The delay of the Payments Services Directive means that the Single Euro Payments Area will go live in a phased approach. Frances Maguire looks at the impact this will have.

Banks would be excused for breathing a quiet sign of relief that the European Parliament has still not passed the controversial Payments Services Directive, which will provide the legal framework for Single Euro Payments Area (Sepa). The delay means that they are able to focus efforts on the launch of the Sepa credit transfer, the easier of the two Sepa schemes to implement, on January 1, 2008, because the Sepa direct debit cannot go live until each EU country has passed the directive into national law. This is unlikely to happen until 2009 at the earliest, making the European Commission’s ambition of full migration to the new Sepa instruments extremely unrealistic.

The European Payments Council published the rulebooks for the Sepa instruments at the end of last year. Banks have the specifications to build Sepa payment instruments, but the delay means that less is known about the final shape of Sepa, and will probably mean a longer and more costly transition period when banks will have to support the old and new payment systems. With less than nine months before launch, there is still much to be decided.

Time to be flexible

Brendan Reilly, product head, global ACH (automated clearing house) and wholesale clearing for EMEA and the Americas at JPMorgan Treasury Services, says that although JPMorgan is undertaking material system developments to shield customers from the complexity of Sepa, there are still some areas of uncertainty to be addressed. “We need to give ourselves flexibility because not all countries will migrate at the same pace, so the domestic ACH may remain dominant in some countries for longer than others.”

Also, the reach of the European Payment Council’s Sepa scheme is not as clear as it is today under the Euro Banking Association’s (EBA) Step2, which uses gateway banks and is a reliable route to the beneficiary banks. According to Mr Reilly, banks have yet to return adherence agreements to their national banking associations and a database will need to be in place before January 2008 for the credit transfer scheme to run smoothly.

Winners and losers

Moreover, while banks are building to the EBA Step2, it is still not certain who will be the ultimate winners in the pan-European ACH (PE-ACH) space and whether more players will come in. Mr Reilly says: “Banks should build flexibility into their solution that will cope with a potentially changing landscape. It is not clear who will be the ACH winners yet and we need to build this flexibility into our systems so we can switch between players at a later date. This is a big build and we have to ensure that the customer is not affected by the uncertainty and complexity.”

Thomas Egner, vice-president at Commerzbank, says that regardless of the number of PE-ACHs available, Commerzbank will only use one, and will attempt to build bi-lateral links with other banks. “In the short term, we have a single-window approach using EBA’s Step2, but in the long term we hope to develop bi-lateral links with banks in Europe, where we see large payment volumes, to exchange files and settle in Target2 or EURO1 and for the other banks to stay within Step2,” says Mr Egner.

“We are not going to join more than one PE-ACH or split our volume unless we are forced to. By concentrating our volumes on one PE-ACH, we can see where volumes rise to such an extent that we can set up a bi-lateral clearing agreement, subject to profound economical analysis.”

Mr Egner points out that there is a clear distinction between being technically ready and going live with the Sepa direct debit. “If a customer sends us a Sepa direct debit, we will act on it. But we cannot guarantee that the customer will find a truly harmonised legal landscape until the Payments Services Directive is in place, and it is evident that not all the European banks will have signed the adherence agreements.” Some communities, such as Belgium, will only sign the adherence agreements once the directive is in place.

Outsourcing offerings

Will Sepa encourage consolidation as banks decide to exit the payments business and outsource to payment providers? Mr Reilly believes that it is still too early to see what impact Sepa will have because many of the smaller banks only started looking at it in detail this year, following the publication of the European Payment Council rulebooks. There has been a shift in focus, however, away from interest in a full-scale lift-out of payments processing, which the larger payments processing banks have been promoting, to a halfway house.

“It may be potentially a more phased approach,” says Mr Reilly. “Some banks are thinking a lot more about indirect participation, where they are using another bank but they are visible as an indirect participant within the clearing scheme.” Banks could become indirect members of EBA’s Sepa credit transfer scheme and Target2 through JPMorgan, offering a solution for urgent and non-urgent payments where the technology around the routing of payments is done for them, he says.

At this stage, it seems it is still a buyer’s market because it is a logical next step for any bank investing in Sepa compliance. Commerzbank will offer indirect membership to clearing systems to small and medium-sized banks, which have low volumes of Sepa transactions, as will Austrian bank RZB. Walfried Lemerz, head of transaction services at RZB, says: “RZB is acting as a clearing bank with strong focus on euro and US dollar clearing services. Due to that strategic orientation, it is paramount to build Sepa capabilities in house and to sell those abilities in a second step to other banks as a white labelling service.”

Mandate flows

Charles Bryant, secretary general of the European Payments Council, believes that the banking industry has delivered, and that Sepa is moving strongly from design to implementation, although there are aspects of the design that will continue to evolve. For example, the Sepa direct debit scheme uses a creditor mandate flow (CMF) model, and there has been much debate about the need to include aspects of the debtor mandate flow (DMF) model to ensure mandates are verified.

“The CMF is not a straight copy of the current national schemes that are based on similar principles. It is inevitably a compromise, and the European Payments Council endorsed it as the core scheme because it meets market needs for all actors,” says Mr Bryant. “In June, the council will make a decision and finalise the debate on whether and in what form there should be an alternative mandate flow-DMF, or perhaps a way of delivering the benefits of both approaches.”

Richard Moseley, head of corporates, global transaction banking, at HSBC, says that HSBC will go well beyond strict Sepa compliance by offering customers multiple channels and formats, and introducing new value-added services, such as e-invoicing, integrated accounts payable and accounts receivable solutions. But he says: “Without legal certainty over key matters such as debtors’ rights and, consequently, certainty for the creditor, it will be extremely difficult to get a pan-European solution off the ground. The debtor mandate flow model is in our development plans but, without agreed details concerning message formats and flows, there is little that can actually be built.”

He believes the market should be left to decide which flow model to use, and if the two flows are to co-exist, there should be full interoperability between them so that, for example, a mandate created under the debtor-initiated flow model may be amended later by a creditor-generated amendment message or vice versa. “We believe there is still much work to be done to position DMF effectively as part of the Sepa direct debit solution,” he says.

Mr Reilly says that JPMorgan will only build a DMF model for direct debits if there is substantial client demand for it. “At present, we are prioritising efforts around Target2 and the Sepa credit transfer launch because we will not be offering Sepa direct debits until the directive is in place. There is less certainty about direct debits and whether that optional process will work.”

Multiple model support

One payment solutions provider, Clear2Pay, has launched a solution that will support both models. Mark Hartley, vice-president, strategy and marketing at Clear2Pay, says: “Everybody would like to see forms around mandates tightened up so there is a requirement to check a mandate database.”

He believes that the delay in the directive and Sepa direct debits means that banks will now implement both the creditor and debtor side of the Sepa direct debit instrument instead of just doing the absolute minimum by January 2008 – which was to only accept direct debits requests on their customer accounts. With just the payee side of the direct debit in operation, there would have been no product. Now hopefully banks will have time to build more viable offerings that will go beyond basic compliance.

Thomas Egner: hoping to build bi-lateral links with banks in Europe in the long term

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