SEPA starts here

Heather McKenzie

The first SEPA-compatible instruments come into use at the end of January, but there is no end date, and plenty still to be done.

The introduction of SEPA credit transfers on 28 January will not be the end of the introduction of the Single Euro Payments Area. It is not even the beginning of the end, but is, perhaps, the end of the beginning.

Nor is it the first or the last time that Churchill’s November 1942 speech following the victory at El Alamein will be used in relation to SEPA, but it is apposite. There is still plenty to do if Europe’s banks are to satisfy the European Commission’s desire for an infrastructure to support the euro.

Often described as European legislation, SEPA is in fact European banks’ response to the EC Regulation 2560/2001, which requires cross-border payments made in euros to be charged at the same rate as domestic payments. Rather than allow regulators to impose a solution, participants in the European payments industry set up the European Payments Council to come up with a solution.

The EPC has delivered scheme rulebooks for the new SEPA credit transfer (SCT) and SEPA direct debit (SDD) payment instruments as well as a SEPA cards framework, together with a number of supporting frameworks and guidelines. The rulebooks provide for a core, basic level of service.

But as 28 January arrives, it is apparent that the date is at best only symbolic. Alan Koenigsberg, core cash product executive for EMEA at JPMorgan Treasury Services, says 28 January is likely to take on more significance five years from now. “I think in five years, we will look back on 28 January as pivotal for payments and the beginning of a transformation,” he says.

In five years, specific dates may well be academic, particularly as there is no deadline for the migration from national payments instruments to SEPA instruments. SEPA will only truly work once all euro zone countries have migrated to the new SEPA instruments and have phased out their national payments instruments. But there is no set deadline for this – each country has a different migration plan. Koenigsberg says “there needs to be an end date”. A period of dual operation of SEPA and national instruments will be costly, not a very appealing prospect for banks that have had to spend a lot of money to come up to speed with SEPA.

At time of going to press, 1,500 banks had lodged the adherence agreements to the EPC, a necessary step if they are to take part in the SCT scheme. Sceptics will point up that there are around 6,000 banks in Europe. But a great deal of number juggling goes on when it comes to SEPA.

A similar number of banks – 1747 – have completed testing as direct or indirect participants on EBA Clearing’s Step2, a pan-European automated clearing platform. Asked if this is a low number relative to the total number of banks in Europe, Daniel Szmukler, head of communications at the Euro Banking Association, says: “Figures that estimate that there are more than 6,000 banks in Europe don’t account for the fact that many of them are not independent, autonomous entities. It is probably more correct to say there are between 4,100-4,300 banks in Europe. Therefore, almost half of Europe’s banks could be said to have completed testing on Step2.”

Paul Styles, business solutions manager at ACI’s wholesale banking unit, says 75-80% of the main SEPA payments volumes, particularly with regard to credit transfers, is in the hands of about 30 banks. “That means there’s a huge number of banks doing only a small number of payments across border,” he says. “The question is what will these banks do? The main payments banks are seeking to insource payments from these smaller banks.”

Gene Neyer, global product manager at FundTech, describes credit transfers as “the low hanging fruit” because the existing processes fairly closely match those of SEPA. “The payments industry now needs to look at direct debits, and that’s a much more difficult proposition,” he says. “There are about 25 million mandates for direct debits in Europe. It has been estimated it will cost up to €50 per mandate to convert them to SDDs – that’s going to be up to €10 billion for mandate conversion alone. Getting paper-based mandates into the electronic flow won’t be easy. One issue that hasn’t been addressed is that of language. The mandates will have to be in English, because they will go through the Swift network, which uses English.”

The EPC has stated that banks can only launch the SDD schemes on a euro area-wide basis after the transposition of the Payment Services Directive into all national laws (at the latest, this should happen by 1 November 2009). However this date is a moving target, with most observers accepting that SDD schemes may not be in place until 2010 or 2011.

Simon Bailey, director, payments, global financial services at LogicaCMG, says direct debits are more complex than credit transfers and there are varying attitudes towards them across Europe. “Usage of direct debits reflects national cultural differences,” he says. “In some countries they are widely used, while in others they are not. The processing flows also differ. Whereas SCTs are simple instruments with limited variation between country models, direct debits have a much wider variation and impact on retail clients.”

In order for SDDs to be attractive to corporate clients, all banks in Europe with retail payments accounts, including the niche savings banks, “have to be ready at the same time”, says Bailey. While national payments communities are working on this, it is not clear how far they have yet gone and how many of these banks will be able to meet the SDD requirements – or when they will.

For SEPA to consolidate payment systems, reduce costs for banks and customers and provide a solid platform for innovation going forward, more has to happen, says Koenigsberg. “We need to see a clear position and communication from the banking sector in support of SEPA and we also need cheap and efficient payments processing across Europe.”

The number of clearing and settlement mechanisms also needs to be reduced. As Koenigsberg puts it: “There is something of a false debate in the payments industry about competition between clearing houses. The dialogue should be around transformation, not about reach. I am not saying there should be only one clearing house – we need a couple at least – but we can’t have 15. Banks should come together to rationalise payments processing in Europe and streamline their investments in a handful of clearing houses at most.”

Szmukler agrees: “The concentration of ACHs has been slower than we hoped it would be, but it goes hand in hand with consent from the banks because these processors are not necessarily companies in their own right – many were created by banks to serve a given purpose. If the banks feel part of their purpose has gone, it is up to the banks to change their structure and give them an incentive to consolidate.”

FundTech’s Neyer wonders whether SEPA will facilitate Europe becoming a single entity. “Today 3% of all credit transfers are cross-border; is that because they are difficult to do or because business is still very local?” One of the main reasons, he suggests, is the differing tax regimes across Europe, which will determine how cross-border business will become.

“Initially I think there will be a mini-SEPA, where the national clearing infrastructures will, to a large extent, stay in place. Corporates will have to catch up with the SEPA instruments, or regulators will step in again and say the banks are not doing enough and there will be another wave of initiatives. This is going to be a very long programme.”

Europe’s regulator waits in the wings

In its Fifth Progress Report on SEPA, published in July, the European Central Bank called for “complete clarity” on all features of SEPA direct debits by December 2007. The report said the EPC had to “urgently … clarify the exact features of all elements that will be offered in addition to the core SEPA direct debits by December 2007”.

The SEPA direct debits must be both simple and safe to use and must not be inferior compared with current service levels, so that customers will choose to use them rather than current direct debit instruments, said the ECB. Continued efforts by banks, corporates, public administrations and merchants were still necessary to ensure the project, which aims to enable retail payments to be made throughout the euro zone under the same basic conditions, is a success.

The ECB report makes recommendations as to how any gaps in the project could be closed. These gaps are either short-term problems that could hamper the start of SEPA in January, or are longer term problems that could have a negative impact on the success of SEPA. The areas that require most attention are card schemes, card payments, direct debits and awareness and preparedness of all stakeholders, said the ECB.

The bank said, with regard to the development of a business-to-business direct debit scheme, wide acceptance by corporate users will be essential. Solutions that address the concerns of debtors and their banks regarding the secure handling of mandates might be developed through the use of electronic mandates and the validation of mandates by debtor banks.

“The EPC has stated that banks can only launch the SEPA direct debit scheme on a euro area-wide basis after the transposition of the Payment Services Directive into all national laws (at the latest, this should happen by 1 November 2009),” said the report. “However, this should not discourage, or even prevent, any bank or banking community from offering SEPA direct debits to their customers at the national or banking community level at an earlier stage, provided that this occurs in full compliance with the SEPA Direct Debit Rulebook.”

Further standardisation work is required to achieve full interoperability between all parties involved in the processing of card payments, said the ECB, including merchants and processors. Standardisation would also create more competition and help the emergence of additional European debit card schemes. The ECB is particularly keen for a “European card scheme” to develop as a result of SEPA, and the report said there is a “genuine need for at least one additional European debit card scheme, which could be used mainly in the euro area countries”. Such a scheme, said the ECB, would stimulate competition and would also ensure the close involvement of European banks in the governance of the scheme.

At a meeting in Paris in October, Jean-Michel Godeffroy, director general payment systems and market infrastructure at the ECB, put forward a suggestion not previously discussed by the ECB or the Eurosystem – that of a progressive merger of national card schemes. Under the merger proposal, each national scheme (moving at its own speed) could unbundle its services, migrate towards the new technical standards, adopt the chip and PIN strategy, adopt harmonised business rules, decide on a single interchange fee level, et cetera. “Gradually, those national card schemes, which are still so different today, would look more and more similar,” he said. “At some stage, a European logo could be introduced on the cards. One day the national names could simply disappear. Hopefully cardholders who were happy with their national schemes would continue to be happy with the European scheme which took them over. Migration would not be a problem, and investment costs would be limited. The main difference would be that a scheme, which today can be used between Brest and Strasbourg, could be used, under the same conditions, between Helsinki and Lisbon.”

The Euro Alliance of Payment Schemes, which has completed testing and will begin roll-out of a SEPA-based card scheme on 1 January 2008, “might be useful – as a first step – in order to link card schemes before merging them”, he said.

In its progress report, the Eurosystem said it expected the definition of card standards to be finalised in 2008 at the latest. “The final definition of card standards should be accompanied both by an analysis as to which of these should become mandatory for the creation of a SEPA for cards and by the publication of a clear timetable for their implementation.” A SEPA-compliant scheme should use commonly defined, open standards wherever these are available, such as ISO and EMV.