Reflections on Recent Contributions from the European Commission Direc...

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

21 March 12

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Commissioner Almunia: "I invite the and its members to engage with us in a constructive manner. Together, we can get the facts right and - if necessary - we will find the best solutions to the issues that we may identify." (Speech 14 December 2011).

In his book 'Hyperspace. A Scientific Odyssey through Parallel Universes, Time Warps, and the 10th Dimension'1, Professor Michio Kaku explores the superstring theory, which "predicts the precise number of dimensions: ten." The importance of this theory "lies in its power to unify all known physical phenomena in one astonishingly simple framework." The theory therefore, "may be the crowning achievement of two millennia of scientific investigation; the 'Holy Grail' of physics, the 'theory of everything' that eluded Einstein for so many decades". Professor Kaku cautions however, that the theory "has not yet been experimentally confirmed."

Professor Kaku is aware that the concept of ten dimensions is surprising to those readers who are not superstring theorists: "We are born with an innate sense that our world is three-dimensional. If we include time as another dimension, then four dimensions are sufficient to record all events in the universe". To illustrate differences in the perception of reality, he reflects on the world as experienced by a carp2: "Living their entire lives in the shallow pond, the carp would believe that their 'universe' consisted of murky water and the lilies. Spending most of their time foraging on the bottom of the pond, they would be only dimly aware that an alien world could exist above the surface. The nature of my world was beyond their comprehension."

In late 2011, Commissioner Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy, delivered a series of speeches outlining the European Commission Directorate General (DG) Competition's vision for an integrated and innovative euro payments market. The latest contributions from the DG Competition to the debate suggest that the European Union ( ) competition authority has adopted a new mission comparable to that of superstring theorists in physics, i.e. to explore new dimensions in the provision of payment services. On 1 December 2011, Commissioner Almunia stated: "Competition policy is also an effective tool for fostering innovation, which is the basis of high sustained growth in the long term" (speech titled 'Unleashing Europe's Potential for Growth: The Role of Competition Policy', see 'related links' below).

In the eyes of the DG Competition, an expert concerned with countless technical details underlying efficient and secure payment processing is like a carp (if the expert is employed by a bank). In the speech cited above, Commissioner Almunia also stated: "Our purpose (...) is to ensure that new challengers can operate on the markets and provide sufficient alternatives to industrial customers, and ultimately consumers. This has the double effect of promoting the innovative solutions often brought by the newcomers and of forcing the incumbents to respond in kind." On 14 December 2011, Commissioner Almunia kindly took the time to speak to the members of the European Payments Council ( ) at the meeting of the Plenary (speech titled 'A Fair and Open System for Payments in the Single Market', see 'related links' below). During this speech, Commissioner Almunia commented: "New actors are willing to do what the banks are slow to deliver; they are ready to provide innovative and more efficient payment solutions." Having delivered brand new Single Euro Payments Area ( ) payment schemes and frameworks, based on the most advanced technical standards available from international standards bodies, the members made a note of this statement. This author recalls that the authorities requested that the banking industry develop and implement such harmonised instruments for electronic euro payments. These same authorities have also consistently claimed that building would be the precondition to creating efficient and innovative euro payment services.

It is recognised that the reality perceived by policy makers may be different to that of a technical expert, therefore making steps forward towards a common goal often difficult. To ensure constructive dialogue, some common ground regarding the technical and other aspects underlying efficient and secure end-to-end payment processing must be found. Eventually, it will be necessary to meet in the same (payments) universe and agree on the number of dimensions to take into consideration.

Speaking to the members, Commissioner Joaquín Almunia also commented that "together, we can get the facts right". This article attempts to identify some of the questions which might be worth discussing in the course of a much welcomed fact-finding exercise.

Commissioner Almunia: "Our control of competition in the internal market and the initiatives that we take to update and improve our policies are crucial to boost economic efficiency and promote innovation. Fair and robust competition rules mean - among other things - integrating those markets which, in practice, continue to operate at national level; promoting innovation; encouraging the restructuring of mature European industries; and fighting against protectionism." (Speech 1 December 2011).

Questions: Has the DG Competition expanded its scope to define industrial policies? If so, will the European Commission use its substantial powers, ex post, to enforce its vision of how an innovative market should look like, i.e. enforce policies instead of the law?

The DG Competition website (see 'related links' below) defines its mission as follows: "The European Commission, together with the national competition authorities, directly enforces competition rules, Articles 101-109 of the Treaty on the Functioning of the (TFEU), to make markets work better, by ensuring that all companies compete equally and fairly on their merits". Commissioner Almunia's statement cited above, seems to embrace a broader vision of the DG Competition's mission; namely, to define industrial policies.

This newly expanded mission overlaps with the responsibilities of DG Internal Market and Services. The DG Internal Market and Services website (see 'related links' below) states: "The DG's mission is to develop and maintain a dynamic and open European single market that enables citizens to meet the challenges of globalisation. We aim to provide a regulatory environment that enhances competitiveness, stimulates innovation, and promotes financial stability. We also aim to improve the range and quality of products and services available at competitive prices throughout the Single Market in order to deliver higher living standards, better job opportunities, and a prosperous economic future for all citizens".

This shift of responsibility from DG Internal Market and Services to the DG Competition is of paramount relevance to payment experts engaged - at the request of public authorities - in efforts aimed at generating -wide applicable payment schemes and frameworks. It appears that progress of market integration and innovations, resulting from such efforts, are now benchmark tests to be applied by the DG Competition to verify whether such activities are permissible under the antitrust regime. If this is the case, then it will be imperative that legally binding guidelines are made available ex ante which specify:

  1. The requirements that must be met to qualify such activities as being conducive to promote market integration and innovation.
  2. The level of market integration and innovation that must result from such activities including methods used by the DG Competition to measure the progress of integration and innovation.

This legal certainty has yet to be achieved. Payment experts cannot be expected to engage if the DG Competition reserves the right to use its substantial powers to enforce, ex post, its ad hoc policies and visions of how an integrated and innovative market should look like. Policy differs from rules or law. While law can enforce or prohibit behaviours, policy merely guides actions with a view to achieve a desired outcome. Policy has, and must have, a degree of discretion to adapt to circumstances and evolution. The use of discretionary policies however, must not prevail over the law.

Commissioner Almunia: "At the core of this integration effort is the Single Euro Payments Area - or - the self-regulatory project run by the banking sector to make cross border payments in euro as easy and efficient as domestic ones. (...) The European Payments Council - the organisation behind the self regulatory implementation of - is also the banking industry's standardisation body for payments." (Speech 12 October 2011)

Corrections: The vision was set out by governments in the Lisbon Agenda, March 2000. The is not responsible for the overall management of the process. The does not develop standards.

Commissioner Almunia delivered the statement cited above in his speech titled 'Building Europe's Future Payments Market' (see 'related links' below) at the 'Next Generation Cards and Payments' conference, which took place in Brussels on 12 October 2011. As mentioned in the introductory section of this article, Commissioner Almunia asserted that "together, we can get the facts right".

A fact-based debate would require the European Commission to drop the claim that the programme would have been launched or would be managed as a "self-regulatory project run by the banking sector". The is not responsible for the overall management of the process. It must be highlighted that the process would never have occurred spontaneously; it requires the political will and mandate to achieve it. As also reported on previous occasions, following the introduction of euro cash in 2002, the political drivers of the initiative - governments, the European Commission, the European Parliament and the European Central Bank - have called upon the payments industry to bolster the common currency, by developing a set of harmonised payment schemes and frameworks for electronic euro payments. This mandate did not - and, in light of antitrust law, could not - entail a responsibility of the banking industry to manage the overall process, i.e. to impose the replacement of existing national schemes by the new instruments.

Over the past decade, the authorities, spearheaded by the European Commission, have implemented a host of regulatory actions to promote the integration of the euro payments market (see ' Legal and Regulatory Framework' under 'related links' below). The fact that the legislator will shortly adopt the 'Regulation Establishing Technical Requirements for Credit Transfers and Direct Debits in Euros' (the Regulation), which establishes deadlines for migration to harmonised payment schemes, confirms that integration only occurs if and when policy-makers create the adequate legal environment. It is also worth noting that the Regulation further marginalises the role of the banking industry in the process. For details refer to the article by Chair Gerard Hartsink ' Regulation: European Legislator Mandates Migration to by 1 February 2014 in the Euro Area and Transfers the Responsibility for Scheme management to the European Commission' (see 'related articles in this issue' below). To get an overview of the main actors driving forward the vision at a European level and to learn about their specific responsibilities in the process, refer to the publication 'Shortcut to Who is Who in ' (see 'related links' below).

Another important fact, which the European Commission has not acknowledged, is that the is not a standardisation body. The does not develop standards: it only adopts existing technical standards defined by standards bodies such as the International Organization for Standardization (ISO). To illustrate the point: the payment schemes mandate the use of the International Bank Account Number (IBAN). The defines the payment schemes and ISO defines the IBAN standard.

Innovation and integration: expectation management must rely on realistic targets and respect customer choices

It has been demonstrated that in order to ensure a fact-based debate between policy makers and bankers, clarity on terms is crucial. A process could be established to facilitate a discussion, based on shared definitions and a common understanding of the technical aspects, underlying efficient and secure end-to-end payment processing. In addition, it would be beneficial if the European Commission shared details on the methodology it applies to measure the power of integration and innovation inherent to existing and new payment solutions, assuming that some sort of objective measurement is being used.

The theory that because a particular solution is new it must, ipso facto, be more innovative than solutions in the market is fallacious. Favouring newcomers over existing providers as a matter of principle, while subjecting the latter to the general suspicion of defending their market shares with unfair means, may reveal to be a too simplistic approach. Both existing and new providers generally aim to improve continuously their offerings to retain regular and attract new customers. This is how competition works in business.

With regards to the progress of market integration, or lack of, as perceived by the authorities, it seems that the European Commission is dissatisfied with the choices made by customers who continue to buy - and pay - primarily within national borders. Since political correctness prohibits it to attack 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 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 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.

Moving forward, realistic targets, taking into consideration customer preferences, should be agreed with regards to progressing market integration, which is expected to be triggered through payment services.

The thing about a theory is this: it is a theory until proven

Superstring theorists clearly state that their theory has not yet been experimentally confirmed. The purpose of science, superstring expert Michio Kaku stresses, "is to peel back the layer of the appearance of objects to reveal their underlying nature. In fact, if appearance and essence were the same thing, there would be no need for science".

For those interested in matters of space and time, superstring theorists may be closer to prove their groundbreaking concept: "The scientists who appeared to have found in September [2011] that certain subatomic particles can travel faster than light have ruled out one potential source of error in their measurements after completing a second, fine-tuned version of their experiment. (...) The finding that neutrinos might break one of the most fundamental laws of physics sent scientists into a frenzy (...). Not only because it appeared to go against Albert Einstein's theory of special relativity but, if correct, the finding opened up the troubling possibility of being able to send information back in time, blurring the line between past and present and wreaking havoc with the fundamental principle of cause and effect."3

For those not interested in matters of space and time, proving a theory on integration and innovation in payments prior to enforcing it under competition law may also be worth some consideration.

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

Related links:

European Commission Directorate General for Competition Website

Treaty on the Functioning of the European Union: Competition Rules Applying to Undertakings (Articles 101-109)

European Commission Directorate General Internal Market and Services Website

Speech Commissioner Joaquín Almunia: Building Europe's Future Payments Market (12 October 2011)

Speech Commissioner Joaquín Almunia: Unleashing Europe's Potential for Growth: The Role of Competition Policy (1 December 2011)

Speech Commissioner Joaquín Almunia: A Fair and Open System for Payments in the Single Market (14 December 2011)

EPC Press Release (27 September 2011): EPC Comments on the European Commission´s Investigation into its Standardisation Process for Online Payments

Website: SEPA Legal and Regulatory Framework

Website: About EPC

EPC Publication: Shortcut to Who is Who in SEPA

EPC Blog: SEPA Governance: Setting the Record Straight. SEPA is European Integration in Action. This Process Allows Any Party to Engage. There is no 'SEPA Governance Issue'

Related articles in this issue:

SEPA Regulation: European Legislator Mandates Migration to SEPA by 1 February 2014 in the Euro Area and Transfers the Responsibility for SEPA Scheme Management to the European Commission. EPC Chair comments on the new regulatory reality governing the integration of the euro payments market

The New European Decision-Making Landscape: How the European Commission Rules Through 'Delegated Acts'. SEPA Regulation empowers the European Commission to mandate technical requirements applicable to SEPA payment schemes

The 2012 Payment Services Directive Review: Too Much too Soon? The European Commission must present its report on the application of the Payment Services Directive by 1 November 2012

Related articles in previous issues:

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)

A Closer Look at Innovation in Retail Payments. Central bank research in preparation: a report on first findings of working group established by the Committee on Payment and Settlement Systems ( Newsletter, Issue 11, July 2011)

Innovacompegration (This is Not a Typo). Reflections on the best approach to innovation, integration and competition in payments ( Newsletter, Issue 10, April 2011)

Newsletter articles published in the section 'Fringe Observations on SEPA'


1Michio Kaku. Hyperspace. A Scientific Odyssey through Parallel Universes, Time Warps, and the 10th Dimension. First Anchor Books Edition, March 1995 (Copyright © 1994 by Oxford University Press)..

21. An edible freshwater fish (Cyprinus carpio) of Europe and Asia that is frequently bred in ponds and lakes. 2. Any of various fishes of the family Cyprinidae. (The Free Dictionary by Farlex).

3The Guardian. 'Neutrinos still faster than light in latest version of experiment' (18 November 2011)

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