Could a single European payments area boost Europe’s economy? Wendy Atkins finds out.

For frequent travellers in the eurozone, the advantages of the single European currency are clear: no need to change currency each time they cross a border. This is fine when making payments with euro notes and coins. But with debit card payments, there are different standards and processing infrastructures to contend with.

Anecdotal evidence suggests that cross-border debit payments represent about 2.5% of total debit transactions in western Europe. So as the war against cash targets cross-border transactions, the challenge is to establish a future-proof pan-European infrastructure that makes no distinction between ‘domestic’ and ‘cross-border’ payments. If achieved, this could potentially boost Europe’s economy by €50bn each year.

Proposals drawn up

This month, the European Payments Council – which was set up to respond to the European Central Bank’s (ECB) requirement to implement a single European payments area (SEPA) by 2008 – will deliver its proposals.

“The immediate challenge for European banks and the card systems is to find the optimal SEPA solution for consumers and business,” says Alexander Labak, president of MasterCard Europe. “Our current industry focus is to find a model acceptable to all stakeholders that will drive value, foster innovation and deliver efficiency to the single market. Moreover it will provide consumers with a borderless payments experience.”

Open competitive models enabling competition throughout the payments value chain have been welcomed by the industry. Paul Marsh, director, card services, at APACS, says: “We’re hearing just the right words from the ECB regarding competition and standardisation in the cards market at the moment. Standardisation brings competition – and we don’t want banks to be prevented from operating because of protectionism.”

An open model approach could give banks the opportunity to design new accounts and products that capture and keep consumer attention. This is particularly important in the debit market, where, as Dr Labak says: “The explosion in consumer preference for debit card products means that SEPA – with a technology backbone that can support innovative cards and products – is a commercial necessity, not an option.”

Defining principles

How SEPA principles will finally be defined is still being debated. “It is tempting for the banking industry to look for an incremental and comfortable response,” says Dr Labak. “It would be possible to put together the network of current domestic legacy systems by which we all do our banking every day, alter the pricing and refine European acceptance.” However, this approach could have weaknesses, as he says: “If the industry chooses this approach – a cost-based utility system – it is locking out a range of the technological and product innovations which, together with the SEPA principles, could make the fast-growing world of debit and the accelerated replacement of cash an even greater contributor to European economic efficiency.”

Some are concerned that a utility approach could make it harder for cardholders to conduct transactions beyond Europe – a situation that Dr Labak believes could create a “fortress Europe” that could “stifle rather than stimulate growth”.

However, Cath Rawcliffe, head of marketing at ACI Worldwide, says: “We believe that in practice, both the shorter-term utility-based approach, and a longer-term architectural approach that will enable greater flexibility of payment services, will emerge. Many financial institutions and service providers may be challenged to justify a longer-term common, more flexible solution at this time, given that other initiatives such as Europay Mastercard Visa (EMV) are an immediate priority. The critical role of solution providers is to deliver architecturally flexible services and pan-European local support capabilities, enabling a mix of scenarios to be accommodated, while advising on the most beneficial approach for each customer.”

Consumers should see the benefits of SEPA in the next three years. However, some may be unwilling to use their cards for cross-border transactions. Roger Alexander, CEO at S2 Card Services says: “The answer is to promote use centrally. For example, the Maestro scheme uses imagery of penguins in exotic places to highlight that it can be used beyond national borders.”

Smart card-based payments systems that work in harmony across borders could provide an improved customer experience and a massive reduction in costs associated with cash. For some banking insiders, a SEPA model could help the EU meet its commitment that, by 2010, it would be ‘the most competitive and dynamic knowledge-based economy in the world’.

War on cash

The cards Working Group of the European Payments Council has estimated that the cost of cash to the European economy currently represents €50bn. Of this cost, €32bn falls on the retail banking industry.

Cash remains the dominant payment instrument in Europe, accounting for 79% of retail transactions throughout the continent. However, in the UK, electronic payments overtook cash payments for the first time on December 29 2004. Meanwhile, MasterCard’s figures reveal that debit transactions grew at 15% across Europe last year.

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