Principal European Union regulatory initiatives impacting payments in progress
As stakeholders impacted by European Union (EU) policymaking in the area of euro payments we all are currently empathising with Vladimir and Estragon, the protagonists in Samuel Becket's play 'Waiting for Godot', although in this case Godot is likely to appear. Today, the European Commission (the Commission) has not yet communicated its position on three dossiers which will have a major impact on the future of the euro payments market.
The Green Paper 'Towards an integrated European market for card, internet and mobile payments (the Green Paper) was published by the Commission in January 2012 for a three month consultation. Based on the feedback received, the Commission will determine the need for action on the various issues raised in the Green Paper. It is expected that the Commission will announce its intentions in the coming months.
The Payment Services Directive (PSD), which was implemented by most Member States by November 2009, is being reviewed by the Commission. Article 87 of the PSD requires the Commission to present a report on the implementation and impact of the Directive, together with proposals for its revision by November 2012. To date the Commission presented neither the report nor the proposal. In the meantime it has been suggested that the '' proposals will be published in the spring of 2013, although it should be noted that this has not been officially confirmed.
Review of the Single Euro Payments Area () governance structure: Recital 5 of the 'Regulation () No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro' (the Regulation) states that the Commission should "review the governance arrangements of the whole project before the end of 2012 and where necessary make a proposal. This review should examine, inter alia, the composition of the European Payments Council (), the interaction between the and an overarching governance structure, such as the Council, and the role of this overarching structure." The Council, which brings together representatives of both the demand and supply sides of the payments market including the , was established by the Commission and the European Central Bank (ECB) in June 2010 (for information, refer to 'related links' below). The proposal for a revised governance structure remains outstanding. It is expected that the Commission will table a related communication early 2013.
The Newsletter article, entitled: ' is Just a Piece in the Puzzle: Additional European Union (EU) Regulatory Initiatives Now in the Pipeline Will Have a Profound Impact on the Payments Market' covers a host of further regulatory initiatives, which will impact the financial services sector (see 'related articles in previous issues' below). According to the Commission, these initiatives are aimed at promoting market integration, improving efficiency, increasing security and transparency, as well as strengthening financial stability in the EU, while at the same time fostering innovation and increasing the competitiveness of the EU economy1. These are noble aspirations which deserve everyone's full support. The question however, remains whether regulatory action is the adequate means to all these ends.
While the Commission continues to contemplate its next steps, this author seizes the opportunity to highlight principal aspects relevant to the innovations in payments debate identified with the many contributions on the subject published in the Newsletter (see the twelve links included with the 'related articles' below). These contributions reflect legal analysis, latest market, central bank and academic research as well as views from bankers on what drives innovation in the marketplace. It has to be stressed again that market realities are shaped by altogether different factors than those underlying the opinion building processes at level. It would therefore be welcomed if the Commission would, in addition to its own particular wishes on how the market should evolve, take the findings summarised in this article into consideration when determining the need for further regulatory action in the area of payments.
From the perspective, there is not much else that can be progressed until the Commission has clarified its vision for 2.0 and the specific role it wishes the to assume in future in dialogue with all other stakeholders.
On integration and competition
The integration of the national euro payment markets into a single European one is a process that would have never occurred spontaneously. It requires the political will and mandate to achieve it. It is therefore the task of the European legislator to set the legal and regulatory conditions required to conclude this market integration exercise. The EU lawmaker met this objective with the adoption of the Regulation, which effectively establishes mandatory deadlines for migration to Credit Transfer () and Direct Debit (SDD). - or integration - is however not an end in itself. It is an interim stage that should not be judged on the direct outcomes, but on the situation it leaves for the market to reap further benefits. is a seed rather than a fruit.
With regards to the further progress of market integration - or lack of it, as perceived by the authorities - it seems that the Commission is, first and foremost, dissatisfied with the choices made by customers who continue to buy - and pay - primarily within national borders. Since political correctness prohibits it from attacking businesses and consumers for making these choices, the authorities blame payment service providers instead. The expectation expressed by authorities that the volume of cross-border transactions in the internal market should dramatically increase based on the introduction of harmonised instruments for electronic euro payments, is however unrealistic. It will take time to change ingrained payment habits on both the demand and supply sides. Cross-border transactions would generally take place over the internet. In these instances, buyers are unable to personally verify a good or discuss services tendered, but depend entirely on the information provided online. How many companies in the offer the information required to conclude a purchase in all languages? Consumers like to be aware of what they are buying and need to understand the language describing the goods and services offered, including any contracts that they may have to sign. Moreover, payments continue to rely on proximity effects; merchants prefer to bank with a nearby institution that they can easily contact; consumers open accounts based on closeness to their home or work. Even large corporations in general make similar considerations when searching for solutions that best meet their needs. Consequently, customers will regularly choose payment service providers with an overlapping footprint in the markets where both are present.
For these same reasons, cross-border competition in the European payments market will take time to materialise, even once migration to the single set of payment schemes is completed. The removal of national barriers in the payments market will bring value, but not as much as expected or as quickly as desired. The most ambitious EU integrator will not change the fact that payment habits and business models on both the demand and supply sides will only change gradually once is a reality. Moving forward, realistic targets, taking into consideration customer preferences, should be agreed with regards to progressing EU market integration in payment services.
On innovation and regulation
With publication of the Green Paper, Joaquín Almunia, Vice President of the Commission responsible for Competition Policy, claimed that today's "inefficient payment systems" within the "unduly undermine the global competitiveness of the European economy and limit its potential for growth. Europe's consumers, merchants and companies deserve payment services in tune with the 21st century: transparent, with genuine value added and making the best use of our technologies."2 The Green Paper claims to analyse "the obstacles which hinder European market integration in these promising payment technologies." The does not support a number of related assumptions and suggestions put forth in the Green Paper. Consequently, the believes that many of those suggestions will not help achieve the objectives stated in the Green Paper and may even undermine their realisation. From the perspective of market participants both on the demand and the supply sides of the payments market, the Commission's analysis of the state of affairs in 2012 regarding integration of, and innovation within, the euro payments market is surprising. Latest developments have generated a host of innovative solutions taking advantage of rapid technological progress in the areas of card, internet and mobile payments. As a result, the market is witnessing a spectacular growth in card transactions and contributions to the development of an integrated mobile payment ecosystem. Contrary to assumptions put forward with the Green Paper, payments do not act as a main barrier to the development of e-commerce; otherwise e-commerce would not have experienced continuous fast growth as evidenced by several market studies. The Green Paper also seems to overlook major market achievements to date to progress . The detailed response of the to the 32 questions tabled by the Commission with the Green Paper is set out with the 'related links' at the end of this article.
A commonly recognised definition of innovation states: "Innovation is the multi-stage process whereby organisations transform ideas into improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace"3. Günther Gall, Vice Chair and a banker with more than forty years of experience in managing all aspects of payments, identified the main factors fostering innovation in the Newsletter article, entitled: 'What Drives Innovation in Payments? Invites European Authorities to Take the Market Perspective into Consideration' (see 'related articles' below). These factors are, among others: (1) there must be market demand for the solution; (2) there must be a business case for providers to develop a new solution; (3) the solution must be convenient and easy to use for the customer, especially in payments. The Vice Chair commented: "Documents published by the EU regulators, addressing innovation in payments, do not reflect any of the items listed above; views articulated by the regulators on the subject may therefore risk overlooking the most important factors driving forward innovation in the marketplace. From the perspective of payment service providers active in the market, regulation risks stifling innovation and standardisation initiatives led by market participants. Regulation is also not suited to keeping pace with the fast evolution of technology, fraud and market developments. As a matter of principle, any regulatory action should be technology-neutral." Günther Gall concludes: "Regulatory intervention should not undermine the innovative capacity of the European payment sector and its competitiveness in the global marketplace."
In the Newsletter article, entitled: 'On Innovation: What the European Union Could Learn from Apple and Facebook' (see 'related articles' below), this author suggested that the EU authorities now feeling competent to define what constitutes an efficient and innovative payments market may also wish to take a closer look at innovation leaders who have demonstrated the ability to accurately assess future customer needs.
On innovation and standardisation
In order to obtain an overview of payments innovation globally, the Committee on Payment and Settlement Systems (CPSS)4, established the Working Group on Innovations in Retail Payments (the CPSS Working Group). The CPSS Working Group focused on fact-finding, in order to define the most relevant developments and to identify the major factors driving and hampering innovation. The findings of this central bank research are set out in the report 'Innovations in Retail Payments' (see 'related links' below). The report addresses, among other things, the impact of cooperation on innovation. In his related contribution to the Newsletter in July 2012 (see 'related articles' below), Dirk Schrade, Chairman of the CPSS Working Group, points out that standardisation "helps to achieve a critical mass and avoids any proliferation of incompatible, smaller-scale systems which lack the necessary acceptance. It can also create a solid foundation for new players wishing to enter a new market. Moreover, standardisation avoids the costs and risks attached to overcoming the absence of standards. At the same time, standardisation could hamper innovation, for example if the standard-setting process has the disadvantage of restricting participation to incumbent players, or if standards become obsolete but are still widely used. In any case, experiences with mobile payments clearly demonstrate the benefits of standardisation. Different payment models and different standards have developed into incompatible solutions, often limited to market niches and hardly viable over the longer term. In this respect, widespread standardisation should ensure that innovation is not locked up in market niches."
This author noted in the Newsletter article, entitled: 'Innovacompegration (This is Not a Typo)' (see 'related articles' below') that innovation must also be left to market forces to ensure that only those initiatives which meet market demand are the ones that survive and set the benchmark for new 'standard' solutions. It is the market that judges which developments are ripe for further standardisation and generalisation - not the regulator. The authorities that would claim the role of referee to judge which innovative ideas must be taken forward and which should be given up would effectively prevent the materialisation of innovation. Only when individual initiatives have passed the market test, should cooperative efforts aimed at generalising such solutions be progressed.
On innovation and cooperation
The report 'Innovations in Retail Payments' published by the CPSS Working Group also finds that cooperation is an important factor behind innovation. In his contribution to the Newsletter of July 2012, the Chairman of the CPSS Working Group Dirk Schrade comments: "Cooperation has always been key to the payments industry, as innovations often entail high fixed investment costs. In view of the fact that the payments business is a network industry, cooperation helps to make innovative products or services available to a high number of potential customers. Cooperation is also the response to a higher degree of complexity in the value chain of innovative payment solutions, as evidenced by mobile payments. Consequently, more than half of the innovations reported in the findings involve some kind of cooperation between the different parties involved." Dirk Schrade adds: "Recent discussions in Europe have shown that cooperation in the field of payments is an especially challenging task because it has to comply with the relevant competition-related legislation. It can be concluded from the CPSS report that an innovation-friendly environment requires a proper balance between competition and cooperation of market players. Thus, it is of utmost importance that legislators give clear guidance on how cooperation can be achieved without provoking fears of anti-trust investigations."
Considering the prevailing uncertainty as regards the views of the competition authorities on cooperative efforts by the , incidentally taken forward at the request of other institutions, the concurs.
The longer it takes the European authorities to define the new rules of cooperation and standardisation, the more fragmented innovation will be. This scenario however, seems to contradict the Commission's expectations that innovation should act as a principal 'integration driver' in the euro payments market and promote the global competitiveness of the European economy.
On the future overarching governance structure
As mentioned above, Recital 5 of the Regulation tasks the Commission to review the governance arrangements including "the composition of the " and it is now expected that the Commission will table a related communication early 2013. In this newsletter it has been clarified many times that the European banking industry established the in 2002 in response to the regulators' call to action. The purpose of the to date reflects the mandate handed down to the banking industry by the EU authorities more than a decade ago. At that time, the political drivers of the programme called upon the industry to bolster the common currency by developing, in close dialogue with the customer community, a set of harmonised payment schemes and frameworks for electronic euro payments. The delivered as requested.
As emphasised in the Newsletter article, entitled: 'What Happens Next? European Authorities to Communicate Their Vision for 2.0 by End 2012' (see 'related articles' below), the remains committed to contributing to the creation of an efficient and secure payments landscape, which responds to market needs. The author of this article again invites the EU authorities to share their thoughts on how the and the banking industry could help in this regard in the future. For latest contributions on the subject, refer also to the European Parliament resolution of 20 November 2012 'Towards an integrated European market for card, internet and mobile payments' and the speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the off-site meeting in November 2012, entitled: ' migration, innovation and change' (see 'related links' below). In particular and with all due respect, the asks the various regulatory bodies offering opinions on the matter to (re-)align their expectations as to what exactly the banking industry, acting in the cooperative space of payments, should contribute to the further evolution of . This is a precondition for the , as one stakeholder group among many involved in the process, to evaluate the appropriate steps to be taken going forward.
Cobbler, stick to your last: the most successful innovations materialise if the market is simply allowed to generate forward-looking payment solutions in response to customer demand
While the Commission still needs to communicate its vision for 2.0, we are positive that we will be spared the fate of Vladimir and Estragon who ultimately waited in vain for Godot to make an appearance5. We trust that the Commission will early in 2013 lift the stalemate it has effectively imposed on the innovation in payments debate at the European level by clarifying the open items analysed in this article. The hope is that the Commission's current silence indicates a willingness to revisit regulatory ambitions (expressed in 2012) to establish the EU authorities as a main arbitrator on what constitutes innovation in payments and which solutions should be taken forward through cooperation and standardisation. Chances are that the market will simply not have the leisure to align research and development with the opinion building processes governing EU policy making. The pace of technological evolution creates immense pressure in the real world to bring forward-looking solutions to market, fast. Innovation will therefore naturally happen, independently of regulatory initiatives. The longer it takes the authorities to define the new rules of cooperation and standardisation, the more fragmented innovation will be. This scenario however, seems to contradict the Commission's expectations articulated with publication of the Green Paper, namely, that innovation should act as a principal 'integration driver' in the euro payments market.
As observed on earlier occasions: regulatory action in the area of payments should be restricted to and focus on integration, not on 'innovacompegration'. Experience demonstrates that the most successful innovations materialise if the market is simply allowed to generate forward-looking payment solutions in response to customer demand. It would be welcomed if the Commission would take this market reality into consideration when determining the need for further action in the area of payments.
Javier Santamaría is the Chair of the .
Related articles in this issue:
Innovation in Progress: Harmonised SEPA Cards Standardisation Requirements Expected to be Ready for Market Implementation Start 2014. Cards Stakeholders Group will release the next version of the standardisation requirements for public consultation in 2013
Related articles in previous issues:
SEPA is Just a Piece in the Puzzle: Additional European Union Regulatory Initiatives Now in the Pipeline Will Have a Profound Impact on the Payments Market. European payments regulation is a moving target ( Newsletter, Issue 16, October 2012)
'Towards an Integrated European Market for Card, Internet and Mobile Payments': Striking the Balance - Interoperability and the Access Dilemma. European Commission publishes feedback report on its Green Paper ( Newsletter, Issue 15, July 2012)
What Happens Next? European Authorities to Communicate Their Vision for SEPA 2.0 by End 2012. EPC looks forward to learning more about the authorities´ views on the continued merit of creating harmonised payment schemes and frameworks in the cooperative space of payments ( Newsletter, Issue 15, July 2012)
What Drives Innovation in Payments? EPC Invites European Authorities to Take the Market Perspective into Consideration ( Newsletter, Issue 15, July 2012)
Committee on Payment and Settlement Systems' Working Group Publishes Report 'Innovations in Retail Payments'. Central bank research identifies market trends and elements geared to assessing what an innovation-friendly environment should look like ( Newsletter, Issue 15, July 2012)
On Innovation: What the European Union Could Learn from Apple and Facebook. Reflections on the evolution of SEPA in the new regulatory reality governing the euro payments market ( Newsletter, Issue 14, April 2012)
Reflections on Recent Contributions from the European Commission Directorate General Competition to the Innovation in Payments Debate. Seeking common ground between policy makers and technical experts ( Newsletter, Issue 13, January 2012)
Dare to be Bold: Electronic Legal Tender is an Option. A SEPA legal tender model spanning both cash and electronic payments ( Newsletter, Issue 10, April 2011)
Innovacompegration (This is Not a Typo). Reflections on the best approach to innovation, integration and competition in payments ( Newsletter, Issue 10, April 2011)
The Economy of Standards: the 'Pros' and 'Cons' of Standards Competition. An introduction to a comprehensive qualitative efficiency comparison using the example of payment cards ( Newsletter, Issue 12, October 2011)
1 Commissioner Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy, in his speech, entitled: 'A fair and open system for payments in the Single Market' (December 2011) http://europa.eu/rapid/press-release_SPEECH-11-889_en.htm?locale=en.
2 European Commission Press Release: 'Breaking Down Barriers to Secure and Innovative Card, Internet and Mobile Payments' (January 2012).
3 Baregheh A, Rowley J and Sambrook S. (2009) Towards a multidisciplinary definition of innovation, Management decision, vol. 47, no. 8, pp. 1323-1339.
4 The CPSS serves as a forum for central banks to monitor and analyse developments in domestic payment, settlement and clearing systems as well as in cross-border and multicurrency systems. The CPSS Committee also focuses on standard-setting activities. The CPSS consists of the Reserve Bank of Australia, National Bank of Belgium, Central Bank of Brazil, Bank of Canada, The People's Bank of China, European Central Bank, Bank of France, Deutsche Bundesbank, Hong Kong Monetary Authority, Reserve Bank of India, Bank of Italy, Bank of Japan, Bank of Korea, Bank of Mexico, Netherlands Bank, Monetary Authority of Singapore, Sveriges Riksbank, Swiss National Bank, Central Bank of the Russian Federation, Saudi Arabian Monetary Agency, South African Reserve Bank, Central Bank of the Republic of Turkey, Bank of England, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York.
5 There is a sequel to Beckett's Waiting for Godot ('Godot Arrives', by Daniel Curzon), in which Godot finally appears, bringing mankind, in the form of Gogo and Didi, various spiritual, worldly, and mental 'answers' to life's many riddles.
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