Gertrude Tumpel-Gugerell: A single market for cards: the missing piece
in the SEPA puzzle
Speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European
Central Bank, at the EFMA Conference on Cards & Payments, Paris, 9 September 2009.
* * *
Introduction
Ladies and gentlemen,
It is a pleasure for me to participate in the EFMA conference once again.
The market for cards reminds me of ancient Greece. Why? In ancient Greece there was a
strong military state called Sparta where trade was forbidden for free citizens and the
currency consisted of huge iron bars, making money circulation very difficult, creating a
barrier to transactions. Sparta concentrated on warfare and was outlived by a more creative
people, namely the people of Athens. Since the time of Sparta trade has become a major
factor for wealth creation. Trade requires open markets for payment services.
7 years after the start of the Single Euro Payments Area (SEPA) project, we are not yet there
- and with cards even less than with other transactions. Today, I would like to focus on card
payments and share with you the expectations that we have in this field. But let me begin
with the progress we have made so far in the SEPA process.
SEPA progress
The SEPA credit transfer (SCT) scheme, although its use is still relatively low, is growing
every month. The forthcoming launch of the SEPA direct debit (SDD) scheme, the expected
use of the SCT and SDD by public authorities and corporates and the definition of an
enddate are all elements that will further boost SCT migration.
With respect to the SDD migration, I am pleased to see that developments moved in the right
direction:
1. the Payment Services Directive (PSD)1 will be transposed into national legislation by
1 November 2009 providing a single harmonised legal framework across Europe;
2. the updated Regulation on cross-border payments2 requires the SDD scheme to be
reachable in full by November 2010; and
3. the European Commission has provided the necessary long-term perspectives for the
multilateral interchange fees (MIFs) for direct debits in March this year: the European
Commission, supported by the ECB,3 has clarified that there is no reason for
pertransaction MIFs to remain in place at the national and at cross border level for either
SEPA direct debits or national "legacy" direct debits after 31 October 2012. Although
this guidance falls short of the expectations of some national banking communities,
we now have clarity in the market.
I very much welcome, therefore, the subsequent decision of the European Payments Council
(EPC) to launch the SDD scheme in November 2009.
As regards the migration end-date for both SEPA credit transfers and SEPA direct debits, let
me emphasize that the definition of an ambitious but realistic migration end-date is a key
factor to provide certainty, to speed up the migration process, to reduce the cost of
maintaining dual systems and to limit the "wait-and-see" attitude. Moreover, the possibility of
setting earlier national end-dates will ensure that migration does not slow down in certain
countries.
I would also like to say a few words on e-payments and m-payments, the "newcomers" in the
SEPA world. An e-payment, is an internet banking payment, but has the additional feature
that the web-merchant receives a payment confirmation in real time. An m-payment is
initiated on a mobile phone and could be used for both proximity and remote transactions.
SEPA provides a unique opportunity for a break-through regarding these e and m-payments,
building on the basic SCT and SDD schemes, and on SEPA for cards. Linking up with the
cards dossier, e-payments could be the answer to the security concerns many professionals
and consumers have in the field of "card-not-present" transactions.
In the domain of e and m-payments, banks will, of course, face fierce competition from other
market players. Therefore, I see the risk that banks may lose ground in this field if not
adapting fast enough to the changing technological environment and to the changing
payment habits of the younger generation. Therefore, we urgently need sufficient
coordination and commitment at the European level for establishing competitive solutions for e
and m-payments that at the same time ensure an appropriate security level.
SEPA for cards
Let me now turn to SEPA for cards, the main focus of my speech today.
When being on business travel, I usually conduct my own little "taxi test", trying to pay with a
credit card for the taxi fare. The results - though the sample may statistically not be large
enough - are disappointing. Even in Paris, London and Frankfurt, taxis still mainly rely on
cash payments. Only Helsinki is an exception.
This illustrates only one of the many obstacles and hurdles we still have to overcome in order
to provide the citizens of Europe with a cashless means of payment that can be used
throughout the region in a harmonised manner.
We need to overcome the current stagnation in the work underlying SEPA for cards. To bring
the cards dossier forward, this requires to urgently tackle three important issues, namely the
business rules, the technical standards, and finally one or more new European card
schemes. I will review each of these elements, focusing in particular on the work that needs
to be carried out.
1) Let me start with business rules. The SEPA Cards Framework (SCF), the ECB's "SEPA
for Cards" report of November 2006 and the additional explanations4 provided by the EPC at
the request of the Commission's DG Competition set out the basic rules for SEPA for cards.
However, as I have already said on other occasions, the SCF is a general document that
requires further elaboration.
The EPC has started in depth work on the SCF. We at the ECB see this as an opportunity to
provide clarity and more detailed rules. The EPC should reflect on the creation of a card
transaction processing framework which was also highlighted in the 6th SEPA Progress
Report.
However, not only the EPC needs to continue its work. Individual card schemes apply rules
that function as barriers to competition and need to be removed.
Let me give you some examples from a long list of issues:
•
the charges or reporting requirements that some schemes impose on issuers and
acquirers for transactions carried out with cards on which their brand is present even
if their brand was not used;
• the pre-setting of priority at terminals regarding the brand that will be used without
giving the retailer and/or cardholder any choice; and
• the rule that in the case of cross-border acquiring, it is always the interchange fee of
the country of the merchant that applies;
Therefore, I would like to invite the EPC and the individual card schemes to take further
action in the domain of business rules and to abolish practices that act as obstacles.
2) The second element that lays the foundations for SEPA for cards are the technical
standards (i.e. card and terminal specifications, applications, messages and protocols). The
EPC has published the "SEPA Cards Standardisation Volume", which is now available to the
market for comments.
Moreover, various market initiatives have developed or are developing more detailed
standards. The EPC will need to adopt these detailed standards as to complement its own
work in the field. This would be a guarantee for interoperability, security and market access.
Without such detailed standards, I fear that technical fragmentation in Europe will remain in
place or will even be re-established. Therefore, I believe that SEPA for cards will not be a
realistic undertaking unless there are implementable standards.
In addition, SEPA for cards needs a certification framework that will ensure trust, an
appropriate level of security for cards and terminals, and "one-stop shopping" for
manufacturers of terminals.
On top of this, it is important not only to set standards, but also - equally so - to control
them! The EPC needs to decide on whether it should become a member of EMVCo and the
PCI SSC. The ECB is of the opinion that a stake on the part of the EPC in these
standardssetting bodies would be a way for Europe to increase its coordinated influence in them.
Therefore, the selection of standards, a certification framework and a decision on its future
role in the standards-setting bodies are areas in which the EPC needs urgently to take
action.
3) In my view, yet another ingredient necessary for the success of SEPA for cards is a new
European card scheme. The ECB has made a clear request to the European banking
industry for the creation of such a scheme. Joint research by De Nederlandsche Bank and
the ECB5 has shown that a new European card scheme could provide a decisive impetus to
solving interoperability and overcoming costly fragmentation in the European market for
cards. Consumers and merchants in the card payments market are likely to benefit most
from SEPA if there is sufficient competition.
So far, a critical factor in the emergence of an additional European card scheme has been
the uncertainty surrounding interchange fees. Clarity has now been provided through the
"tourist test" or "equivalence test" methodology. The market would feel more comfortable with
a list of "what is allowed" and "what is not allowed" regarding interchange fees. However, we
need to accept that DG Competition's mandate is to act on specific cases and not to define
the rules.
I am aware of the uncertainty within the banking community on whether the "equivalence
test" will from now on be the guiding methodology or whether it will just be an interim
solution. Of course, I cannot answer this for the Commission, but the "equivalence test" is, in
my view, one of the possible methodologies, and it has the advantage that the competition
authority seems to be comfortable with it. This does not mean, however, that market
participants cannot conceive other models and methodologies - but they will clearly have to
be in line with competition rules.
Allow me a final reflection on interchange fees: one can certainly find alternative ways and
arrangements for replacing the MIFs. However, before entering into complicated
undertakings and setting up new structures, a banker should not disregard the possibility of
lower interchange fees being translated into higher earnings through the volume effect.
Recent research work focusing on the Spanish market in the period from 1997 to 2007 found
evidence that banks were even better off after the intervention of authorities on interchange
fees because the increase in the volume of transactions offset the decrease in
pertransaction revenue.6
The market for card schemes is in a decisive stage of development. We are very much
concerned about the possibility that small national schemes such as Dutch, Finnish and Irish
schemes will be replaced by the international schemes. I would invite the banks behind these
schemes to also consider the possibility of joining one of the new European card scheme
initiatives. Let me clarify once more that Europe needs Visa and MasterCard, since they are
currently the only schemes that offer a pan-European card payment solution. But we also
need sufficient competition.
For the moment, there are three new card scheme initiatives, each with their own strengths
and weaknesses. What is now needed is that the parties involved in the various initiatives
clarify their commitment and go ahead. Whether all independently or with joined forces, this
is of course up to the market. But we need to get down to business now.
Conclusion
In conclusion, encouraging work is taking place in the cards area. However, efforts have to
be intensified.
Coming back to the payment habits of ancient Sparta, I would like to note that cards have the
potential to become a serious alternative for the huge iron bars of our times, which is cash!
However, this can only be done with harmonised business rules, standards and one or more
additional card schemes in place at the European level.
To get there, we need leadership and vision. Regarding the rules and standards for the cards
business, I call upon the EPC to show this leadership and vision. Regarding the additional
European card scheme, I call upon the various parties to the individual initiatives to show
leadership and vision, to set up additional European card schemes.
Let me close by emphasising that harmonised European card schemes are not only the
piece still missing in the SEPA puzzle, but it would also be a crucial additional piece of the
puzzle necessary for completing the European vision of a single market in general. Our
currency, the euro, has made an important contribution. But the area of card payments
shows that the single market is still a case of work in progress, and that a lot more can be
done - in the long term interest of the customer and the industry.