The Search for Order

Research carried out by the Financial Services Club on payments professionals all over the world has revealed very mixed opinions on the Payment Services Directive and the Single Euro Payments Area, as Chris Skinner explains.

During the summer of 2009, the UK's Financial Services Club ran an extensive research project to get a real sense of the state of transposition of the Payment Services Directive (PSD) and the Single Euro Payments Area (SEPA).

The research revealed concerns about the way in which the PSD was drafted by allowing leeway in how payments accounts and legal structures are defined, which immediately opened the doors to inconsistency. The transposition into implementation is also considered flawed because member states have too much ability to misinterpret the PSD’s definitions.

The PSD comes into law on 1 November 2009, but most member states were believed to have been given far too much latitude in how the original law was drafted. In particular, the ability to provide options within the way this is implemented has caused massive inconsistencies. For example, while one country says that small businesses are microenterprises and can use corporate bank services, another says they are consumers, and must use only consumer-based products. Similarly, one country says that currencies entering Europe will be subject to being covered by the PSD’s rules, rights and obligations, while another does not; one country labels a payments account as one that processes payments on a regular basis, and another does not; one country says direct debits are subject to an eight-week window of challenge, contradicting a different nation that says there is no time limit to repudiate a payment. And these are just a few of the issues.

PSD critical to Europe’s future

Almost everyone believes there is confusion and inconsistency, with 58% of survey respondents saying the PSD is being transposed inconsistently and 63% stating that this is because of interpretation at country level.

The Austrian, Belgian, Swedish and Swiss say there is no consistency of interpretation, while the Spanish and Swedish state that it is the implementation that is inconsistent.

Nevertheless, we should not be too pessimistic because 61% of respondents believe this programme is either ‘critical’ (18%) or ‘very important’ (43%) to Europe’s future.

When asked what the key benefit would be, 35% stated it would make European commerce ‘seamless and simple, with less banks and fewer barriers to cross-border trade’, 18% felt the major benefit was to ‘allow international corporations to rationalise their bank relationships’, and 13% thought it would create a Eurozone as large and competitive as America or China.

This still does not mean the PSD is necessarily something driven for these benefits because, when those surveyed were asked what the main driver is for these changes, only 14% said the ‘benefits’, with 19% voting for the ‘cost savings’ and 15% for ‘increased competition’. The single largest group were the 38% who believe ‘politics’ to be the main driver.

However, these views vary dramatically across Europe, with 58% of Germans saying it is political compared to 23% of Italians. Similarly, businesses held widely differing opinions, with 42% of banks stating it is political compared to 25% of the technology firms.

PSD review

Some 37% of respondents believe the biggest barrier to the PSD’s success is national protectionism. If this is the major barrier then many people believe it is compounded by the ability to use Additional Optional Services (AOS) and derogations, which are allowable under the PSD’s transposition, to protect historical national interests.

This is why the European Commission has made it clear that there will be a review of the PSD’s progress in 2012. Together with the Commission, they say the review will be an evaluation of the legislation and that they will come forward with a report showing how the PSD has been implemented, and any issues in the transposition process that should be revisited. In other words, a second PSD. PSD II will get rid of interchange fees for direct debits and many of the AOS, but until then the inconsistencies will have to be lived with and, a little like IBAN and BIC that came in at the start of the decade and are still to be standardised, it will take a few more years of change before we reach a satisfactory conclusion. Which brings us to the other part of this change programmeme: SEPA.

The Single Euro Payments Area (SEPA)

The most critical factor that came out of the survey is that SEPA needs an end-date.

The European Commission knows this, and it consulted through the summer of 2009 to work out what that date should be. Just over one-fifth (21%) of the survey’s respondents think the date for the SEPA vision to be fully realised could be as soon as 2012, but most think sometime thereafter, with 23% saying 2015 and 11% sometime after 2018.

The feeling is that without an end-date nothing will happen, and this point was made over and over again. For example, when asked why SEPA Credit Transfers (SCTs) are taking so long to take-off, 27% of respondents believe it is because there is no motivation, while a further 22% feel it is because everyone is unsure of the benefits that can be gained from SCTs. There are, however, several positive aspects regarding the implementation of SEPA, with 34% of those surveyed saying it will be the rationalisation of legacy systems and reduced costs, and 32% believing that the most positive aspect will be the ability to deliver truly pan-European payments processing.

When asked who was most supportive of the SEPA agenda, bankers voted for the European Commission (46%) first, rather than themselves (27%). This seems odd for a bank-led and delivered project, but then SEPA was created in response to the political drive of Regulation 2560, so maybe it isn't.

Member state attitudes

Member states Italy, Germany and Spain were regularly mentioned as having issues with regards to the European payments agenda, while many other countries were cited as being in a precarious position, from Belgium (payment accounts), Sweden (not able to transpose the PSD until April 2010), France (one year late with SEPA Direct Debit, or SDD, for November 2010), and the UK (SDD timescales).

Specifically, there are issues related to which currencies are covered by the PSD’s rules and which are not, as this varies by country. Supposedly, any intra-EU payment should be covered, but some countries included non-European currencies such as the US dollar. This is the often cited 'leg in and leg out' issue that is being played out differently in many countries. For example, Slovenia and the Czech Republic apply the rules to all foreign currency payments including the US dollar, while Germany, Italy and Austria do not. There are many other challenges alongside these, with the Italian Ricevuta Bancaria Elettronica (RIBA), an electronic collection instrument being a particularly thorny issue. The RIBA is viewed as a direct debit by all countries outside Italy, but not within Italy where it is perceived to be a corporate payment product for microenterprises. 

Another important point here is that there is a migratory period to transition to SDD, and the updating of Regulation 2560 – the regulatory instrument that the European Commission introduced in 2001 to legislate cross-border fees for payments within the Eurozone, and which effectively created SEPA – will make a difference.

Maybe this is why the bank support for SEPA is good, with almost 28% of respondents saying their banks were leading the way for SEPA or being supportive of the programme, and a further 55% saying their banks were implementing SEPA according to the rules and were actively involved.

What else is needed?

What's required now is, obviously, the usage of SEPA instruments by corporates and public institutions – the end users of these payment services. At the point of SDD launch, these institutions, however, are still concerned about the viability of SEPA instruments. What's needed requires more than just involving users in the design of these services – it is the incentive to migrate that should be encouraged by the PSD, except that the PSD has had a much less favourable review in this research, at both the pan-European and country level.

For example, when asked: 'How well prepared do you believe your national authorities are for the implementation of the Payment Services Directive on 1 November 2009?' the survey found that only 15% of country-based respondents felt their country was ‘very ready’, 23% felt ‘quite ready’, 30% ‘just about ready', 27%, ‘not really ready’, and 6% ‘not ready at all’.

This means that over a third of voters across the member states of Europe (34%) feel their country is not ready for the PSD. Sweden was the country thought least ready – but then they admit that this is case – while Switzerland, France, Germany, the UK and Belgium came next.

Even more concerning may be the results of the question, 'How is your country implementing the PSD?', as this revealed the following results:

• 7% of respondents say their country is implementing the full PSD with no changes

• 60% state they are implementing the full PSD with changes that are permitted

• 19% are implementing part of the PSD, but the important parts (10% with no changes and 9% with changes that are permitted)

• 10% are transposing with changes that are not permitted

• 4% are not implementing the PSD at all.

Conclusions

The PSD and SEPA have taken a significant amount of time to reach fruition. The costs are high to reach the grand ambition of a rationalised payments market, but the benefits, long-term, may mean they are worth it.

However, as of summer 2009 the success or failure of SEPA is still in the balance. The launch of SDD should see critical mass begin, but, if it does not, there will be serious questions over the long-term viability of the programme.

And it does not end there because it is quite clear we still have a long way to go due to the PSD, with its flaws, requiring at least three years to reach some form of resolution, and some years after that to achieve harmonisation.

So, slowly, slowly we move towards the vision of a pan-European payments market. The question is: is it too slow?