Gertrude Tumpel-Gugerell: Do you SEPA? The ECB's point of view
Keynote speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the
European Central Bank, at the 3rd International Payments Summit, Milan, 27 October 2008.
* * *
Introduction
What does "to SEPA" mean? Does it mean to follow a fashion or to pay lip service to an
idea? To me, it means more than that: it means being fully committed to creating a more
integrated retail payments market in Europe, enabling competition and innovation, and in
general making retail payments more efficient, safer and easier to use.
People may wonder why, at a time of unprecedented financial turmoil, we continue to focus
our attention and energy on payment issues. I would argue that the payments business,
which generates about one-quarter of all banking revenue1, is rock-solid. At a time when
banks' other sources of income are more volatile, they can count on reliable and regular
revenues being generated through payment services. So far, it appears that banks that are
active as universal banks have been able to weather the crisis better than specialised banks.
Even at the current juncture, European integration of trade will continue, and the integration
of payments has to follow suit. Moreover, there is a need for SEPA at such a time of distress,
as it will contribute to a smooth and safe underlying payments infrastructure for stable
transactions at the retail banking level and thus to safeguarding financial stability.
At last years' International Payments Summit, SEPA was in its warm-up phase. Is it now
going full-steam ahead, or has the engine stalled? Let's have a look at the status of the
different components of the vehicle, namely SEPA Credit Transfer (SCT), SEPA Direct Debit
(SDD) and SEPA for Cards.
Do you SCT?
In January 2008, we all welcomed the launch of the SEPA Credit Transfer. Now, at a time
when banks are under stress, it is tempting to slow down the process of modernisation and
innovation of payment services. This reaction is understandable, but, actually, we need to
respond in precisely the opposite way.
However, the ongoing financial turmoil is only part of the story. The gap still needs to be
closed between being technically ready to send and receive SCTs and actively offering
userfriendly SCT products and services to customers. Thus, customer experience of the SCT
cannot yet be fully compared with national credit transfers. For instance, it is not always
possible to make payments with a scheduled execution date and/or periodic payments. The
online banking applications for the SCT - if it is available at all - are sometimes more
complex than those for national credit transfers. Often, the SCT is offered in the same way
as other cross-border instruments for payments to countries outside Europe, although it
should be considered a domestic payment instrument.
Based on data collected by the Eurosystem, half a year after the launch of the SCT, SCT
transactions account for only about 1.4% of total credit transfers in the euro area. The use of
SCTs seems to be mainly restricted to cross-border transactions. Although corporates which,
together with public administrations may bring a critical mass of payments to the SEPA
environment, claim that they can see the benefits of SEPA, they are still taking a cautious
approach towards its actual implementation. One of the major difficulties cited relates to
obtaining IBAN and BIC information. In this respect, I am happy to observe that in Italy the
IBAN became the single, exclusive standard used to identify current accounts in the
execution of domestic payments as of January 2008. I expect that the provision of good
quality services for deriving IBAN from national account numbers and reliable directory
services will also help to overcome this obstacle in other countries.
Do you SDD?
Although some SEPA Direct Debit pilot projects have been launched by banks,
infrastructures and IT providers, it cannot be denied that the SDD is having some engine
trouble. I have recently discussed the three main problems faced by the SDD, namely the
migration of mandates, the uncertainty of users and the multilateral interchange fee for direct
debits.
It is claimed that it is a heavy burden to have to sign new mandates when switching from the
national direct debit schemes to the SEPA direct debit schemes. Nevertheless, some
countries have already found a solution to ensure the continued legal validity of existing
direct debit mandates, while others are still looking for an answer. The European
Commission and the European Payments Council are gathering information on this issue,
and I would welcome more transparency in this regard.
Owing to different national business practices, many opinions were voiced, in particular
about the SDD, even before the product was visible: "it is not safe enough"; "it is too safe to
be efficient and inexpensive"; "it is not modern enough"; "it is too different from previous
procedures". Consequently, direct debit users are somewhat uncertain about what form the
SDD would take. All users, including here in Italy, should be reassured that their special
needs can be met by means of individual offers from their banks, by transparent additional
optional services that are offered by groups of banks or by additional services offered at the
level of whole banking communities.
Users are obviously concerned about prices. They will only embrace the SDD scheme if it is
clear that the prices of these services will not go up. In this respect, the review of EU
Regulation 25602 will extend its scope from credit transfers and card payments to include
direct debits. Thus, the price of making a cross-border direct debit will not exceed that of
making a national direct debit. Increasing the national prices would clearly be against the
spirit of the review and would severely affect banks' reputations and credibility in the eyes of
their customers.
Costs and prices are not only a matter of concern in the customer-to-bank domain, but also
in the bank-to-bank domain. The multilateral interchange fee for the SDD has proven to be a
controversial issue. To encourage the market to move ahead, the European Commission and
the European Central Bank have proposed an interim solution. The objective of the interim
solution is to have, right from the start, a level playing-field in place for the both the SDD
scheme and the national, legacy direct debit schemes.
Allowing a properly justified multilateral interchange fee (MIF) for cross-border SDDs during
an interim phase would help to get the engine running. At national level, the existing legacy
MIF could remain in place and be applied to both legacy direct debits and SDDs. Any
changes to the legacy MIF should be applicable to the SDD scheme, too. Given that most
direct debits will initially still be conducted at the national level, the vast majority of direct
debits would thus be treated in the same manner. Customers, in particular, creditors, would
not need to be afraid of price increases.
In the long term, an alternative compensation model for SDD will have to be devised, as it is
understood that the transaction-based MIF will have to be phased out for both the SDD and
for legacy direct debits at both national and cross-border levels.
Different models can be conceived or are already in use for covering costs and providing
incentives for those involved in offering and using direct debits. If this compensation is based
on a proper calculation and methodology, it should also be acceptable to the competition
authorities.
Unfortunately, public perception of the problems faced by the SDD has deflected attention
away from the considerable achievement that the design of SEPA Direct Debit represents.
For the first time, customers will have access to a direct debit instrument that can be used
not only at the national level, but also on a pan-European level. Banks, CSMs (clearing and
settlement mechanisms) and IT providers have launched pilot projects for the SEPA Direct
Debit, and I am convinced that SDD will bring great benefits to its users in 2009.
Do you SEPA for cards?
The SEPA for Cards scheme started officially on 1 January 2008. However, although several
individual card schemes have adapted their rules to SEPA requirements, SEPA for Cards is
difficult to perceive and is even invisible to merchants and cardholders. This is mainly owing
to the fact that the EPC did not create a scheme for card payments, but rather a framework,
which owing to its more general nature, leaves some room for interpretation.
The Eurosystem has repeatedly voiced its expectation that the banking industry will set up at
least one additional European card scheme. At the moment, I know that several projects are
underway on one or more European card schemes, and I hope that they will soon release
their prototypes to the public. For the interlinking of existing schemes, a degree of
determination is required to move beyond an interim solution towards a long-term merging of
the schemes.
As with SEPA Direct Debit, the main obstacle to the work towards a European card solution
seems to be the gridlock regarding the future of the multilateral interchange fee.
To bring SEPA for Cards to fruition, it is necessary to surmount these obstacles, as national
card schemes are at risk of extinction, and competition might decrease to a duopoly of
international schemes with similar business models.
Again, discussion of these obstacles should not divert attention away from the great benefits
that SEPA for Cards will bring to banks, merchants and cardholders. Better security
standards, more choice and higher acceptance levels will be an incentive to increase card
usage which, in turn, also has the potential to lower cash usage, which can be quite costly for
banks and for society as a whole.
Who drives SEPA?
Having discussed what "to SEPA" means, let me turn to the question of who is in the driving
seat of the SEPA process. The creation of SEPA is a major European policy objective for the
European Commission and the Eurosystem. Thus, we are closely monitoring the
developments, assessing the state of preparation and providing guidance to the market
where necessary. Here, I refer back to the guidance we recently gave in the SDD dossier.
Also, in the upcoming weeks, we will have a further exchange of views on the possibility and
necessity of a migration end-date for the SCT and the SDD.
Notwithstanding the aforementioned political objective, I wish to emphasise that the
establishment of SEPA is a market-driven project. It is up to the banks to win over their
customers and convince them through marketable and user-friendly SEPA products and
services. Likewise, service providers to banks, such as clearing and settlement
infrastructures, and information and communication technology suppliers are expected to
drive SEPA. One of the organisers of this Summit, SIA-SSB, has underlined its commitment
to the SEPA project. It is one of the first CSMs to have published its self-assessment against
the Eurosystem's Terms of reference for the SEPA-compliance of retail payment
infrastructures. I expect others to soon follow suit.
Who will "go SEPA"?
The expectation is for SEPA to be more than a policy vision. It should address the needs of
all users of payment services, irrespective of whether they are corporates, SMEs, merchants,
public administrations or retail customers. However, in order to reap the benefits of SEPA,
users need to "go SEPA". By "going SEPA", I mean be ready to change: change habits,
change national practices, even change focus, if necessary.
For corporates, SEPA is expected to enable bank relationships and account structures to be
rationalised. A centralised treasury, better liquidity management and optimised payment
processing will be made possible. Even for smaller, mainly nationally-oriented corporates,
SEPA is expected to provide benefits as competition in the banking sector will increase,
leading to a broader range of banks and banking services to choose from. However, in order
to realise these benefits, corporates may have to adapt their customer-to-bank interfaces and
internal processes to SEPA standards. The direct cost of making these adaptations might be
considerable. Another reason for the reluctance to "go SEPA" that I touched upon earlier is
the difficulty of obtaining the IBAN and BIC information of business partners and clients.
Public administrations, i.e. tax authorities, customs and social security systems, initiate and
receive large volumes of payments for salaries, social benefits, taxes, pensions, etc. As
political actors, it is essential that public administrations "go SEPA". I understand that there is
quite some frustration on the part of the market regarding the lack of operational involvement
of public administrations to date. Yet there are countries where public administrations do
participate closely in SEPA implementation structures and actively promote SEPA, for
example through the mass distribution of information on SEPA in letters regarding taxation or
the provision of dedicated web pages explaining SEPA to citizens. This is what I understand
by "going SEPA".
Will SEPA keep going?
At the moment, SEPA is at a crossroads. Contention over sticky issues, such as the
interchange fees for card payments and the SDD, has the potential to stall progress in other
areas of the project. Waiting for a final verdict and insisting on positions that will not be
sustainable will lead the project up a dead-end street. SEPA will only get up and running if
appropriate action is taken in a timely manner. Before I conclude, let me mention three
crucial action points:
•
a migration end-date for SCT and SDD;
•
communication; and
•
eSEPA.
Migration end-date for SCT and SDD
For SEPA to be ultimately successful, it is important to have a schedule for replacing the
national payment instruments with SEPA payment instruments. We all know that it is
inefficient and costly if two schemes continue to run in parallel for a prolonged period of time.
Dual processing will not generate the economies of scale that SEPA is capable of delivering
and will hinder stakeholders in fully reaping its benefits. Maintaining national instruments
means that fragmentation along national borders will be preserved.
Continued national fragmentation will prevent the opening of the European retail market to
pan-European competition. Hence, the focus in the debate on a migration end-date for SCT
and SDD from a competition authorities' point of view should not be on the setting of an
enddate, but on the consequences if no end-date is set. Currently, different options for a
migration end-date are being discussed. A migration end-date, whether it is staggered by
individual instrument or common to both the SCT and the SDD, may be achieved through
self-regulation by the banks or through regulation by the authorities. Banks and regulation
authorities will discuss what is the best way forward. The migration end-date(s) should be
communicated in early 2009.
Communication
The public at large still knows very little about SEPA and its advantages. Yet, users need to
know more about SEPA, SEPA instruments and the different possibilities that exist to add
features to core schemes so that they fulfil specific needs. In short, information about SEPA
needs to be communicated more effectively to users: SEPA must be "sold" to users.
Continuous and increased efforts are called for to explain the changes and advantages that
SEPA will bring.
It is up to the banking industry to provide more information to customers and to convince
them with concrete, marketable and high-quality offers. Banks have direct contact with their
customers and are best placed to inform them. Naturally, public authorities should also play a
role in disseminating information and lead by example by actually using SEPA products.
However, it is crucial for banks to effectively communicate what SEPA is about to users.
eSEPA
SEPA does not stop at the development and implementation of the core SEPA payment
schemes. In order to ensure a competitive, forward-looking and innovative SEPA, it is
necessary to develop Additional Optional Services (AOS) that add features to the core SEPA
payment schemes. Designing and offering payment services for specific contexts and
channels will allow customers to realise cost-savings, reduce their risk and save liquidity. To
be concrete, this is about priority payments, e-invoicing and e-reconciliation, mobile
payments or payments at online merchants. Studies have shown that e-services promise
substantial economic benefits both on the demand and the supply side. Thus, I expect that,
in the future, this International Payments Summit will change its slogan from "Do you SEPA?"
to "Do you eSEPA?"
Conclusion
I am convinced that SEPA is more than just a passing fad. It acts as an engine for creating a
more integrated retail payments market in Europe, enabling competition and innovation, and
making retail payments in general more efficient, safer and easier for users. Let's keep it
running, let's SEPA!