Yves Mersch: Efficient retail payments - key in strengthening the
competitiveness and growth potential of the EU
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank,
at the ECB/Bank of Italy Workshop on "Interchange Fees", Rome, 24 March 2014.
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Ladies and Gentlemen,
It is a great pleasure for me to be here today to contribute to this discussion on retail
payments in the euro area and in Europe more broadly. But first of all, I would like to thank
the Banca d'Italia for organising this workshop jointly with the ECB, and for hosting it in this
beautiful setting. I am also grateful to Fabio Panetta for opening this event in the morning.
Payment systems and payment schemes, like this city, don't get built in a day. Good things
take time. Payments are a network industry, and they rely on cooperation between banks
and other payment service providers - cooperation that calls for resolve and stamina.
Today, I would like to talk about retail payments and the ECB's and the Eurosystem's role in
those payments, and to touch on current developments and future challenges. I'd also like to
say a few words on interchange fees, the issue of this workshop.
Why are retail payments important?
Payments oil the wheels of the single market. They facilitate the "four freedoms"- the free
movement of people, goods, services and capital. Without an efficient electronic payment
system, the Union would not have been able to develop and grow over the years. And
neither should we forget the contribution made by the large-value and retail payment
systems to Europe's economy at the height of the crisis and in its aftermath. They helped
Europe's economy to run smoothly.
Some of you may still remember the times when wages were paid in cash, or the
inconvenience of obtaining foreign currencies for trips abroad, the complexities of
crossborder payments, not to mention the plans disrupted by unforeseen exchange rate
movements. You may even remember how interbank positions were cleared and settled at a
physical meeting at the central bank at the end of the business day.
Efficient, robust, standardised and integrated retail payments and payment systems are
essential to make trade easier, to increase competition and innovation, to foster financial
integration and to complete the single currency project. They play a key part in strengthening
the competitiveness and growth potential of the European Union.
In 2012 the ECB published a study, conducted with 13 EU central banks, on the social and
private costs of different retail payment instruments.1 The study showed that the social costs
of retail payment instruments are substantial and amount to €45 billion, i.e. 0.96% of GDP for
the participating EU countries.2.So, in terms of costs, retail payments certainly matter.
An ECB study from 2009 shows that in countries with more developed retail payment
services banks perform better - both in terms of their accounting ratios and their profit and
cost efficiency.3 Retail payment transaction technology itself can also improve bank
performance, and evidence shows that heterogeneity in retail payment instruments is
associated with enhanced bank performance. Similarly, a higher usage of electronic retail
payment instruments seems to stimulate banking business. There is also evidence showing
that retail payment services generate more stable revenues for banks and decrease their
risk. So, also in terms of bank performance, retail payments matter.
In this context, the discussions on "ring-fencing" retail banking activities are relevant. Retail
banking is about taking deposits, offering credit to the real economy and providing payment
services to firms and households. These three functions are key public services.
To sum up, retail payments are important, and maybe more important than people often
think. I am convinced that even greater efficiency in payment systems would further advance
the development of the internal market.
Let me now turn to the role of the ECB and the respective national central banks.
The central banks' role
One of the basic tasks of the European System of Central Banks is to promote the smooth
operation of payment systems. The integration and harmonisation of retail payment systems
within the euro area is therefore of vital concern to us.
Progress in this field has only been achieved gradually. It takes time and is sometimes
difficult to recognise. However, looking back to when the euro was introduced, we can see
that we have made some considerable progress.
Back in 2000 most cross-border credit transfers were processed via correspondent banking
arrangements, which were based on bilateral relationships between financial institutions. To
provide adequate geographical coverage, many bilateral arrangements were needed. It was
a system which was considerably less efficient than the fully automated interbank funds
transfer systems that were used for national payments in most Member States.
These arrangements might also explain the high charges for cross-border payments at that
time. The European Commission's report "Bank charges in Europe",4 published in April 2000,
stated that the average total cost of a cross-border credit transfer was €17.10 for a €100
transfer. Moreover, a cross-border credit transfer took on average nearly 31⁄2 days.
Since the introduction of the euro, the ECB and the other Eurosystem central banks have
worked in close cooperation with the Commission and the payments industry to establish the
Single Euro Payments Area (SEPA).
The ECB has acted as a catalyst here, providing analytical work and producing progress
reports, together with the national central banks, as well as organising conferences and other
events to bring market participants together. It has also worked closely with EU legislators,
supporting a harmonised legal framework for retail payments. It has resulted in some
concrete achievements:
• Pan-European schemes for basic retail payments, i.e. the SEPA credit transfer and
direct debit, were introduced by the payments industry in January 2008 and
November 2009 respectively.
• Costs for cross-border payments are the same as for national payments, and
• The execution time for a credit transfer does not take more than one banking day
(D+1) and the trend is clearly towards same day - or even real-time - settlement of
retail payment transactions.
The ECB has also been a strong advocate of the SEPA end date regulation and it specified
1 February 2014 as the end date for migration to SEPA credit transfer and direct debit.
Despite the Commission's late amendment allowing banks to process old payment formats
until 1 August this year, most Member States succeeded in migrating before the original
deadline of 1 February 2014. The most recent migration figures from February 2014 shows
that 93.9% of all euro area credit transfers, and 80.3% of all euro area direct debits were
processed in SEPA format.
Current developments, future challenges
As I said earlier, good things take time. That applies to the European Union and to the
creation of an integrated market for retail payments. The successful migration to SEPA credit
transfer and direct debit does not mark the end of our efforts in retail payments, but lays the
foundation for new and innovative payments, and further integration.
I wish to take this opportunity to mention some areas in which we would like to see further
integration and harmonisation.
First of all, cards. Cards are the alternative to cash at the point of sale. 12 years after the
introduction of euro banknotes and coins, we still don't have an integrated European market
for card payments. That is why the Eurosystem is currently preparing a report entitled "Card
payments in Europe - a renewed focus on 'SEPA for cards'". It will emphasise the need to
harmonise principles, business practices and rules, as well as technical standards relating to
card payments.
We would also like to see payments become faster. Although the D+1 requirement for credit
transfers - part of the Payment Services Directive - came into effect in 2012, an increasing
number of merchants want to have a payment confirmation before providing the goods or
services, and person-to-person payments via mobile phones seem to have great potential. It
is becoming clearer by the day that the market wants increasingly faster retail payment
execution. Such services are already available in some Member States, but they need to be
widely available across Europe.
Even if we are focusing on the euro area and the rest of Europe, we should however also
aim for integration in a broader context, by bringing forward SEPA standards to a global level
as an input for others. SEPA is based on the ISO standard for financial services messaging
and on clear business rules.5
The use of this global standard and these rules for retail
payments worldwide would further facilitate the interlinking of payment systems and increase
efficiency for all involved. Think about its potential for remittances by migrant workers.
Security, unsurprisingly, continues to be a critical topic. Advances in technology mean that
the safety and security of retail payments remain of vital interest to market participants and
authorities alike. The SecuRe Pay Forum published its recommendations for improving the
security of internet payments in January 2013, and it recently published its "public note on
security of payment account access services".6.
The creation of the Euro Retail Payments Board (ERPB) by the ECB's Governing Council is
another step taken by the Eurosystem to foster an integrated, innovative and competitive
market for retail payments in euro in the EU. The ERPB will bring together representatives
from both the supply and demand sides to identify strategic issues and work priorities,
including business practices, requirements and standards, and ensure they are addressed.
The Commission will participate as an observer. Similar "social dialogue" bodies have
already been set up and are successfully operating in several Member States. The move to
establish the ERPB was very well received and its first meeting is scheduled for 16 May.
Finally, I would like to say a few words on virtual currency schemes. Bitcoin is perhaps the
most notable and topical of these, but certainly no longer the only one. Many media
commentators have been wondering what impact these currencies will have on retail
payments and even on central banks. I agree that virtual currency schemes are an
interesting phenomenon and should not be ignored or dismissed. The ECB was one of the
first public authorities to see their potential and their risks and published a detailed analysis
in 2012.7 Despite the overall rise in the value of bitcoin since the publication of the report and
the media attention it is getting, our conclusions still seem to be valid, namely, that such
currencies are not (at least yet) economically important. In Europe, virtual currencies do not
pose a risk to price stability or financial stability, but do pose a risk for users. However, this
user risk is more related to speculative investments and consumer protection, and not
necessarily to payments. Nevertheless, we are closely following developments and keeping
in touch with other authorities.
All in all, we are living in a time of rapid change. It may well hold in store some novel and
even unconventional challenges as we create the building blocks for further financial
integration.
Interchange fees
Let me conclude by touching on interchange fees, the topic of today's workshop. The fees
have turned out to be a rather controversial issue, not only in Europe but also worldwide. The
Eurosystem's position is neutral on interchange fees. But clarity is needed so that banks and
other payment service providers can decide on future investments. That clarity has now been
provided in the Commission's proposal for an interchange fee regulation, which we very
much welcome.
Even with a cap on interchange fees, banks should seize the opportunities that a "SEPA for
cards" offers. The growth potential for cards at the point of sale is still substantial in Europe,
especially in some countries. The favourable outlook for card transactions is a business case
in itself, even for a scheme that operates with a low interchange fee.
Building the European Union is a slow and laborious but ultimately rewarding process. The
migration to SEPA credit transfer and direct debit marks the completion of another element in
that construction, and there are more to come. I am sure that today's workshop will give us
new insights and help pave the way for further design and construction work, which is of
such value to the people of this continent.
Finally, a word of thanks to the colleagues of the Banca d'Italia for their warm welcome and
hospitality. And, of course, thank you all for attending this workshop today. Unfortunately, I
soon have to leave for Frankfurt, so let me wish you "buon appetito" and a fruitful afternoon
session.