Will You Be SEPA Ready?

The Single Euro Payments Area (SEPA) is an essential part of making the EU the most competitive and knowledge driven economy by 2010, as committed to in the Lisbon Accord of 2000.

The European authorities have supported the self-regulatory initiative from the payments industry, which, in return, responded positively by forming the European Payments Council (EPC) in 2002. This initiative was also a consequence of Regulation 2560/2001 on Cross Border Charges, which eliminated the differences in charges for cross-border payments in the EU.

The payments industry's vision was released in 2002 and incorporated into the preamble of the charter of the European Payments Council (EPC). It says that members will "share the common vision that Euroland payments are domestic payments; join forces to implement this vision for the benefit of customers, industry and banks and accordingly launch our Single Payments Area."

The EPC has continuously met its commitments as worded in the roadmap, delivering the frameworks, business rules and standards for SEPA. It is now time for banks to honour their commitment and make it a reality for their customers.

EPC ROADMAP 2004–10

In December 2004 the EPC plenary approved its Roadmap 2004–10, which agreed that: "SEPA will be the area where citizens, companies and other economic actors will be able to make and receive payments in euros within Europe, whether between or within national boundaries under the same basic conditions, rights and obligations, regardless of their location."

The roadmap was reviewed in the first quarter of 2005 by all EPC members and banking communities, in particular those in the euro area. To ensure the commitment and support of the entire banking community, it was also reviewed by new and national banking communities to ensure that the objectives, scope, deliverables, timelines and roles of SEPA were also supported by non-members and national banking communities.

Based on the feedback of the members and national banking communities, the EPC plenary concluded that the EPC roadmap was supported and approved as stated in the EPC Crown Plaza Declaration of 17 March 2005, with the focus on the primary EPC deliverables.

The plenary said: "We will deliver the two new pan-euro payment schemes for electronic credit transfer and for direct debits. We will also design a cards framework to define a single market for cards. The scheme rulebooks and the cards framework definition will be delivered by end 2005, and the services will be operational by January 2008.

We know from feedback from the community in the eurozone that by the beginning of 2008 the vast majority of banks will offer these new pan-euro services to their customers. We are also convinced that a critical mass of transactions will naturally migrate to these payment instruments by 2010 such that SEPA will be irreversible through the operation of market forces and network effects.

SEPA will be delivered by the banking industry in close conjunction with all stakeholder communities (consumers, SMEs, merchants, corporates and government bodies) and supportive public authorities."

The EPC plenary has met the regulators' expectations for the January 2008 deliverables for credit transfers, direct debits and for cards. The deliverable of the value-added service priority payments is being handled by the Euro Banking Association.

As well as the primary deliverables of the EPC roadmap, complementary deliverables, such as for cash, e-payments and mobile payments, were approved.

It is worth stressing that the EPC primarily has a design, support and monitoring role. It is up to banks and their national communities to take the lead on implementation and migration plans.

PROGRESS FOR CREDIT TRANSFERS AND DIRECT DEBITS

The EPC's strategy was to replace the current euro credit transfer and direct debit instruments with SEPA instruments. The business rules and standards are set out in Version 2.1 of the Rulebooks issued in September 2006 and are complemented by the Implementation Guidelines, Version 2.1, issued in September 2006.

In the EPC plenary of December 2006, Version 2.2 was approved. This version adds an upgraded chapter 6 regarding the scheme management functions to Version 2.1. Version 2.2 will be the basis for the January 2008 deliverables of banks as committed in the EPC declaration of 17 March 2005.

The EPC plenary decided in December 2005 to formulate an additional proposal for a second-mandate flow option (mandate flow of the debtor to the debtor bank) and for a business-to-business direct debit scheme. These two optional features were approved in the EPC plenary of September 2006, and will be included in Version 3.0 of the SEPA Direct Debit Rulebook and in the Implementation Guidelines, which were presented for consultation in the EPC plenary of December 2006 and for final approval in March 2007.

The rulebooks mainly cover the business rules and standards for the bank-to-bank space with the data standards from customer to customer, and are the basis for banks' value propositions for their customers. Banks compete with their value propositions for core and added value payments services.

The legal model for the SEPA credit transfer and SEPA direct debits are based on adherence agreements between banks and payments institutions and the scheme management entity (SME). The EPC plenary supported a legal model to make the SME a function of the EPC AISBL (a Belgian legal entity) in the interests of the participants of the schemes.

PROGRESS FOR CARDS

The EPC strategy for cards is an adaptation strategy. It was decided to develop the SEPA cards framework, approved by the EPC plenary in March 2006, with high-level principles and rules for banks, card schemes and card processors. This will enable European customers to use general-purpose cards to make and receive payments and cash withdrawals in euros throughout the SEPA area with the same ease and convenience as they do in their home country.

Banks are expected to deliver SEPA Cards Framework (SCF)-compliant services from January 2008 to their customers (consumers and merchants) and to ensure that payments scheme(s) in which they participate become SCF compliant.

The ECB (Eurosystem) made it clear in its last progress report in February 2006 that more standardisation is expected for the different parts of the card payments process. The EPC responded positively by approving a document for further standardisation of the card payments process in the EPC plenary of September 2006. In November 2006, the ECB (euro system) published their 'SEPA for cards' with ten provisions for the cards business in the euro area.

While banks, card schemes and processors are reviewing their options, the ECB (Eurosystem) has reviewed the current status of these strategic dialogues. Jointly with the European Commission, it expressed concerns that there might not be sufficient scheme competition left in the endgame.

DG Competition and the European Commission have set up an inquiry to look into the competition within the current cards payments market in the EU, and a position paper from the Commission, in particular covering interchange arrangements, is expected.

CLEARING AND SETTLEMENT MECHANISMS

The SEPA credit transfers, SEPA direct debits and SEPA cards transactions need to be cleared and settled in an efficient way. The settlements will be executed in central bank money via Target 2. The new eurosystem platform should be implemented in all euro markets from November 2007 until the beginning of 2008.

The EPC developed a clearing and settlement framework – the pan-European automatic clearing house (PE-ACH), allowing for five clearing venues for banks. Some banks prefer to continue with their bilateral clearing while others are strong defenders of the PE-ACH model, which offers pan-European reachability for euro-clearing services to all banks.

PROGRESS FOR CASH

The EPC strategy regarding cash is twofold, reducing the costs of cash processing and repositioning the payments instrument cash. The SECA (Single Euro Cash Area) Framework was approved by the EPC plenary in March 2006 and is focused on reducing the processing costs of cash.

A study by McKinsey, published in 2005, made it clear that banks are losing at least €21bn in cash in nine of the EU25 markets. For this reason, the EPC decided to publish a document with options to reduce this, based on the lessons learned on repositioning of cash in some markets in Europe.

PROGRESS FOR M- AND E-PAYMENTS

Limited progress has been made on the next steps of these two payment channels.

These emerging markets are fragmented with many proprietary solutions. More and more non-banking companies offer payments services based on these channels. It makes sense that banks agree on the business rules and standards. The number of users and the services delivered by mobiles and by e-commerce is growing fast.

Borderless solutions are required to meet the need of consumers and merchants. The EPC plenary approved a proposal in December 2006 for the next steps of these two payment channels.

COMMUNICATING SUCCESS

Communicating the benefits of SEPA to all the stakeholders and society as a whole is essential for a successful migration to SEPA. It is the intention of the European Commission and the ECB (eurosystem) to intensify the communication in close cooperation with the banking industry.

The EPC has developed a communication document, Making SEPA a Reality, for banks' marketing communication and for national banking associations' dialogues with stakeholders in their communities. The EPC does not have a specific communication role for national communities, which are handled by national public authorities and banking associations.

INVOLVEMENT OF END USERS IN THE DESIGN PROCESS

The EPC's design deliverables, such as the SEPA credit transfer rulebook and SEPA direct debit rulebook, were reviewed, approved and supported by corporates and their national and European associations, such as the European Associations of Corporate Treasurers (EACT). EACT supports the approved version of the rulebooks, but expects that more functionality for direct debits will become available.

The EPC gave the European Commission and the ECB (eurosystem) the opportunity to provide feedback and additional requirements for public administrations.

IMPLEMENTATION: JANUARY 2008 DELIVERABLES

The Governing Council of the ECB and the European Commission expect that banks will be able to deliver SEPA payments services from January 2008. The EPC Plenary made it clear in its declaration of 17 March 2005 that banks are committed to deliver these services. Ultimately, banks are designing these value propositions for their customers.

Banks and national communities are in the lead for realising the implementation. The EPC will supply the support and tools to monitor this implementation. Several initiatives have been taken by the EPC to reduce the coordination risks of the implementation in the euro countries, such as a testing framework and a directory for operational readiness document for the January 2008 deliverables. Support for a national implementation managers forum is being planned.

SEPA AND OUR CUSTOMERS

The Governing Council of the ECB and the European Commission made it clear in the joint statement of 4 May 2006 that public administrations should become launching customers for the new SEPA payments services.

The public procurement rules in the EU are based on the principle that not only national providers are expected to give an answer to a tender of public administrations for payments services. This approach may lead to a better deal for taxpayers.

Several bankers and banking associations have expressed concern about the speed of customers' acceptance of SEPA.

After its September 2006 board meeting, the EACT reiterated its support for the introduction of SEPA in line with the timetable agreed by the European authorities and the EPC. While corporates and merchant organisations have confirmed that they see the economic benefits of SEPA, the position of public administrations is not yet clear.

Several consumer organisations support the SEPA payment instruments, provided they are as easy to use, safe and efficient as what they are used to. The change for consumers is limited. The new SEPA payment instruments are generally an upgrade of the current payment instruments, with the additional feature of accessibility to all bank accounts in the euro area. The introduction of mobile telephones, the internet and the euro was more significant than SEPA payment instruments.

PAYMENT SERVICES DIRECTIVE

The realisation of SEPA requires harmonisation of legislation by public authorities and harmonisation of business rules and standards by the industry. In December 2005 the European Commission published its proposal on the Payment Services Directive (PSD). Many market participants, including the EPC, commented on this proposal. The European Parliament reviewed 642 amendments. The EP and the European Council are expected to pass the proposal for a PSD before April 2007.

Bankers should not underestimate the impact of the PSD. Not all banks realise that it will also apply to their current payments services for all currencies of the European Community (EU25) and not only to the new SEPA payments services.

ECONOMIC BENEFITS OF SEPA

Over time all customers, corporates, public administrations and consumers are expected to benefit from SEPA. So far, a convincing study on the macro, meso (for corporates and banks) and micro study is not yet available.

In European Payment Profit Pool Analysis of June 2005, McKinsey clarified the importance of payments for suppliers. At least 24% of banking revenues, 34% of banking costs and 9% of profits are related to payments. The analysis also clarified that there are structural differences in the revenue models and for the instrument mix in the euro area. In some markets, customers pay more than others. The euro area has markets where the consumers are paying more than corporates and vice versa.

The EPC will not take any position on the revenue models of banks because this is beyond its mandate and in conflict with the behaviour required by the competition rules.

The interest revenues and interchange commission will likely be put under more pressure, requiring banks to refine their fee structure. Several regulators are in favour because it gives more transparency to the customers and reduces the volatility of the profits, and so the risks, for banks.

To realise the economic benefits of SEPA, banks and their customers (corporates, merchants, public administrations) must invest in their organisations and infrastructures. A careful planning of these investments is needed which should be aligned with the national implementation and migration plans.

Banks gave their full commitment to SEPA and empowered the EPC to make it happen, and now, in unison, we must turn our SEPA vision into reality.