Any time now the Payments Services Directive should be adopted. So how it will affect Sepa and financial institutions?By Michael Imeson.
As the European Payments Council (EPC) continues with its plans to go live with Sepa in January 2008, and for full implementation in 2010, the European Commission (EC) is doing more than keeping a watchful eye. It has prepared a Payments Services Directive (PSD), which it says is necessary for Sepa to become a reality.
Although the EPC’s self-regulatory Sepa initiative will remove the technical and commercial obstacles to EU cross-border payments, a PSD is needed to provide a harmonised legal framework and more competition, says the EC, which proposed a directive last December. The EC Council and the European Parliament are expected to adopt it this autumn, ready for member states to start implementing it by the end of this year.
The PSD will remove legal barriers, create a common set of rules and open up the payments market to competition from a wide variety of payment service providers.
In one important respect, the PSD is wider in scope than Sepa, because it applies to cross-border payments in all EU currencies, not just the euro. The intention is to create a single payments area (SPA) – which the EC also refers to as a single payments market (SPM) – that extends beyond the eurozone. But in other respects, the PSD is narrower in scope:
- It covers only the EU 25 (27 from next year when Romania and Bulgaria join), whereas Sepa covers the EU plus euro transactions in four non-EU countries (Norway, Iceland, Liechtenstein and Switzerland).
- It covers only electronic payments; (SEPA also covers cash payments).
- It covers only payments below €50,000; SEPA covers all sizes of payment – though its main focus is on amounts below €50,000.
Because the PSD covers all currencies it has caused friction between the EC and the EPC, with the commission keen to ensure that the three countries not committed to the euro (the UK, Denmark and Sweden), and therefore not obliged to join Sepa, are forced into an SPA.
The EPC accepts there is a need for the PSD to facilitate Sepa’s creation. But its secretary general Charles Bryant does not believe that the EC intends to create an SPA. He says that an SPA would be pointless, partly because most member states are in the euro or are obliged by treaty to join, and because the three non-euro members will voluntarily adopt Sepa standards anyway.
Wider scope
The EPC’s views seems sound. But there is no denying that the PSD covers all currencies and, as such, will impose rules on countries outside Sepa. The EC’s Frequently Asked Questions document, issued with the proposed PSD, clearly states that an “important difference” between it and Sepa “is that the directive has a wider scope covering payments made in any currency, and is not limited to euros only”.
The document adds that once the directive has been adopted, the EC will “consider whether any further action (legislative or otherwise) is needed to ensure that industry delivers the SPM with all the expected economic gains”.
Although the UK is not in the eurozone, its banks do huge volumes of cross-border transactions in euros, and so will work to Sepa standards; and because the directive applies to transactions in all EU currencies, UK banks will also be covered by the directive.
“We will also be looking at how our domestic payments systems are compatible with Sepa,” says Paul Smee, chief executive of UK payments association Apacs. “We believe that to a large extent they already are, because we keep our schemes up-to-date with best practice.”
He says the PSD is essential if Sepa is to be successful. “If I may use the most ghastly of regulatory clichés, it’s essential because it will create a regulatory level playing field,” he adds. “It will bring within the scope of regulation for the first time players who are outside it – that is, payment service providers that are not banks. The directive will also create a harmonised legal framework that will facilitate, rather than create, competition.”
Apacs is broadly in favour of the directive as it stands. “We have come up with lots of detailed amendments, which we have been talking to the European Parliament about. But they are essentially to improve the operation of the directive and remove ambiguity rather than to rewrite it. We will continue to lobby the Parliament until it votes on the issue.”
Mr Smee does not see any real disadvantages in Sepa or the directive for banks, though both will force banks to look at the ‘value-added’ they provide in payment services. “The revenue stream from payments for banks will change,” he says. “Is that a good or a bad thing? I believe that if they are offering a competitive payments proposition, as our members aim to do, with value added on, they will be fine.”
Losses and gains
Somil Goyal, who works in the financial services advisory practice at consultancy BearingPoint, says the revenue lost by banks as a result of Sepa “is not insignificant”. He calculates they will lose about €2 on each cross-border transaction, which for a bank with two million such transactions annually would be €4m a year.
“But it will make branch consolidation, the rationalisation of operations and the building of utilities and operations hubs possible,” says Mr Goyal. “This will save money through lower head count, simpler systems, reduced real estate costs and smaller management overheads. Large banks will benefit from centralisation, small banks from pooling resources in utilities.”
