The realisation of the Single Euro Payments Area has been dogged by delay and now, even before SEPA Direct Debit has launched, it looks to some as though the European Commission is moving the goalposts before mandating an end-date. Frances Maguire explores whether the industry can jump this final hurdle.

Since its inception almost 10 years ago, the creation of the Single Euro Payments Area (SEPA) has had a long and rocky road to full fruition. Eurozone countries have witnessed the SEPA Credit Transfer (SCT) go ahead, with a launch in January 2008. However, the SEPA Direct Debit (SDD) scheme has been delayed. It was postponed until November 2009, only to be pencilled in again for November 2010, when compliance is finally expected to be mandatory for all banks and payment providers.

At one point, 2010 was slated as the year when the critical mass of payments might have migrated to SEPA schemes so that the domestic schemes could have been switched off. This has now been put back to 2012, mainly because of the necessity of the legislation and the adoption of the Payments Services Directive by all member states as well as the delayed SDD launch.

In December last year, the Council of Finance Ministers of the 27 EU member states formally invited the European Commission (EC) to start the path towards setting legally binding end-dates for the SEPA schemes.

Subsequently, the EC issued a discussion paper on March 15 this year, and began a consultation period to last until June 23 concerning options for the industry to move towards aligned SEPA migration and what the payment services industry should be required to provide by the deadline.

Competition concerns

However, the debate over whether or not an end-date to SEPA should be mandated has been prolonged by yet another twist. On the one hand, it is positive in that the Council of Finance Ministers and the European Parliament is urging the EC to push the market towards rapid SEPA migration based on schemes that go beyond what payment-service providers have developed thus far.

On the other hand, some say that after clearly encouraging the banking industry to provide a single set of SEPA payment schemes, as developed by the European Payments Council (EPC), the EC now equates these with a 'private monopoly' and is considering mandating migration to multiple, competing SEPA schemes, compliant with so-called 'essential requirements' instead. All relevant transactions would have to comply with a set of requirements for payment services that would be defined to allow for "the application of currently existing EPC schemes but do not restrict flexibility and innovation".

Self-defeating logic

Gerard Hartsink, chairman of the EPC, believes that the 'essential requirements' approach would effectively defeat the purpose of the SEPA harmonisation exercise originally defined by the European authorities, and would nullify the intended benefits for bank customers that would have been achieved through standardisation and scale. Furthermore, he adds that a single set of standards would not be any more monopolistic than what exists today.

Mr Hartsink says: "Existing national payment systems operate on the basis of a single set of payment instruments developed by national banking communities, a fact that has not been challenged by competition authorities in EU member states; hence, it is not plausible to assume that migration to a single set of SEPA schemes developed by the European banking industry could be challenged on grounds of public policy."

According to the EC paper, the benefit of the 'essential requirements' approach would be "to define the characteristics which need to be respected by pan-European payment schemes without mandating the EPC schemes on a de jure basis. The 'essential requirements' approach thereby provides a way to define pan-European payment instruments while avoiding a regulatory endorsement of one specific scheme, which was developed by the industry. In contrast to a scheme-based reference, this option would retain the possibility for new competing credit transfer and direct debit schemes to emerge under the condition that they are compliant with the essential requirement."

But the EPC argues that the 'essential requirements' approach would only be valid if additional SEPA schemes had a realistic chance of getting to market - for example, if the European legislator could force payment-services providers to adhere to such alternative schemes.

Mr Hartsink says: "Without such enforcement, payment-service providers might choose to adhere to the SEPA schemes developed by the EPC, which would leave the EC facing renewed accusations based on the flawed 'monopoly' argument. Properly thought through, therefore, the 'essential requirements' approach would lead to a situation in which payment-services providers would have to offer different sets of SEPA services and products based on different sets of SEPA schemes, each compliant with the 'essential requirements'."

Creating disunity

As a consequence, bank customers would have to continue to support multiple payment applications to conduct business and manage cashflow throughout SEPA. "By the same token," says Mr Hartsink, "scale and scope advantages for all market participants that would result from increased standardisation owing to the implementation of a single set of SEPA payment instruments would be minimised or even nullified. Such a scenario, however, would - de facto and de jure - reduce to pieces the SEPA vision promoted by regulators throughout the past decade."

The benefits for bank customers associated with SEPA, for example, opening the market to increased competition in the provision of payment services, can only be realised if a single set of SEPA schemes based on the same standards is implemented.

Mr Hartsink adds: "Migration to the SEPA schemes developed by the EPC does not imply migration to specific SEPA products and services offered by individual payment-services providers." The EPC, therefore, recommends that the EC abandons the 'essential requirements' approach in the context of setting an end-date for migration to SEPA.

By way of contrast, Tom Buschman, the founder, chairman and chief executive of Twist, a corporate-driven standards organisation, says that by introducing 'essential requirements' for payments systems to be provided by a SEPA end-date, the EU regulators are opening the door for user requirements to be fully met within three years.

He believes that the 'essential requirements' emphasise the payment-user perspective, defining what payment-service providers have to offer before the regulatory end-date. In his view, competing payment schemes will only emerge if the EPC schemes do not support "essential user requirements". And in that case the market will ensure that complementary payment schemes will be internally consistent with the EPC schemes.

Mr Buschman also warns that it is necessary to focus the SEPA regulation on the functional and operational requirements and avoid embracing specific technical solutions. In his view, the EU should not repeat the situation with e-invoicing, where the well-intended regulation slowed down the rollout of e-invoicing by prescribing technical solutions, such as the use of qualified digital signatures.

Technical issues

According to Mr Buschman, some exceptions can be made for widely available neutral technical frameworks such as ISO standards and the use of XML, a set of rules for encoding documents electronically. The most important technical requirement being proposed is that the format of all SEPA payments should be based on ISO 20022, which can help remove a costly bottleneck for SEPA. This is because little has been done in most member states to harmonise across different interpretations for cross-border payments to date.

Mr Buschman's overriding concern is that the regulation does not get too technical, or regulate technical solutions, and that there should be no regulatory endorsement of technical standards alone. "Regulating to have ISO standards and XML does make sense," he says, "but regulating BIC [bank identifier code] and IBAN [international bank account number] leaves me somewhat concerned. Quite a few banks still do not know how to inform the customers about BIC and IBAN and are making mistakes.

"It is a solution that has been chosen by the banking industry to solve the problem of account identification, which would not be the technical choice of their customers. There might be other ways of identifying bank accounts and service providers can offer the easy translation of existing account numbers. Why, then, does it have to be regulated that the customer has to provide it? As long as there is a way to uniquely identify the bank account of the beneficiary, it should not be specified how."

Mr Buschman adds that regulating BIC and IBAN would accelerate the harmonisation of intra-EU payments, but the SEPA regulation is also aimed at local payments. The prescription that any payment instruction from users should contain the IBAN of the payer and the payee introduces an unnecessary complication for local payments and their low-cost providers.

He says: "Much more effective is the proposal from the EU that payment-service providers are prohibited to pose discriminatory requirements based on nationality or place of residence to open a payment account. The result is that any payment-service provider can easily operate in any EU member state, which leads to the necessary competition to offer attractive payment services that are sufficiently harmonised, efficient and user-friendly for customers."

What's more, the 'essential requirements' stipulate the use of XML in ISO 20022 format, but also prescribe quite a few data elements that must be included in a payment. "These measures would definitely lead to harmonisation, but they go much further than mandating ISO 20022. If you look at what is outlined for a direct debit and what is required to be made available by payment service providers for the payer and the payee, it is pretty comprehensive," says Mr Buschman.

The EC consultation document, SEPA Migration End-date, also outlines settlement times, minimum message size, payment thresholds, and states that the due date, settlement date and debit date must be the same, which leaves no uncertainty as to how the essential requirements would operate.

While he largely supports the 'essential requirements' approach, Mr Buschman says there are a few details to be resolved during and after the consultation, such as the different timelines for SCT and SDD, waivers for individual member states that need clarification and last, but not least, how SDDs will be made available to small and medium-sized enterprises that are often excluded from this collection service.

Mr Buschman says: "It is good that the European Commission comes up with detailed requirements of what payment instructions should be accepted of its customers by every bank, in terms of the data formats, the XML language and so on. This means that corporates can go to their own bank or banks with the knowledge of one standardised way of how SEPA should be implemented.

"But they can also go to another service provider, as long as they are prepared to migrate their systems and processes. One question mark is the waiver-option that may result in different timelines per member state. This could lead to SEPA adoption by corporates to be held up by the slowest country."

Implementation dates

The EC outlines two end-dates for the two SEPA instruments (2011 for SCTs at the earliest and 2012 for SDD) for the service providers. These end-dates should apply to euro area member states, while non-euro area member states would be granted a transitional period, based on their limited euro payment transaction volumes.

The EC's document states that the proposed way forward for setting end-dates is based on a combined approach of making certain important standards used by the payment industry mandatory and defining essential requirements applying to payment-service providers and customers.

This would allow achieving the goal of full SEPA migration, while staying neutral and open as to how the payments industry will develop the SEPA instruments. Any further improvement or innovation would have to be in line with the requirements set by the legislator.

What the entire industry agrees upon is that SEPA will not become a reality without legally binding deadlines for adoption of the SEPA instruments for payments. At present, it is thought that fixing a required approach for an end-date based on existing schemes could hinder potential innovation and limit the incentives for scheme improvements.

What the debate comes down to is what should be regulated and what should be left open to market forces. SEPA, designed to strengthen the common currency, drive the integration of the internal market and generate tangible benefits for bank customers, needs to take effect. Without a mandatory end-date it will not. The message to be taken from all this, then, is that unless the 'how' is left to the practicality of market forces, in reality, the vision may well prove elusive.

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