An Epic Voyage: the SEPA Odyssey

An Epic Voyage: the SEPA Odyssey

Looking to Homer provides useful insight on the integration of the euro payments market

26 September 11

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Regulation 2560/2001: the Trojan horse

Frequently, when we refer to a journey full of perils and adventures into the unknown, we call it an odyssey. Indeed is an epic voyage that deserves to be described as an odyssey. Homer's hero Odysseus reached Ithaca some ten years after he set off from the coast of fallen Troy to go back home. Almost a decade has passed since the journey began and until recently it seemed that the final destination was just around the corner. Alas, it seems we did not please the gods enough - and they might choose to send us back where we came from.

can be traced back to 2001 AD, when the European Commission (EC) laid the foundations of its policy through Regulation 2560/2001 on cross-border payments in euro1. This regulation states that banks2 are not permitted to impose different charges for domestic and cross-border euro payments or ATM withdrawals in the Member States. This regulation has also generally been understood as a turning point in the financial integration policy of the European legislator: beyond its formal stipulations, Regulation 2560/2001 was clearly intended to shock the banking sector into stepping up its efforts to achieve .

From the perspective of a transaction banker, Regulation 2560/2001 turned out to be the Trojan horse - one way or another.

Odysseus knew where he was going and so did the banking industry - or so we thought

A decade ago, Regulation 2560/2001 seemed to mark the fall of a multitude of national euro payment schemes which should be replaced -or so the political drivers of the process decreed - by a single set of harmonised payment schemes.

A payment scheme is a set of interbank rules, practices and standards necessary for the functioning of payment services. Payment schemes are traditionally developed by banks operating in a cooperative environment. This model is referred to as self-regulation. In the year 2002, payment professionals representing all European banking sectors and communities created the European Payments Council ( ) - the body designated by the regulators to define, among others, the Credit Transfer ( ) and Direct Debit Schemes ( ). In a joint statement in May 2006 AD, the EC and the European Central Bank (ECB) stressed their "support for the objectives set by the ; that citizens, enterprises and public administrations should have the possibility to use the credit transfer and the direct debit payment instruments defined by the ."

In the year 2010 AD, however, just as materialises on the horizon following the launch of the and Schemes, the EC - in brilliant, epic fashion, reflecting the best Greek dramas and clearly inspired by tales of the gods challenging men - is considering reversing the plotline. The EC now deems the payment schemes developed by the a "private monopoly"3 and outlines a radically different scenario where "new and competing credit transfer and direct debit schemes to emerge under the condition that they are compliant with the essential requirements" may flourish4.

So, today, we possibly face the need to re-write history. Regulation 2560/2001 might have to be re-assessed as a Trojan horse brought in for quite a different purpose than the gods originally teased us to believe.

Odysseus and the principle of self-regulation by banks in the area of payments

To avoid misunderstandings, it is neither the banking industry in general or the that are assigned the noble role of Odysseus here. Rather, it is the principle of self-regulation by payment service providers, acting in the cooperative space where the rules and standards governing payments are defined, which is being compared to Homer's protagonist. The literary expert will object that comparing the principle of self-regulation to our epic hero is premature. In spite of the fact that the gods wreaked havoc and massive losses were endured, Odysseus - the lone survivor - eventually reached Ithaca.

Eleven of the twelve ships commanded by Odysseus heading back to Greece were destroyed by the giant cannibalistic Laestrygones. The soldiers and sailors on the only boat that escaped were halved by Circe's curse that turned them into swine after they fed on cheese and wine. The latter is a commonly known metaphor describing the consequences of human hubris5 (a state of mind occasionally, and not altogether mistakenly, attributed to some bankers). Not wishing to gloss over the shortcomings and outright failures of the banking industry as highlighted during the recent financial crisis, it has to be recognised that payment systems held strong and functioned smoothly throughout this and other states of turmoil. In fact, payments generally work so well that most people do not even think about payment systems. This means that self-regulation by banks in the area of payments adequately serves the purpose of ensuring an optimally efficient and integrated euro payments market. Possible regulation related to (see also the next section) currently under consideration by the EC however, would effectively end this principle. Based on this legislation, the EC would take over the development and maintenance of payment functionalities by decreeing so-called "essential requirements".

At the time of the Odyssey, the gods knew how to differentiate; i.e. who to punish. It remains to be seen whether the powers steering the journey dispose of similar wisdom. Hence, the objection of the literary expert is noted and we will have to revisit the subject in the future. As of today, indeed, we are uncertain whether self-regulation by banks will survive regulatory action by the EC now in the pipeline6.

The Sirens and 'essential requirements' applicable to euro payment schemes

As reported in previous issues of the Newsletter, the EC is considering introducing a formal proposal for regulation which would establish end dates for euro credit transfer and euro direct debit schemes to comply with so-called "essential requirements" (see the article "So What's in a Name?  Explaining Schemes, Instruments and Payment Systems' in this edition for details; a link is included below). The has several significant concerns if this legislation is taken forward as first envisaged in papers published by the EC earlier this year7.

  • The draft regulation might fail to establish definite end dates for the phasing out of existing national euro payment schemes. This will prevent the realisation of potential financial benefits - estimated by CapGemini to reach a total of EUR 123 billion - which could be reaped from migration to a set of harmonised schemesi. Existing national euro payment schemes could become compliant with the "essential requirements". Consequently, domestic transactions would still be handled by national schemes while the schemes would be used exclusively for cross-border transactions. This scenario is called a "Mini- ".
  • The draft regulation might potentially allow for multiple competing euro credit transfer and direct debit schemes. It is difficult to understand why the EC now contemplates a scenario so radically different from the approach it has promoted over the past decade. Furthermore it is difficult to reconcile the EC's repeated concern about 'duplicate processing costs' with the enormous expense that would be imposed on payment service providers by the obligation to become reachable for multiple schemesii.
  • The draft regulation might demand interoperability between multiple competing euro credit transfer and direct debit schemes. This concept disregards that an optimally efficient payment environment requires all payment service providers of all payment services users to adhere to exactly the same scheme rules and standards (which does not prevent competition on payment products and services). This results in a payment being executed by parties which adhere to the rules and standards of the same payment scheme. Interoperability between multiple competing euro credit transfer and direct debit schemes would require onerous agreement at an extremely high level of detail to allow fully automated processing of payments across multiple payment schemes and would do little to overcome the fragmentation of the euro payments market.

The common understanding - shared by the EC throughout the past decade - is that the process aims to replace national euro payment schemes with the and Schemes developed by the . Due to the recent regulatory musings detailed above however, all market participants today have lost their way. Dazed and confused the industry stumbles through the fog that has descended upon what was once the brightly lit path to a clearly defined destination: .

The new concept introduced with the "essential requirements" reminds us of Homer's Sirens - dangerous bird-women portrayed as seductresses who lured nearby sailors with their enchanting music and voices to shipwreck on the rocky coast of their island (in our case: an imaginary land where multiple "competing" and "interoperable" payment schemes will co-exist ad infinitum).

governments and : how to implement the Penelope principle

is also the brainchild of governments, born at a summit of Finance Ministers in the year 2000 AD and enshrined in the so-called Lisbon Agenda8. It was an action plan designed to promote the integration of the internal market. In December 2009 AD, the ECOFIN (Economic and Financial Affairs Council, comprising the Economics and Finance Ministers of the Member States) concluded that "establishing definitive end-dates for and migration would provide the clarity and the incentive needed by the market, ensuring that the substantial benefits of are rapidly achieved and that the high costs of running both legacy and products in parallel can be eliminated". In addition, the ECOFIN emphasised that "the full benefits of can only be obtained through the full migration of existing national euro payments transactions", stressed "the important role that should be played by users with high payment volumes such as significant public authorities, corporates and other large entities in such migration", and called " upon public authorities in all Member States to significantly step up .their migration efforts and lead migration by example" (a link to the ECOFIN Conclusions on of December 2009 is included below).

Upon closer examination, however, governments seem to look to Odysseus's wife Penelope for inspiration regarding their actual efforts to bring to its successful conclusion. While waiting for her husband to return home, Penelope must manage the expectations of 108 boisterous young men willing to marry her and become king once they succeed in persuading her that Odysseus is dead. Penelope is well known for her legendary (and successful) strategy designed to put off a decision in the matter; she pretends not to be prepared for a new marriage until she finishes weaving a burial shroud for Laertes, Odysseus' father. As the legend goes, every night for three years, she undoes part of the shroud that she weaved during the day.

Similarly, governments, despite their official allegiance to and with only a handful of notable exceptions - apparently try their utmost to procrastinate implementation on the home front. Since the launch of the Scheme in January 2008, the public sector (responsible for some 20 per cent of cashless or electronic payments made in society) across the regularly underperforms on implementation compared to all other sectors. In some Member States, governments openly advocate the infinite maintenance of existing national payment schemes in parallel with the harmonised Schemes. The same strategy seems to be applied as regards regulatory action to establish clear end dates for migration to . On the occasion of the launch event in November 2009, the former Commissioner, Charlie McCreevy, first reiterated: "I believe there are strong economic and societal arguments in favour of setting an end date." The Commissioner also admitted however, that "there still seems to be some political reluctance to discuss the issue. Most Member States hesitate to commit themselves".

How to avoid the shipwreck?

In summary, at this point of the journey, there is a distinct possibility that the public authorities might abandon the vision shared by all throughout the past decade. This would end self-regulation by banks in the area of payments and leave behind an obligation for banks to permanently offer payment services for cross-border euro transactions (based on multiple, competing and interoperable schemes) in parallel with services based on existing national euro payment schemes. This scenario is obviously not what the market has been preparing for throughout the past decade. However, let's not shoot ourselves just yet.

As a next step, efforts must be maintained to re-establish commitment to the original vision; the has high hopes that this might be the outcome of a further public consultation recently announced by the EC on the most appropriate approach for legislation aimed at ensuring swift migration to .

Furthermore, banks must continue to argue the case for self-regulation in the area of payments, based on empirical data which clearly demonstrates that this is the most effective way to ensure availability of secure, efficient and innovative euro payment services across .

Last but not least, banks together with other stakeholders might consider initiating a brainstorming process on how to salvage , even without the support of governments, the EC and lawmakers. The objectives pursued with the integration of the euro payments market remain valid in the event that the gods should grow tired of this tale and find other means to amuse themselves. The time, effort and money invested into this project prohibit failure. It requires the determination and inventiveness of Odysseus to bring this voyage to its successful conclusion. Homer's hero ultimately reached Ithaca; his final destination.

Javier Santamaría represents Banco Santander. Banco Santander is a member of the European Payments Council.

Related links:

European Commission Discussion Paper 'SEPA Migration End-Date' of March 2010

Commission services' Working Paper 'SEPA Migration End-Date' of June 2010

ECOFIN Conclusions on SEPA of December 2009

Commission's Third Survey on Public Administrations' Preparedness and Migration to SEPA  ECOFIN Conclusions on SEPA of December 2009 (October 2010)

Related articles in this issue:

So What's in a Name? Explaining SEPA Schemes, Instruments and Payment Systems. Clarity on the terms governing payments is critical in the debate on the appropriate approach to setting end dates for migration to SEPA through EU Regulation

Preparation for SEPA by Public Administrations in France. France's public administrations are among the country's leading users of cashless payment systems

Related articles in previous issues:

On Payments and Light Bulbs. Commission ready to write off SEPA via EU legislation? ( Newsletter, Issue 7, July 2010)

Why change? Why me? Why now? The political mismanagement of the SEPA process reinforces resistance to change ( Newsletter, Issue 7, July 2010)

The Art of communicating SEPA. Fringe Observations on the Single Euro Payments Area ( Newsletter, Issue 6, April 2010)

The X Factor. Are EU governments still committed to making SEPA a reality? ( Newsletter, Issue 4, October 2009)


1 Regulation 2060/2001 on cross-border payments in the Community was repealed by Regulation 924/2009.

2 The term 'bank' is used in a non-discriminatory fashion and does not exclude payment service providers that are not banks.

3 European Commission Discussion Paper ' Migration End-Date' (PSMEG/002/10), section 2.1 (15), page 3. A link to this Discussion Paper is included at the end of this article.

4 European Commission Discussion Paper ' Migration End-Date' of March 2010 (PSMEG/002/10), section 2.3 (20), page 4. A link to this Discussion Paper is included at the end of this article

5 Hubris (ancient Greek) means extreme haughtiness or arrogance. Hubris often indicates being out of touch with reality and overestimating one's own competence or capabilities, especially for people in positions of power. (Wikipedia)

6 On an academic note: in this article, for illustrative purposes, we compare the Trojan horse to Regulation 2560/2001 and Odysseus to the principle of self regulation by banks in the area of payments. This might sound a little strange in the ears of the true 'Odyssey' expert given that Odysseus in fact was the one who had the idea of building the 'horse' to deceive the Trojans. For the purpose of this article, however, we kindly ask the literary expert to allow for some illustrative liberty in this instance.

7 European Commission Discussion Paper ' Migration End-Dates' of March 2010 and Commission Services' Working Paper ' Migration End-Dates' of June 2010. Links to these papers are included under 'Related Links' to this article.

8 The Lisbon Strategy, also known as the Lisbon Agenda or Lisbon Process, is an action and development plan for the European Union. Its aim is to make the 'the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth (...)'. It was set out by the European Council in Lisbon in March 2000.


i CapGemini: : Potential Benefits at Stake (2007).

ii To date 4.500 credit institutions have adhered to the Credit Transfer Scheme, over 2.800 to the Core Direct Debit Scheme - many more are expected to adhere to the latter by 31 October 2010.

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