Issue 9 - January 2011
Fringe Observations on SEPA
The Good, the Bad, the Ugly and a Knight in Shining Armour?European Commission requests unprecedented powers to determine payment functionalities
31.01.11 By Javier Santamaría
One of the most industriously cultivated political myths in the Brussels fish bowl is that users of payment services across all SEPA countries and customer segments would share a common vision with regard to SEPA payment schemes - and that the European Payments Council (EPC) would disregard this vision. The myth implies that dialogue between the demand and supply sides in the payments market would have broken down. Javier Santamaría refutes the myth and points to reality instead. The European Commission now seeks unlimited executive powers to decree payment functionalities top-down and entirely at its discretion. Consultation of market participants is not foreseen. The moral of the story? In response to an imaginary market failure, the regulator excludes the market, on both the demand and supply sides, from the process. The 'Fringe Observations on SEPA' highlight aspects transcending the day-to-day management of the process aimed at making SEPA a reality in the foreseeable future.
"The Good, the Bad and the Ugly" (Italian: Il buono, il brutto, il cattivo) is a 1966 western film directed by Sergio Leone.
KEY INFORMATION IN THIS ARTICLE
Payment Service Providers (PSPs) operating in a competitive market must distinguish their services and performance to acquire paying customers (the end users). Hence, it is of vital importance that the SEPA payment schemes, developed by the EPC, enable PSPs to design SEPA products and services that meet specific customer needs.
Regarding the ideal design of a SEPA payment scheme, the viewpoints of European Payments Council (EPC) members are as distinct (and occasionally mutually exclusive) as are those of payment services users – and each EPC member will make every effort to channel the requirements of their customers into the schemes.
Statements which imply that the demand and supply sides of the payments market would each act as a unified, homogenous and monolithic front are a distortion of reality.
It is a standard exercise in SEPA to bridge different payment practices and customer expectations in the process of SEPA scheme development.
The development of payment schemes through self-regulation by banks in close dialogue with customers represents the established approach in all national banking communities – and in SEPA.
This model ensures an optimally efficient, systemically stable and competitive payments market. It also incentivises innovation as a result of market pressures.
The proposal for a SEPA Regulation published in December 2010 (Articles 5 (4) and 12 – 15) envisages conferring unlimited executive powers on the European Commission to decree payment functionalities entirely at its discretion. Consultation of market participants is not foreseen.
To ensure that core principles of good governance continue to be observed in the euro payments market it is necessary that Articles 5 (4) and 12 - 15 are deleted from the proposal for a SEPA Regulation.
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The bad and the ugly?
The European Parliament's Resolution on SEPA of March 2010 states that "the SEPA decision-making process is currently at the discretion of the European Payments Council (EPC), where only banks take decisions on SEPA products neglecting end-users requests"1. I would like to invite the members of the European Parliament to reconsider this statement.
The EPC does not take decisions on the overall SEPA process - this is the responsibility of the public authorities and relevant political bodies at a European and national level.
The EPC is exclusively responsible for the development of SEPA payment schemes and frameworks - not the overall management of the SEPA process. The latter is the responsibility of the relevant public authorities and political bodies including the European Commission (the Commission), the Economic and Financial Affairs Council (ECOFIN), the European Parliament, the European Central Bank (ECB) / Eurosystem and European Union (EU) governments.
The EPC never discusses or takes decisions on SEPA products
We do not tire of explaining the material difference between a SEPA payment scheme and SEPA products and services: the EPC is responsible, among others, for the development and maintenance of SEPA payment schemes as defined in the SEPA Credit Transfer (SCT) Scheme Rulebook and the SEPA Direct Debit (SDD) Scheme Rulebooks. The Scheme Rulebooks contain sets of rules and standards for the execution of SEPA payment transactions that have to be followed by payment service providers (PSPs). These can be regarded as instruction manuals which provide a common understanding on how to move funds from account A to account B within SEPA. The rules and standards which make up a payment scheme are defined by PSPs in the collaborative space - that is the EPC.
The particular SEPA payment products and services offered to the customer are developed by individual, or groups of, PSPs operating in a competitive environment. The SEPA schemes developed by the EPC in close dialogue with the user community provide flexibility and options which enable PSPs to add features and services of their choice to the actual payment product.
The EPC does not 'neglect' end user requests. EPC members have a fundamental interest in promoting the needs of their customers.
The EPC does not 'neglect' end-user requests - for rather obvious reasons: PSPs operating in a competitive market must distinguish their services and performance to acquire paying customers (the end users). Hence, it is of vital importance that the SEPA payment schemes developed by the EPC enable PSPs to design SEPA products and services that meet specific customer needs.
The EPC currently consists of 74 members acting on behalf of banks, banking communities and payment institutions from 32 SEPA countries. More than 350 professionals representing all sizes and sectors of the banking industry within Europe are directly engaged in the work programme of the EPC. These payment professionals are committed to the SEPA vision and to the highly diversified customer base of the banking sectors and national communities on whose behalf they speak in the EPC.
It is also important to remember that the individuals engaged in EPC scheme development are not academics or lobbyists delegated to work for the EPC, but full-time payment professionals who interact daily with their local customers and manage payments in the real world. In addition, EPC members receive feedback from customer consultations on the SEPA schemes carried out at a national level and profit from the dialogue which is taking place in the EPC Customer Stakeholder Forum (CSF) since mid 2007. It may therefore be safely assumed that they know what their customers want.
Regarding the ideal design of a SEPA payment scheme, the viewpoints of EPC members are as distinct (and occasionally mutually exclusive) as are those of payment service users - and each EPC member will make every effort to channel the requirements of their customers into the schemes.
Observations on the term 'payment service users': the requirements of consumers, corporates, SMEs and public entities acting as payers and payees - within and across 32 SEPA countries
Paying is an activity that cannot be undertaken in isolation. It must rest on an underlying economic transaction (a service being provided or a product being sold) in which the starring roles are performed by a seller - who is the payee and the one that gets the money - and a buyer - who is the payer and gives the money. The underlying relationship is hence deeply asymmetrical and requirements from both ends may differ greatly. That a payment instrument is easy and safe to use would be subscribed to by both payers and payees. With regard to the cost of using a payment instrument, payers and payees agree that it should be borne by the other party. This is where the similarities between the requirements of payers and payees usually end.
Payment service users, however, are not only divided into payers and payees. They encompass consumers, corporates and SMEs - which may be active domestically, regionally or globally - and public administrations, for example. Expectations with regard to payments among these different customer segments differ widely. In a multi-country environment such as SEPA, even within a specific customer segment, there exist very different schools of thought as to which specific features should be included in a payment scheme or not. Consumer requirements related to direct debits illustrate the fact: subject to local practice, consumers living in one SEPA country prefer a direct debit model which relies on assumptions not readily shared by consumers living in another SEPA country. As a result, it is virtually impossible to translate the expectations of each national user group into mandatory elements of the SDD Scheme.
The division is not between users and suppliers: the art is in the process of building consensus across different payment cultures and customer expectations
Statements which imply that the EPC - or the demand side in the SEPA payments market - would each act as a unified, homogenous and monolithic front are a distortion of reality.
It is a standard exercise in SEPA to bridge different payment practices and customer expectations, while going through the painstaking process of forging agreement on the countless technical and procedural details that make up a European payment scheme. At the end of the day, European integration - in this case, developing harmonised SEPA payment schemes - is only possible if all parties engaged in the process are willing to aim for a solution that caters for the majority. This requires the ability to differentiate between the needs of particular customer segments in specific national markets on the one hand, and the overall requirements of the broader customer base on the other.
Proposed changes to the SEPA schemes that find broad acceptance in the entire user community are taken forward - regardless of whether such a change is proposed by PSPs or customer representatives. Change requests that lack such broad support are not. To identify whether any change request finds broad support in the entire SEPA market, the EPC does not roll the dice, but engages in an annual open scheme change management process. This includes a three month public consultation of all market participants. As pointed out above, in most instances a specific change request will be supported (or opposed) jointly by a particular user group and banking representatives catering to this particular user group.
The European institutions closely monitoring EPC activities should be the first to recognise that the process of consensus building inevitably means that not all requests can be taken forward. To construe this as 'negligence' of the EPC to honour user requirements is erroneous.
The question is why does this myth continue to be propagated?
Translating customer requirements into a payment scheme: the principle of self-regulation by PSPs operating in a network industry
Only by chance will a payer and payee share a common PSP (i.e. both holding an account in the same bank). In the more frequent scenario, a payment transaction involves the following four parties: the payer, the payer's bank, the payee and the payee's bank. Hence, there is a need to establish a network of providers that are able to communicate with each other; i.e. exchange funds between bank accounts held at different banks in a fast, secure and efficient manner. In other words, banks need to agree on the rules and standards governing a payment scheme - for example, payment schemes stipulating the rules and standards to execute a credit transfer or a direct debit. Traditionally, payment schemes are developed by PSPs operating in a cooperative and interbank environment. In the pre-SEPA era, it was the responsibility of national banking communities to develop and maintain payment schemes for euro credit transfer and direct debits. In SEPA, this task is performed by the stakeholders cooperating in the EPC.
In an industry body such as the EPC, banks representing the payers and banks representing the payees each defend their position and strike a balance. With their customers' (payment service users) interests in mind (for the reasons outlined above), banks strive to reach an agreement which is acceptable to both parties (payers and payees) and which releases enough efficiency to satisfy their different needs or requirements.
This model relies on the specific position of banks2 as the intermediary whose role it is to find the right point of equilibrium between the two parties; payees and payers. Banks are forced to satisfy both the payers and the payees, their customers. It is a case of supply meeting demand.
Self-regulation by banks in close dialogue with all customer segments ensures an optimally efficient, systemically stable and competitive payments market. This model also incentivises industry to innovate as a result of market pressures. The reluctance of payment service users to migrate voluntarily to SEPA confirms this conclusion: the vast majority of users in SEPA lack the incentive to move, because they are sufficiently satisfied with existing payment services - created based on the model described above.
This being said, and with my hand firmly pressed to my European heart, I fully support the SEPA vision. However, I share the view that SEPA is not a market-driven initiative and will require regulatory intervention to succeed; i.e. end dates for migration to SEPA must be established through EU Regulation. There is, however, no rationale whatsoever to obliterate the proven model of scheme development in the process. Yet this is precisely the goal now pursued by the Commission.
The proposal for a SEPA Regulation published in December 2010 envisages unlimited executive powers of the Commission to determine payment functionalities
On 16 December 2010 the Commission published its proposal for a Regulation establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924 / 2009. Articles 5 (4) and 12 through 15 of the proposal envisage that unlimited executive powers shall be conferred on the Commission to amend - at its sole discretion - the technical requirements to be met by euro credit transfer and euro direct debit schemes through delegated acts. The fact must be stressed that these technical requirements are set out in an annex to the proposed regulation for the following reason: by not including these requirements in the core text of the regulation, the Commission would be authorised to amend these requirements without having to obtain approval by the European Council (Representatives of EU Governments) and the European Parliament of such amendments. In other words, the Commission is now determined to take over the task of developing payment functionalities.
According to the regulatory proposal, the Commission does not foresee any involvement of market participants (users and suppliers) in the process of identifying these technical requirements.
(By the way: the core legal text of this regulatory proposal - commonly referred to as the 'SEPA Regulation' - does not mention the Single Euro Payments Area once. The SEPA initiative is only referred to in the explanatory memorandum and the Recitals accompanying the core legal text ... but this peculiar fact will have to be analysed on another occasion).
If it isn't broken, don't fix it
We have established that statements which imply that the EPC - or the demand side in the SEPA payments market - would act as a unified, homogenous and monolithic front are a distortion of reality. We have further demonstrated that PSPs cooperating in the EPC - if only out of pure self-interest - respond to customer needs. The following question therefore still requires an answer: why is the myth so industriously cultivated that the EPC would 'neglect' user requests?
The myth serves a purpose because the myth implies that the market does not work in the area of scheme development. The myth supplies the rationale for the regulator to claim the role of a knight in shining armour, ready to rescue payment services users supposedly disregarded by the supply side. Hence, the myth conveniently (if rather obviously) paves the way to a new reality. If endorsed by the legislator, the regulator will enjoy unprecedented powers to decree requirements applicable to euro credit transfer and direct debit schemes which will have to be met by all market participants - users and suppliers.
The hope remains, however, that EU lawmakers recognise that the established model of developing payment schemes - through self-regulation by banks in close dialogue with all payment services users - is the most appropriate approach to create an optimally efficient payments environment. To ensure that core principles of good governance continue to be observed in the euro payments market, it is necessary that Articles 5 (4) and 12 -15 are deleted from the proposal for a regulation establishing technical requirements for credit transfers and direct debits in euros.
Javier Santamaría represents Banco Santander. Banco Santander is a member of the European Payments Council.
EPC publication 'Shortcut to Who is Who in SEPA'. This publication clarifies the roles and responsibilities of the different actors involved in the SEPA process.
Regulation of the European Parliament and of the Council establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924 / 2009 of 16 December 2010.
Related articles in this issue:
Related article in previous issue:
2The term 'bank' is used in a non-discriminatory fashion and does not exclude payment service providers that are not banks.
Other articles in this issue
31.01.11 SEPA Scheme Change Management 2011 - Call to Stakeholders - Suggestions for changes to SCT and SDD must reach the EPC by end February 2011 By Javier Santamaría 31.01.11 Update EPC Plenary Meetings - Main decisions taken in December 2010 By Gerard Hartsink 31.01.11 Your Points of View - What our readers think of the EPC Newsletter By the EPC Newsletter Editorial Board 31.01.11 Work in Progress - The EPC approves update of the SEPA Cards Standardisation Volume and a new Resolution 'Preventing Card Fraud in a Mature EMV Environment' By Ugo Bechis and Cédric Sarazin 31.01.11 Building a Single Market for e-Commerce Payments*** - The SEPA e-Payment Framework - from design via proof of concept to market By John Holsberg and Javier Santamaría 31.01.11 Happy New Year? - Post-crisis EU financial sector reform: the impact of 'Basel III' on payments By Dermot Turing 31.01.11 The King is Dead, Long Live the King - The EPC repeals the Convention for Cross-border Payments in Euros and the Interbank Charging Principles (ICP) Convention By Ruth Wandhöfer 31.01.11 Reaping the Benefits of Electronic Invoicing for Europe - A summary of the European Commission Communication issued in December 2010 By Charles Bryant 31.01.11 Facing the Facts in January 2011 - The EPC Newsletter tracks the progress of SEPA migration By Gerard Hartsink 31.01.11 More Market Integration - EPC recommendations regarding proposed Regulation for the professional cross-border road transportation of euro cash By Leonor Machado 31.01.11 The Breakthrough for SEPA? - European Commission publishes proposal for a Regulation establishing technical requirements for credit transfers and direct debits in euros By Gerard Hartsink 31.01.11 Best of Class: the Netherlands - A case study in successful migration to SEPA By Friso Spinhoven 31.01.11 How to Migrate to SEPA - Experience in Belgium: what works and what is difficult? By Jan Vermeulen
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