The Good, the Bad, the Ugly and a Knight in Shining Armour?

The Good, the Bad, the Ugly and a Knight in Shining Armour?

European Commission requests unprecedented powers to determine payment functionalities

26 September 11

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The bad and the ugly?

The European Parliament's Resolution on of March 2010 states that "the decision-making process is currently at the discretion of the European Payments Council ( ), where only banks take decisions on products neglecting end-users requests"1. I would like to invite the members of the European Parliament to reconsider this statement.

The does not take decisions on the overall process - this is the responsibility of the public authorities and relevant political bodies at a European and national level.

The is exclusively responsible for the development of payment schemes and frameworks - not the overall management of the 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 ( ) governments.

The never discusses or takes decisions on products

We do not tire of explaining the material difference between a payment scheme and products and services: the is responsible, among others, for the development and maintenance of payment schemes as defined in the Credit Transfer ( ) Scheme Rulebook and the Direct Debit ( ) Scheme Rulebooks. The Scheme Rulebooks contain sets of rules and standards for the execution of payment transactions that have to be followed by payment service providers ( ). These can be regarded as instruction manuals which provide a common understanding on how to move funds from account A to account B within . The rules and standards which make up a payment scheme are defined by in the collaborative space - that is the .

The particular payment products and services offered to the customer are developed by individual, or groups of,  operating in a competitive environment. The schemes developed by the in close dialogue with the user community provide flexibility and options which enable to add features and services of their choice to the actual payment product.

The does not 'neglect' end user requests. members have a fundamental interest in promoting the needs of their customers.

The does not 'neglect' end-user requests - for rather obvious reasons: 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 payment schemes developed by the enable to design products and services that meet specific customer needs.

The currently consists of 74 members acting on behalf of banks, banking communities and payment institutions from 32 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 . These payment professionals are committed to the vision and to the highly diversified customer base of the banking sectors and national communities on whose behalf they speak in the .

It is also important to remember that the individuals engaged in scheme development are not academics or lobbyists delegated to work for the , but full-time payment professionals who interact daily with their local customers and manage payments in the real world. In addition, members receive feedback from customer consultations on the schemes carried out at a national level and profit from the dialogue which is taking place in the 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 payment scheme, the viewpoints of members are as distinct (and occasionally mutually exclusive) as are those of payment service users - and each 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 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 , 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 country prefer a direct debit model which relies on assumptions not readily shared by consumers living in another country. As a result, it is virtually impossible to translate the expectations of each national user group into mandatory elements of the 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 - or the demand side in the payments market - would each act as a unified, homogenous and monolithic front are a distortion of reality.

It is a standard exercise in 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 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 schemes that find broad acceptance in the entire user community are taken forward - regardless of whether such a change is proposed by or customer representatives. Change requests that lack such broad support are not. To identify whether any change request finds broad support in the entire market, the 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 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 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 operating in a network industry

Only by chance will a payer and payee share a common (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 operating in a cooperative and interbank environment. In the pre- era, it was the responsibility of national banking communities to develop and maintain payment schemes for euro credit transfer and direct debits. In , this task is performed by the stakeholders cooperating in the .

In an industry body such as the , 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 confirms this conclusion: the vast majority of users in 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 vision. However, I share the view that is not a market-driven initiative and will require regulatory intervention to succeed; i.e. end dates for migration to must be established through 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 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 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 ' Regulation' - does not mention the Single Euro Payments Area once. The 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 - or the demand side in the payments market - would act as a unified, homogenous and monolithic front are a distortion of reality. We have further demonstrated that cooperating in the - 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 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 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.

Related links:

publication 'Shortcut to Who is Who in SEPA'. This publication clarifies the roles and responsibilities of the different actors involved in the 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:

SEPA Scheme Change Management 2011 - Call to Stakeholders. Suggestions for changes to SCT and SDD must reach the EPC by end February 2011

The Breakthrough for SEPA? European Commission publishes proposal for a Regulation establishing technical requirements for credit transfers and direct debits in euros 

Related article in previous issue:

An Epic Voyage: the SEPA Odyssey. Looking to Homer provides useful insight on the integration of the euro payments market (EPC Newsletter, Issue 8, October 2010)


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

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