether SEPA wasn’t typical of many centralised mandates that by the time they come to fruition, the rest of the market has moved on: “I am convinced there are huge benefits to be had from SEPA, even if it is just to get people thinking about payments and processes.  But in the meanwhile, life is moving on and SEPA may be the last hurrah of the old style payments processing world before a younger generation of initiatives come storming in.”  

This new generation could be real-time payments, which were discussed in a strategy roundtable session.  At present there are around 35 faster or real-time payments initiatives launched or under development globally.

Liz Oakes of KPMG said there was nothing in the design of SEPA that would stop it moving faster and becoming the basis of a real-time system: “Real-time payments must be embraced because the market is moving to mobile.  We have a great opportunity to change the face of payments and how customers conduct their day-to-day lives.”  

Michal Szymanski of Poland’s payments processor KIR, agreed: “there is pressure from customers because non-bank payment providers are offering real-time services.  Real-time payments are the future and encompass more than just faster payments; they also include reconciliation, enabling all parties to confirm that funds have reached the ultimate beneficiary.”  

A real-time payments infrastructure will be crucial in supporting bank transactional payments for years to come, said Stig Korsgaard of Nordic payments processor NETS.  Faster payments systems will help banks to fight off competition and to meet regulatory requirements.  “You don’t do innovation by utilising legacy systems; real-time is worth taking the risk, it will help banks to compete.”  

Jose Beltran of France’s STET said the industry had to avoid creating another SEPA scenario with real-time payments: “Banks should work collaboratively to develop real-time accounting systems and to avoid fragmentation of the infrastructure.  Creating interoperability in real time payments is important and if we don’t do that, customers won’t understand why we haven’t.”

Jean Pic Berry of STET said the payments industry may have achieved its SEPA vision, but he was unsure whether it had achieved its payments vision: “It is not up to CSMs like us to innovate – we can’t expect to understand the needs of our customers’ customers.  Innovation in payments will come from the smaller companies that can cater to the needs of customers.  The CSMs must ensure that we can make those visions possible by supporting them with our infrastructure.”