Benoît Coeuré: SEPA migration, innovation and change
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at the European Payments Council off-site meeting, La Hulpe, 21 November 2012.
* * *
Ladies and gentlemen,
Thank you very much for your invitation to speak at this year's off-site meeting of the
European Payments Council1. My remarks today uphold the tradition established by
Ms Tumpel-Gugerell over the past eight years. It indicates the importance we attach to the
role and work of the EPC and is a sign of the good cooperation between the ECB and the
EPC.
Let me start right away by conveying the three main messages that I have for you. Of course,
I will be more than willing to take your questions afterwards.
First of all, the most prominent example of European financial integration currently is the
establishment of the "Single Euro Payments Area"- in short, SEPA. The SEPA project, as
well as other integration projects in payment systems, pre-dated the current financial crisis.
Payment systems were not disrupted by the financial crisis and certainly did not cause this
crisis, thanks to solid operations, regulations and central bank oversight. In fact, payments
and, in particular, retail payments turned out to be one of the few stable business lines left for
banks. It is no surprise that many banks are rediscovering retail payments. The provision of
payment services to companies and households is one of the core functions of retail banking,
and also a key public service. Therefore, the work on the SEPA project remains a crucial part
of European integration in the area of financial services. The ECB is committed to
accompanying this work under its Treaty mandate to promote the smooth operation of
payment systems, as a contribution to the efficiency of euro area economy, and as a way to
support continued trust in the euro.
My second message, or perhaps a word of warning, is that the status quo in retail payment
services cannot be expected to remain stable. New players are entering the market and
offering attractive propositions to end-users. Especially with regard to "innovative" payments,
such as mobile payments and internet payments, all the creativity seems to be coming from
outside the traditional banking sector. The ECB welcomes new payment systems and
services, regardless of who is offering them, provided that they are efficient, safe and
reliable. For banks, this poses various strategic questions which the EPC might also wish to
reflect upon during its strategic retreat today.
My third message deals with the future role of the EPC itself, in light of the ongoing review of
SEPA governance. It is not only in the EPC's own interest that it stays at the centre of
European retail payment integration and innovation; it is also in the interest of the market.
The EPC is well positioned to continue contributing to the work of the SEPA Council,
representing the European banking sector for retail payments. Therefore, I expect the EPC to
continue taking a pro-active approach and to continue working on developing efficient retail
payment instruments and services.
SEPA Credit Transfer, SEPA Direct Debit and the migration end-date
SEPA is an initiative aimed at achieving a fully integrated market for retail payment services
in euro, with no distinction between cross-border and national payments. The Eurosystem
continues to monitor and support the work in this field. Special attention is being paid to the
migration to the new SEPA instruments. According to the SEPA indicators, the migration in
the euro area from domestic credit transfers to SCT reached 30.3% in September 2012. As
regards SEPA direct debits, the migration amounted to only 1.9% in September 2012, which
is lower than hoped for.
An end-date regulation to support the migration to the SCT and SDD schemes was adopted
in March 2012. It lays down rules for the initiation and processing of credit transfer and direct
debit transactions denominated in euro within the European Union. It also defines a clear
timeline by when these rules need to be implemented. For the euro area, the final deadline is
1 February 20142. As of this date, existing national credit transfer and direct debit schemes
will have to be phased out and replaced by the pan-European SEPA alternatives as
developed by the EPC. Although not always appreciated, the migration end-date regulation is
an example of a close and fruitful cooperation between a self-regulatory initiative, the
European institutions and - ultimately - the European legislator.
Based on our monitoring of the migration, we know that there are examples of countries that
have already achieved "mass migration". For credit transfers, Finland, Luxembourg and
Slovenia accomplished migration by the first half of 2012. Public authorities, as large "users"
of payment services, have taken the lead in these countries. Spain and France, with 40%
and 30% respectively, show that it is not just "small" countries that can make it work. For
direct debits, similar national divergences occur, with Greece and Luxembourg leading the
way, but also Belgium managed to reach double digits in the first half of 2012. Unfortunately,
for direct debits, public authorities cannot take the role of "launching customer", as not all
citizens will like the idea of tax authorities collecting tax payments by means of a direct debit.
However, efforts are under way at national level to facilitate migration, for instance, by
communication campaigns, and I welcome the strong involvement of national central banks
in coordinating these efforts.
As regard the role of banks in the migration, communication with their customers, as well as
close cooperation with their larger business customers, "big billers", is of the essence. The
EPC has a very important role to ensure that the banks' customers are ready. In fact, this
could be its top priority for 2013. Nevertheless, in 2013 the EPC could also turn its attention
to the adaptation and deployment of these two schemes for use in new channels, such as
with internet and mobile payments.
SEPA for cards
Beyond credit transfers and direct debits, further progress is still needed in the field of SEPA
for cards. The Eurosystem is studying the merits of a SEPA Cards Processing Framework
which would connect card processors. The objective is to process card transactions across
intra-European borders more efficiently. It would be a strong boost to competition between
card schemes, domestic and international, as well as between card processors.
Recently, the European Commission announced new legal proposals on multilateral
interchange fees. Banks will have to be more mindful of the processing costs, as well as the
card scheme fees and the bank-internal costs of card transactions. At the same time, it will
also be a good moment to seize the vast growth potential for card transactions that still exists
in many countries. Whereas a cashless society continues to be utopian, a "cash-light" society
is certainly within reach.
Furthermore, in July 2012 the Eurosystem organised a third meeting of the Forum on the
SEPA Certification Framework. The Eurosystem thereby expressed its support for the
continued joint efforts being made by the stakeholders. In this case: card schemes,
certification authorities, evaluation laboratories, terminal manufacturers and the banking
industry. Together, they are developing a thorough methodology for the security evaluation
and certification of new payment terminals for physical card acceptance. The goal of this
multi-stakeholder cooperation is to allow retailers and terminal manufacturers to buy and sell
card payment terminals which function securely with all card schemes all across Europe.
When thinking of card payments and the internet, several things come to mind, such as
cumbersome keying-in card numbers and sometimes excessive surcharging. However, my
main thought is card fraud. Regrettably, even though banks have a great interest in reducing
card fraud, and the EPC could in theory play a major role, so far it has not engaged
thoroughly with this important task. Some card schemes and some national card
associations have been more ambitious when it comes to addressing card transaction
security. Fraud is about criminals financing themselves and their activities; decisions on
fraud-prevention should therefore not only be based on a bank's short-term business case,
the need to fight fraud is also justified from the perspective of keeping trust in the payment
system, and from society's perspective in general.
It all shows that, in respect of user convenience and of security, cards were not designed for
use on the internet. Although measures could be taken to improve this experience, banks
should not pin all their hopes on cards when it comes to delivering payment services for the
internet.
Study into costs of retail payments - importance of retail payments
In October 2012, the ECB published the results of its study into the costs of making retail
payments, conducted in cooperation with 13 NCBs3. For the euro area, these costs amount
to around €45 billion, or almost 1% of GDP. If extrapolated to cover all the 27 EU countries,
they would be around €130 billion. The results underline the importance of retail payment
services to the people of Europe and its economy as a whole. The study offers valuable
guidance on how overall cost efficiency can be improved even further.
Retail payments are an economic factor on their own, representing a market segment
dominated by banks - at the moment. Research shows that that the performance of banks in
EU countries with more developed retail payment markets is better; an effective payment
service market is found to be associated with higher bank stability4.
According to AT Kearney5, Europe's retail banks are continuing to recover after bottoming
out in 2009. Despite the crisis, income remained remarkably stable and is just slightly below
2007 levels. Not only are traditional retail banks re-discovering the advantages of the more
traditional transaction services, prominent investment and corporate banks are doing so too.
Payment services have a low risk profile and therefore do not worsen the solvency ratio; they
allow for stable profits and are close to the customer, offering cross-selling and customer
retention possibilities6.
During the crisis, the non-cash retail payments market continued to show growth rates well
above GDP growth. This can serve as a proof of the resilience of payment services and their
8
attractiveness as a market in which to invest.7, Alongside the lending and the taking of
deposits, the provision of payment services to companies and households is one of the three
core functions of retail banking, which are also key public services. Retail payments therefore
not only have an economic relevance for the supply side, but also have an overall social
relevance. The involvement of the demand side is therefore critical to any change process in
retail payments. This all shows the importance of payment systems and the SEPA project in
particular for European financial integration and the benefits this brings to society.
Innovative payments
Whereas SEPA has already contributed to the objectives of the European single market, it
will also need to be expanded towards new sectors of the economy, such as
e-commerce9.
In the European Commission's recent proposals on the completion of the single market, one
key objective is to facilitate e-commerce in the EU by making payment services easier to
use, more trustworthy and competitive10.
The prospects of full migration to the SEPA credit transfer and direct debit schemes form the
foundation for innovative payment services offered on a pan-European scale. This is proven
by the fact that, upon closer inspection, innovations are often related to the way the payment
is initiated, such as via a mobile phone or the internet. The underlying payment instrument
used is often a card payment, sometimes a credit transfer and occasionally a direct debit.
For m-payments, smaller pilots have been organised in several European countries,
sometimes followed by actual deployments, but no EU-wide solutions exist. In fact, the
Eurosystem is concerned that too little attention is being paid to technical standardisation
and/or business interoperability. This might create for m-payments the same well-known
problems which SEPA has been trying to solve.
As for internet payments, their development, rollout and usage has not kept pace with the
rapid development of e-commerce. Certainly there are some success stories at national
level. But even 43 years after the forerunner of today's internet first linked two computer
networks in the US, solutions are absent in many countries. Of course, when we look beyond
the traditional banking sector, solutions do exist, even offering a global reach to e-commerce
merchants. Other new players are entering the market and offer appealing propositions to
end-users. The ECB welcomes efficient, safe and reliable payment systems and services,
regardless of who is offering them. The status quo in retail payment services cannot be
expected to remain stable. For banks, this poses various strategic questions which the EPC
might also wish to reflect upon during its strategic retreat today.
In view of the limited progress achieved by the market so far, the SEPA Council11 has
identified a number of key challenges to be examined in order to ensure the provision of
7
Capgemini (2012): World Payments Report 2012.
8
Recently published figures of Capgemini show an annual growth rate in non-cash payments volume of 3.4%
for the U.S., of 4.9% for Europe and of more than 30% for emerging markets like Russia or China. These
increases in volume were mainly fuelled by card payments and especially by debit card payments.
9
Monti, M. (2010): A new strategy for the Single Market - At the service of Europe's economy and society,
Report to the President of the European Commission, José Manuel Barroso, 9 May 2010.
10
European Commission (2012): Single Market Act II, Together for new growth, Communication from the
Commission to the European Parliament, the Council, the European Economic and Social Committee and the
Committee of the Regions, 3 October 2012.
11
The stakeholders' forum, co-chaired by the ECB and the European Commission, aims to promote an
integrated euro retail payments market by ensuring the proper involvement of all parties and by fostering
consensus on the next steps towards the realisation of SEPA. The banking industry, public administrations
EU-wide internet payment services for e-commerce. Among those challenges: ensuring
sufficient choice to meet user requirements, delivering user-friendly, privacy-compliant and
highly secure payment services, as well as fair and open market access while creating a
level playing field for incumbent and new players.
At the request of the EPC, a stakeholder meeting on internet payments was organised on
8 November. The meeting, which was co-chaired by the ECB and the European
Commission, provided new impetus for the discussion, especially on payment initiation
services. These services make use of the banks' online banking systems and are often
offered by non-financial institutions which are not always regulated, supervised or overseen.
During the meeting, it became clear that the various providers of payment initiation services
have very different operational models. Some have chosen to rely on contractual agreements
with the account-servicing banks. Without such cooperation, the technical part of the
payment service is more difficult to maintain, sensitive data of the account owner is not
protected, and the payment service is less reliable overall. The SEPA Council will follow up
on these issues at its next meeting.
Competition rules and work on integration
I am aware that there is a debate on "competition versus integration", which sometimes tries
to frame the current status of the SEPA project as being blocked by competition law.
However, the issue for the competition authorities has been the anti-competitive way in which
some market participants have behaved in recent years. The authorities are also concerned
that work, such as that on standardisation, is being done in an exclusive manner.
In the field of card payments, the EPC's reaction to the latter concern has been to establish a
true stakeholder involvement process, i.e. the Cards Stakeholders Group. For SCT and SDD,
a Customer Stakeholder Forum has already existed for many years. More recently, a forum
was established with the clearing and settlement infrastructures processing the transactions.
In the field of internet payments, the preliminary reaction of the EPC has been less fruitful.
The EPC decided to stop all its work on its E-payments Framework without addressing the
issues at stake and without trying to seek the involvement of all stakeholders.
The challenge will be to address the issues of today and tomorrow, for SCT and SDD, for
card payments, but also for m-payments and internet payments, in a way that includes all
stakeholders.
Review of SEPA governance and future role of EPC
In 2012, the SEPA Council has conducted in-depth discussions regarding the review of
SEPA governance - in other words, on the way the SEPA project is being managed. At the
core of these discussions is the future role of the SEPA Council itself in shaping the future of
retail payment services in euro. In this context, SEPA should be understood as the European
payments area, and not the time-bound project - so why not call it the European Retail
Payments Council?
One option would be that the SEPA Council becomes an advisory body for public authorities
in the exercise of regulation. Another option, which is preferable in my view, is to accept a
body that is empowered with a self-regulatory mandate. As regards the latter, the ECB would
be willing to continue co-chairing the SEPA Council, as far as it is without prejudice to the
statutory tasks of the ECB.
Work at different levels is envisaged. At the strategic level, the SEPA Council would discuss
and agree on the key topics and would set priorities. At a more pragmatic level, concrete
requirements would be developed in a multi-stakeholder environment. For certain issues,
existing standardisation bodies or new organisations would develop technical specifications.
The debate is ongoing, but should hopefully come to a conclusion by the end of this year or
in early 2013, as there are many topics to discuss.
As regards the role of the EPC in the new SEPA governance, it is not only in the EPC's own
interests that it stays at the centre of European retail payments integration and innovation; it
is also in the interests of the market. It is clear that the EPC should continue contributing to
SEPA Council work, as a representative of the European banking sector for retail payments.
The involvement would be at the strategic level and often also at the requirements level.
In addition, as scheme owner of SCT and SDD, the EPC has a continued responsibility for
maintenance and improvements. It should do that in a transparent way, as is being done with
the Customer Stakeholder Forum, the Clearing & Settlement Forum, and with the
consultations on new releases.
Perhaps the EPC should review its involvement in cards, where it is not a scheme owner.
The SEPA Cards Framework and its subsequent Q&As have not proved to be very effective
in developing a European card payments market. The work of the Cards Stakeholders Group
on the standardisation of functional requirements and the standardisation of the security
requirements for cards and terminals should become the leading workstream. The EPC's
role would then be to channel the positions of the European banking sector at the strategic
level of the SEPA Council, as well as to provide technical expertise in the discussions of the
Cards Stakeholders Group. It is a good example of how social dialogue and
multistakeholder involvement can work.
For innovative payments, such as internet and m-payments, the EPC has a legitimate role to
enable the use of the EPC's own schemes. It could do so by developing implementation
guidelines for SCT and SDD for use in such payments. It is important that this is done in a
way that involves other stakeholders, also those outside the traditional banking sector.
Conclusions
Let me conclude. The work on payment systems and on SEPA in particular remains a crucial
part of European integration in the area of financial services. SEPA is delivering value to all
European citizens. For banks, before and during the financial crisis, the provision of retail
payments is one of their few stable business lines and an area on which many banks are
focusing.
The internet, in an embryonic form, started 43 years ago today. Young people today are
unaware how our economy, our society and the world functioned before the internet, and
especially before the World Wide Web. How do you think they perceive the fact that the
institutions to which they entrust most of their money and on which they rely to make most of
their payments are still mostly absent when they want to make payments on the internet?
The ECB welcomes efficient, safe and reliable payment systems and services, regardless of
who is offering them. But if banks want to play a role in the future of retail payments, they will
need to act soon, as their position cannot be expected to remain stable. New players are
entering the market and offer appealing propositions to end users, especially with regard to
"innovative" payments, such as m-payments and internet payments.
The EPC's position will need to be adapted in the light of the ongoing review of SEPA
governance. The EPC is certainly well positioned to continue contributing to the work of the
SEPA Council, representing the European banking sector on retail payments. Therefore, I
expect the EPC to continue taking a pro-active approach. Being the scheme owner of the
SEPA Credit Transfer and Direct Debit schemes, positioning these schemes more
prominently as building blocks for internet and m-payments seems to be a logical next step.
Thank you very much for your attention.