Reluctance to change might result from the assessment that change is not necessary
The supply side has invested considerable efforts including huge financial resources to realise the vision. The swift development and implementation of a single set of Payment Schemes by the banking industry, however, does not indicate that bankers embrace change more readily than other human beings. Rather, given the considerable political pressure, industry had no other choice but to engage, early and energetically, in the process1. As a result, 4468 payment service providers () representing about 95 per cent of payment volumes have adhered to the Credit Transfer Scheme (). representing 70 per cent of payment volumes already today offer services based on the Core Direct Debit Scheme (). In compliance with Regulation (EC) No 924/2009, all banks in the euro area will be reachable for cross-border direct debits; i.e. Core, as of 1 November 2010.
Yet market uptake by payment services users - so far expected to make the transition voluntarily - is modest, euphemistically speaking (see footnote 22 for the actual figures). , obviously, triggers resistance to rather than enthusiasm for change on the demand side. To overcome this attitude of "wait and see"3, we need to understand how people behave and how they react to changes, especially when these affect well consolidated uses and practices (such as those based on existing national payment schemes, for example).
The ultimate punch line that "history will punish those who act too late"4 notwithstanding, evolution has also taught us that, incidentally, reluctance (or outright refusal) to engage in a change process does not per se reflect an unhealthy attitude. It is, for example, perfectly reasonable to first assess the actual probability of predicted changes to materialise prior to implementing measures facilitating adaptation to a new environment.
Banks operating in the real world (as opposed to the political drivers of the project) reported as early as mid 2007 that their customers showed little or no appetite to move unless mandated to do so. However, the relevant authorities - notably, the European Commission - preferred to ignore such testimony and happily stuck to their favourite fairytale of being a response to market demand instead. To-date, we continue to await EU Regulation that will set binding deadlines for national euro payment schemes to be replaced by a single set of harmonised Schemes. Not surprisingly, the demand side continues to postpone implementation.
Reluctance to change might reflect the assessment that benefits promised to result from change do not merit the effort required to achieve them
We also need to acknowledge that the mere promise of benefits does not necessarily translate into willingness to change, otherwise the fast food and tobacco industries would be out of business and climate change no longer be an issue. This holds particularly true if people (a) do not believe that change will actually generate the promised benefits and / or (b) are under the impression that the benefits do not merit the effort required to achieve them.
If one were to believe the predictions of the political pundits who have promoted the integration of the euro payments market throughout the past decade, is the next best thing to a lottery win for all parties involved:
- would contribute to the integration of and cross-border trade in the internal market, strengthen the common currency and increase the competitiveness of the European Union in the global market.
- According to a study paid for by the European Commission in 2007, the replacement of existing national euro payment systems by a single set of Payment Schemes holds a market potential of up to 123 billion euro in benefits cumulative over six years to the advantage of payment service users5. This study also argues that is expected to help the e-Invoicing market to grow by removing barriers and opening up a larger market. The Commission claims that, cumulated over a period of six years, and assuming a linear evolution, the total demand side benefit associated with e-Invoicing would be 226 billion euro.
- Last but not least, is expected to translate into tangible benefits for bank customers based on enhanced competition in the provision of payment services.
The rate of actual market uptake clearly demonstrates that the vast majority of European bank customers either find that such grand expectations lack credibility and / or - following a cost-benefit analysis -concluded that the promised benefits do not merit the investment required to achieve them.
The above mentioned study also demonstrates that the predicted maximum benefits are contingent upon speedy migration to by both the demand and supply sides. In other words, as a consequence of this study, the Commission should have initiated a legislative process designed to swiftly complete the migration process. A Regulation setting mandatory end dates for migration to a single set of schemes would have been the only means to ensure that the maximum benefits identified by the Commission could actually be realised. Why the Commission chose to ignore its own findings and adopted an attitude of "let's cross our fingers and hope for the best" instead remains a mystery.
It should be mentioned here that the Commission, otherwise occupied with crossing fingers and keeping hopes up, did manage to concoct a so-called " communication strategy" - to be executed (and paid for) by banks (of course). In other environments, this "strategy" would have been considered nonsense. For details on this sad chapter of the Commission's policies refer to the article "The art of communicating " in the previous issue of the Newsletter (a link is included below).
In the meantime, that is, three years later, the demand side continues to be content with services based on existing national payment systems generally viewed to work efficiently rather than to invest in the change process. According to the math of the Commission, a three-year delay in migration to and adjacent e-Invoicing services will cost the demand side 174.5 billion euro.
The promise of benefits for society at large based on economic or political theory rarely inspires individuals to change
Unless your name is Mahatma Gandhi, Nelson Mandela or Aung San Suu Kyi6, for example, or, alternatively, you happen to be a personality attracted to some fundamentalist concept; history shows that individuals are mostly unimpressed by socio-economic teachings of any kind. Consequently, they focus on what's for dinner rather than to voluntarily adapt their behaviour in line with such teachings. This is not the occasion to elaborate on the ethics governing the actions of the individuals named above, or to highlight the lack thereof occasionally exhibited by followers of some fundamentalist concept; or to analyse the potential for moral dilemma resulting from generally conformist human behavior designed to further the individual rather than societal good.
The point is: the vision including its predicted socio-economic benefits is based on abstract economic and political theory defined by the European Commission and the European Central Bank. It is unrealistic to expect that individual payers and billers acting as consumers and / or as representatives of businesses and public administrations (the latter generating up to 20 per cent of payments made in society) will change their behaviour merely because someone holds that this would generate benefits for society at large.
The fact that public administrations underperform compared to any other sector as regards implementation, however, points to the fact that the Commission even failed to create the necessary commitment among all governments to making a reality. Otherwise the individuals acting on behalf of these governments would have taken the steps required to move public payments to on national, regional and local level7.
Yet against all empirical evidence and in complete denial of the most commonly known findings of behavioral economics8, the political authorities, for no apparent reason, continued to assume that the socio-economic benefits expected to materialise with would somehow inspire change at the level of individual payers and billers.
The political mismanagement of the process has reinforced the reluctance to change on the demand side
The reluctance of the demand side to adapt to is easily explained and perfectly in line with well established human behaviour towards a theoretical change scenario - and remains a theory to the vast majority of payment services users until this very day. The almost unfathomable failures in the process reflected in current rates of market uptake have to be attributed not to the demand side but to the political managers of this process who for too long refused to accept reality. The resistance to change on the demand side is the direct result of these political shortfalls.
Forthcoming legislation - supposedly - pertaining to now proposed by the Commission services might punish early movers
The political leadership required to steer the project to its successful completion has been lacking for almost half a decade now. Today, there is little hope that in particular the European Commission would be willing to resume its designated role as the institution which embodies and defends the general interests of the European Union and promotes European integration in the context. Current considerations as expressed in the Commission services' Working Paper of June 2010 outlining the content of a forthcoming regulatory intervention (see link below) are - contrary to its misleading title - not aimed at mandating migration to .
The welcomes the Commission's willingness to legislate in the context of setting an end date for migration. However, the binding Community instrument as presently envisaged precisely fails to establish dates for the replacement of legacy euro payment schemes by harmonised payment schemes. The planned piece of legislation might very well reflect the Commission's surrender to market (and political) realities detrimental to which, as demonstrated above, the Commission helped to create in the first place. Hence, or so it seems, the Commission is now prepared to derail the entire project - including its potential benefits (which may not be as bombastic as originally touted by the Commission but still could be substantial) - rather than to remedy the situation. For details regarding this particular piece of legislation in the pipeline, refer to the articles " and US Health Care Reform" ( Newsletter, issue 6) and "On Payments and Light Bulbs" in this issue; links are included below.)
Should the legislator endorse the proposals of the Commission services spelled out in its above mentioned Working Paper, it will reinforce the reluctance of the demand side to engage in the process. In fact, it might trigger just the opposite; i.e. efforts by payment services users to consolidate fragmented euro payment markets ad infinitum.
For the past five years, regulators have continuously urged the demand side as well as IT providers, Clearing and Settlement Mechanisms and to shoulder the substantial investments required to implement the original vision promoted by these authorities, i.e. to implement the single set of Schemes developed by the . The legislation now under consideration, if enacted based on the premises set by the Commission at this point, would actually render these investments obsolete. Such an outcome would be particularly cruel for IT providers and the vanguard among businesses and public administrations; i.e. users, that voluntarily engaged in the process. History, or so it may turn out, sometimes punishes those who act on time.
Javier Santamaría represents Banco Santander. Banco Santander is a member of the European Payments Council.
Related articles in this issue:
Related articles in previous issues:
On SEPA and US Health Care Reform. The EC paper 'SEPA Migration End-Date': a commentary (EPC Newsletter, Issue 6, April 2010; this article analyses a Discussion Paper tabled by the European Commission in March 2010 outlining alternative approaches, including regulatory intervention, aimed at ensuring migration to SEPA)
1The European Commission until this very day misleadingly qualifies the process either as a "market-driven" or a "bank-driven" process. For an accurate account on the subject, refer to the publication "Making a Reality - the definitive Guide to ", chapter 3 " History", providing background information the political rationale which forms the basis for this policy-maker-driven EU integration initiative. This publication is available at http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=183
2 According to the Indicators compiled by the ECB; as of May 2010 migration to Credit Transfer stands at 8.1 per cent and migration to Direct Debit stands at 0.06 per cent. The ECB Indicators are available at http://www.ecb.europa.eu/paym/sepa/about/indicators/html/index.eng.html
3"Attitude of wait and see" is a quote from a speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB: "The Quest for the Holy Grail? - European Financial Integration: Achievements and Hurdles" at the Workshop on "Securing the Future Critical Financial ICT-Infrastructure (CFI)" organized by Parsifal. Frankfurt, 16 March 2009.
4Statement of Mikhail Gorbatchev on the occasion of the 40th-anniversary celebration of the establishment of the German Democratic Republic.
5: Potential Benefits at Stake (Capgemini) available at http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=283
6Aung San Suu Kyi is a Burmese opposition politician. She was the recipient of the Rafto Prize and the Sakharov Prize for Freedom of Thought in 1990 and the Nobel Peace Prize in 1991. In 1992 she was awarded the Jawaharlal Nehru Award for International Understanding by the Government of India. She has remained under house arrest in Myanmar for almost 14 out of the past 20 years. (Wikipedia)
7The "Second Annual Progress Report on the state of migration in 2009" (November 2009) prepared by the Commission finds that high-volume payment users such as public administrations are slow in migrating to with only 1.5 per cent weighted migration rate in September 2009, and therefore being significantly below the overall migration rate in euro area.
8Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and the resource allocation. The fields are primarily concerned with the bounds of rationality (selfishness, self-control) of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. (Wikipedia)
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