Gertrude Tumpel-Gugerell: The future of cards and payments - SEPA for
cards
Speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European
Central Bank, at the IEA & Marketforce's Inaugural Conference on "The future of cards and
payments", London, 2 July 2008.
* * *
Ladies and gentlemen,
You may ask why a central banker is reflecting about cards. Isn't monetary policy sufficiently
challenging these days?
Let me give you three explanations for this:
First, it's a great pleasure to speak before such distinguished audience. And it's certainly
always a pleasure to be in London. But I realize that this explanation may not suffice.
Second, for central bankers efficient financial markets are crucial as they are a prerequisite
for a smooth transmission of monetary policy. In this regard, keeping fragmented markets in
the euro zone would not only mean lost opportunities but also less effective monetary policy.
And third, in the Maastricht Treaty in 1993, European customers were promised a single
market - also for financial services. Retail banking has still some way to go in this regard and
the cards market is one specific example for this.
What is the ECB's role in the SEPA project?
Let me emphasise that - besides the conduct of monetary policy - one of the key tasks
established by the EU Treaty for the Eurosystem is to promote the smooth operation of
payment systems. Moreover, the Lisbon Agenda calls for the removal of technical, legal and
commercial barriers also in financial markets. For the area of payments this means greater
standardisation and harmonisation promoting competition and fostering an more efficient
allocation of resources. SEPA - the project to make all euro payments domestic payments is
a great leap forward in that direction - common technical standards, a common legal
framework - the Payment Services Directive (PSD) - and opening the access to all systems
and providers will change the landscape as the MIFID is changing the landscape for the
securities business.
What can the ECB do in practice to support it?
While the EPC, the European Payments Council, is in the driving seat and the European
Commission can provide legal framework for payments and pressure for more competition to
keep the momentum, the ECB's role is to analyse the issues at stake, offer a platform for
debate discussion and to convince audiences of the advantages of a single market for
payments - and this is the reason why I am here today.
Why is SEPA relevant for the UK?
SEPA offers better and broader services to the euro area financial services market from
which anyone benefits that makes and receives payments in euro. The UK has achieved a
lot with "faster payments" and is a perfect example for using cards intensively. It is obvious,
however, that one country's market can be transformed and harmonized quicker than 15
countries with different customers and payment traditions. But let me emphasize that all the
achievements of the SEPA project - and those are and will be many - will create benefits for
the market outside the euro area as well (standardisation and consolidation).
What are the benefits of SEPA?
Let me very briefly quote a few studies about the benefits and the great potential of SEPA.
According to the European Commission, the potential benefit from SEPA payments could be
more than 100 bn. over the next six years and additional benefits can arise if SEPA will be
used as platform for electronic invoicing.1 There is also empirical evidence2 that
harmonisation and standardisation of retail payment instruments across the euro area are
likely to create economies of scale in payment services in Europe. Significant cost efficiency
gains could be realised if payment processing is consolidated across borders. In particular, a
doubling of payment volume may raise total costs with only 22 percent3 which was
demonstrated by one of the first cross-border mergers in this field.
According to an ECB study, banks may significantly reduce their costs, but will face
increased competition.4 SEPA will also offer banks an opportunity to market new,
valueadded services related to the payment chain.
Overall, SEPA offers great opportunities but SEPA migration is a challenge - for banks and
for their customers.
Where does the SEPA project currently stand?
SEPA was launched end-January 2008; six months after the launch, some changes are
already visible. The number of SEPA credit transfers is increasing though still low given that
we are in a piloting phase. Work in the other fields is advancing well. There are some
concerns on the launch of the SEPA direct debit but I believe that the market will live up to its
commitments and solutions to all remaining issues will be found, especially now since the
EPC has agreed on some improvements in the SEPA Direct Debit schemes to meet
endusers' demands. The ECB is convinced that the SDD plays a crucial part in realising the
SEPA and will contribute to making it a successful project. The timely transposition of the
PSD into national law and clarity on the interchange fee for SDD from a competition authority
perspective, are crucial to address most of the issues. The remaining problems regarding
direct debits should be solvable, be it via upgrading the SDD Rulebooks or via additional
optional services offered by banks.
But let's be clear: stalling does not lead anywhere - it's a loss of time and makes competitors
who have started to act to be even stronger. Running parallel systems is very costly.
Therefore a clear vision and a clear commitment is needed for the realisation of
harmonisation and standardisation in retail payments across Europe.
How do cards and SEPA go together?
The SEPA project includes a particular challenge. Card payments represent an essential part
of retail payments, which make the standardistation and the creation of card schemes are
important element of the SEPA project. Over the last few years, volumes of cashless
payments in the European Union (EU27) have increased by 7% per year.5 In Europe card
payments achieved the highest volume growth and have become the most widely used
payment instrument after banknotes and coins, with over 25 billion payments per year. There
is a lot to win in the field of cards.
A bird's eye view on the European card market, however, shows very fragmented national
markets, especially regarding card schemes - even though for processors, integration has
started. The market is divided into a number of national schemes and international schemes.
But let me just add that the UK belongs to the few countries,6 where one international
scheme offers also the services of a national scheme.
What are the benefits of SEPA for card users?
SEPA for cards means: standardisation, integration instead of current fragmentation and
more competition, more choice for consumers (which schemes to use), more choice for
banks (which schemes to issue and to acquire and which processors to use), more choice for
retailers (which schemes to accept) and more choice for infrastructures (which schemes to
process). On top of this, a more efficient cards market will create incentives not to use cash
as often - this is particularly important for consumers and banks. The potential benefit of
cards replacing cash as a means of payment is considerable. For consumers, using cards
instead of cash will considerably reduce transaction costs which are known to economists as
so-called "shoe-leather-costs".
For banks, an increased use of cards would make cash handling less costly. For example,
very often cash is withdrawn on Friday, to be used at merchants on Saturday and to be
returned by them to the banks on Monday. According to a recent survey,7 the use of cards
instead of cash is one of the most underestimated profitability drivers. An important step for
banks, payment institutions and scheme managers towards an increased use of cards is to
pursue the growth opportunities that this field offers.
A big question, however, remains what overall impact SEPA will have on card payments.
Even though the benefits are very clear, these can only be fully reaped if the card market is a
competitive market with some variety and choice, instead of being limited to only a few
players with a strong position in the market for card schemes.
Would SEPA integration together with a strong position of current players in the card market
mean that national schemes disappear without trace? This cannot be the case.
Nonetheless, even if national card schemes will continue to exist, the integration of the
European cards market will certainly bring changes. The opening of the national markets
implies inevitably the potential for mergers, acquisitions, and sell-offs. More and more banks
will be European banks, more and more processors will be European processors and even
retailers will have and have already European wide presence.
Will the European card market seize the opportunity of change to construct something to its
benefit? Or will it stick to an agreement which will most likely be challenged sooner or later?
What are current initiatives for an additional card scheme and what are the benefits?
Let me mention several card scheme initiatives which have the potential to make competition
in the European cards market livelier. EAPS follows an interlinking model of national card
schemes and a number of countries and a large number of (savings) banks are participating.
The Monnet initiative investigates the creation of a new scheme and is - for the time being -
driven by German and French banks. Payfair is a private initiative.
The ECB welcomes all initiatives and praises the effort and dynamism of the driving entities.
But I should emphasise that the ECB is neutral towards these initiatives and towards any
new initiative that may appear. Some features of the existing initiatives are positive - some
nonetheless would need further enhancement - as, for example, a clear commitment of
EAPS for a future integration and the involvement of more euro area countries in the Monnet
project, and if not now than definitely in a future phase of the project.
All these initiatives follow different concepts and models adding to choice and innovation
which characterises a dynamic market.
Let's assume for the moment an additional scheme will emerge: first, this will increase
competition, especially if the new scheme follows an economical model without a strong card
brand preponderance and without the features offered by international credit cards, such
instant free credit, miles, bonuses, and insurance. This will naturally imply downward
pressure on costs and fees, also for banks.
Second, an additional scheme will offer an additional opportunity to substitute cash by cards
through wider acceptance, especially if the new scheme follows a cost-efficient model.
Looking forward, as a first step, an additional card scheme could start as a basic offering,
before becoming a more sophisticated model at a later stage. Whether the scheme is debit
or credit and the various additional offerings to cardholders and merchants should be an
issue of each issuing and acquiring bank. Overall, I am however convinced that the benefits
of an additional card scheme clearly outweigh the costs and I can reassure you that the
continuation of any initiative in the way I outlined will continue to have our support.
SEPA for cards: implementation challenges
Certainly, on the way towards new schemes - whatever their origin is - and the realisation of
SEPA for cards, some challenges persist. Knowing that examples of scheme rules already
exist and that the EPC is working on the card standards, the most challenging phase for the
creation of a new scheme seems to achieve a clear commitment and co-ordination among
members. In this context it is worthwhile to mention that it is not only technical and business
model differences which have to be overcome. SEPA is a European integration project, as is
SEPA for cards. As a member of a European multi-cultural organisation I know of the
importance not to overlook the cultural dimension either. An open mind and clear objectives
are key in this context. With regards to the additional European card scheme, all participating
parties should clearly recognise the objective of building a basic service, as a first step which
can be further enriched by each individual issuer and acquirer. Let me reassure you that I am
confident that all remaining challenges can be addressed and overcome and creative
initiatives will be rewarded by success in the market.
In this context, I would also like to underline the importance of communication. In this regard,
I very much welcome the clarifications provided by the EPC on the SEPA Cards Framework
published last week on 26 June. Proper communication is crucial for the success of SEPA as
all stakeholders need to be aware about SEPA and the benefits it will bring to them. This
clarification on the SEPA Cards Framework brings more clarity on what SEPA represents for
the payment cards in Europe. I expect that this is only a first step of the banking industry in
enforcing their communication vis-à-vis their users and that the work of the banking industry
on this crucial projects get more visibility in the months to come. The ECB continues to stand
ready to support the banking industry in this task.
Closing remarks
To conclude - SEPA is a far reaching initiative. It will reshape the market for retail payments
in Europe. SEPA is a promise - stalling does not lead anywhere and operating many parallel
systems is costly. SEPA for cards means decision for cross border solutions, new initiatives
and creative ways forward are needed. SEPA means changes. Our host country has proven:
it can be done; Belgium with the public sector in the lead is proving it can be done and other
countries will follow. This is the reason why a central banker remains interested in the project
and I hope any of you will be too.