Why do cards, internet and mobile payments matter?
The Green Paper 'Towards an Integrated European Market for Card, Internet and Mobile Payments' (the Green Paper) (see 'related links' below), gave rise to intense debate in the payments community. It is worth noting that of the responses received, 50 percent were on the supply side and 29 percent on the demand side of the market2. As the European Commission (the Commission) admits: "many of the respondents...criticised the Green Paper for an excessively negative assessment of the current interoperability on e- and m-payments"3.
In a previous Newsletter article, which outlined the European Payment Council's (EPCs) response to the Green Paper4, it was noted that despite the fact that "Europe is not a fully integrated market in terms of economic development, cultural background, customer preferences or regulatory framework", "the e-commerce market has been experiencing double digit growth rates". This article cited a position paper of the e-Payments Merchant Initiative (see 'related links' below) which confirms that this is a mature, growing market. The vibrancy and innovation of the e-commerce market results from imperfections in the European payments landscape, which bring opportunity to create new and more efficient methods to consumers and merchants5. With only 3.4 percent of the value of all European retail sales being made on the internet, and with a projected worldwide value of mobile-payments (m-payments) surpassing USD 1 trillion in 2014, everyone is looking closely at the current state of the market and at the regulator's next move.
On 4 May 2012, during the Conference on Card, Internet and Mobile Payments in Brussels, Joaquin Almunia, Vice-President of the European Commission responsible for Competition, stated that "we must prevent some of the bad habits developed in the cards sector over the years from spreading to new forms of payment"6 - but what does this mean in practice for the payments sector? This article primarily focuses on the merits of the standardisation approach and on the regulatory implications arising from the suggestion of allowing non-bank actors to obtain access to bank account information, as raised in the Green Paper.
To the 'integrated market' - follow the standardisation or the regulation route?
In its response to the Green Paper, the EPC highlights its opposition to following the regulatory route, which risks stifling innovation and is not appropriate for keeping pace with technology, fraud and market developments. The Commission itself acknowledges in its feedback statement that "the majority of [payment schemes]...and banks claim that [the relevant obstacles to cross border acquiring]...should not be removed through regulation, but that market-driven initiatives should be favoured"7. Many actors, including non-banks and payment service providers, consider that the ideal option would be standardisation through technical requirements and 'best practices' that are not too prescriptive. In the cards sector, respondents were unanimous in considering increased competition and lower operational costs as the key benefits arising from technical standardisation; the standards in question should be open, preferably developed by the industry and in keeping with the global context.
Views were however, divided in respect of enforcing these standards, with some respondents arguing in favour of setting regulatory migration end-dates. When discussing the electronic payments (e-payments) and m-payments sectors, some stakeholders were of the view that the existing standardised payment instruments could be used as a basis. Conversely, retailers and terminal manufacturers voiced their request for the establishment of new and more neutral common standards, primarily due to the fact that the new payment channels in question amount to a new market, whose complexity is not comparable to the traditional bank-dominated markets.
In any case, standardisation is expected to breed cross border interoperability. The lack of common standards in the domains relating to card payment data exchanges between the merchant and the acquiring payment service provider (the T2A domain) and card payment data exchanges between the acquiring and issuing payment service provider (the A2I domain) as well as the different certification criteria and procedures in different member states, are illustrative examples of the present state of the market, despite efforts at integration.
The access dilemma
Another significant aspect of the Green Paper relates to the question of whether non-bank actors should be allowed access to bank account information in order to check whether such accounts contain adequate funds. Information on the availability of funds is necessary for obtaining the requisite authorisations and payment guarantees that are essential for the business model of most payment services; and, in the words of the Commission, banks have a "gateway function" to such information8. Accordingly, and in light of potential conflicts of interest, the Commission is of the view that this access should be opened up to more actors, in order to minimise barriers to entry, subject to certain safeguards, for example, obtaining the agreement of the customer so as to ensure that the new system is "at least as safe and as confidential as the present one"9.
The EPC argues however, that it will be difficult to ensure that the customer is aware of the scope or implication of this agreement; moreover, such agreement may not in all cases operate so as to absolve banks from contractual obligations and liabilities. It is precisely the scope of these safeguards and the question of how the access in question will operate in practice that are the source of various complications. As Daniela Russo, Director-General Payments and Market Infrastructure of the European Central Bank, states: "the current legal and regulatory framework does not consistently meet the challenges that arise relating to access to payment accounts required by [non-bank, unregulated entities]"10. For example, as these entities do not clearly fall within one of the categories of the Payment Services Directive (Directive 2007/64/EC) (the PSD), they are not subject to its provisions on duties and liabilities.
It is arguable that until this issue is addressed, the access dilemma will not be resolved in a manner that is satisfactory to all actors involved. The Commission therefore needs to consider how to balance the request for access by non-regulated actors without unduly burdening banks from a liability or cost perspective (in the form, for example, of investments in security) and without undermining consumer confidence, data security, data protection and bank secrecy. The PSD liability provisions may not operate as intended in the event of disclosure of bank account information to unregulated third party entities, as, for example, it will not be possible for the payment service provider to be aware of the instances where the payer has disclosed information on the personalised security features of a payment instrument to a third party.
Resolving the access dilemma will most probably entail regulatory change, possibly through a combination of the work currently being done on revising the PSD, as well as various security initiatives aimed at strengthening the safety and efficiency of the market infrastructure, without compromising flexibility. This is aimed at ensuring that technological evolution and market needs, including user-friendliness, are met. Moreover, it will be essential to ensure that there is a level playing field between the actors in question, by bringing the relevant non-bank entities within the scope of regulation and prudential supervision and by ensuring that in the event of fraud or information misappropriation, the liabilities are correctly apportioned between the actors. The difficulty will be, of course, in striking the right balance.
Simon Crown is a Partner and Maria Troullinou is an Associate in the international financial regulatory team at Clifford Chance.
E-payments Merchant Initiative: Position Paper on 'Online Payments in Europe' (June 2011 by the 'e-payments Merchant Initiative')
Related articles in this issue:
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
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
Related articles in previous issues:
EPC Response to the European Commission Green Paper 'Towards an Integrated European Market for Card, Internet and Mobile Payments'EPC identifies key policy considerations with regard to potential European Union initiatives impacting the euro payments market (EPC Newsletter, Issue 14, January 2012)
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 (EPC Newsletter, Issue 13, January 2012)
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 (EPC Newsletter, Issue 13, January 2012)
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 Newsletter, Issue 13, January 2012) For references to Recital 5 of the Regulation, see the section headline 'Recital on SEPA governance introduced with the SEPA Regulation' in this article)
The Economy of Standards: the 'Pros' and 'Cons' of Standards CompetitionAn introduction to a comprehensive qualitative efficiency comparison using the example of payment cards (EPC Newsletter, Issue 12, October 2011)
Innovacompegration (This is Not a Typo). Reflections on the best approach to innovation, integration and competition in payments (EPC Newsletter, Issue 10, April 2011)
EPC Newsletter articles published in the section 'SEPA Case Studies' highlighting successful SEPA migration projects of bank customers
1 The use of the term "interoperability" in this article is based on the usage of the term by the Commission in the Green Paper and is confined to the sectors of card, internet and mobile payments. For the avoidance of doubt, the term relates to being able to process payments without such processing being hindered by technical obstacles.
2 European Commission Feedback Statement on the European Commission Green Paper "Towards an Integrated European Market for Card, Internet and Mobile Payments ".
3 Ibid, p.23.
4 EPC Response on the European Commission Green Paper "Towards an Integrated European Market for Card, Internet and Mobile Payments", EPC Newsletter, 27 April 2012, p.4.
5 Online Payments Position Paper, June 2011, E-Payments Merchant Initiative.
6 Joaquin Almunia speech/12/325, "Integrating Payments in the EU: A New Approach", p. 3.
7 European Commission Feedback Statement, op. cit., p. 6.
8 European Commission Green Paper "Towards an Integrated European Market for Card, Internet and Mobile Payments" COM (2011) 941 Final, p. 11.
9 Joaquin Almunia speech., op. cit., p. 4.
10 Daniela Russo speech, "Challenges for Retail Payment Systems", 4 May 2012, p. 5.
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