[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 1.12.2005

SEC(2005) 1535

COMMISSION STAFF WORKING DOCUMENT

Annex to the proposal for a Directive of the European Parliament and of the Council on Payment Services in the Internal Market IMPACT ASSESSMENT {COM(2005) 603 final}

Disclaimer This impact assessment report commits only the Commission's services involved in its preparation and the text is prepared as a basis for comment and does not prejudge the final form of any decision to be taken by the Commission.

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY 5

2. PROCEDURAL ISSUES AND CONSULTATION OF STAKEHOLDERS 12

2.1. Consultation methods, collection and use of expertise 12

2.2. Consultation of stakeholders, main sectors targeted 12

2.3. Results of the consultation and how they have been taken into account 13

3. PROBLEM DEFINITION 17

3.1. High cost of the payment system due to inefficient use of payment services 17

3.2. Fragmentation of EU payment infrastructures and services 19

3.3. Large differences in the efficiency of payment services in the Single Market 21

3.4. Lack of efficient competition and a level playing field in the payments market 23

3.5. Fragmented legal framework for payment services 23

4. RELEVANCE FOR THE EU 25

5. COMMISSION´S OBJECTIVES 26

6. MAIN POLICY OPTIONS TO REACH THE OBJECTIVES 29

6.1. Type of policy intervention at EU level to create a Single Payment Market 29

6.2. Type of legal instrument 31

6.3. Scope of the regulatory intervention 31

7. EXPECTED IMPACTS FROM THE DIFFERENT OPTIONS IDENTIFIED 33

7.1. Impacts of the alternative types of policy intervention 33

7.2. Impacts of the choice of legal instrument 36

7.3. Impact of the potential scope of the regulatory intervention 38

7.3.1. Market access requirements for payment service providers 39

7.3.2. Transparency of conditions and customer information requirements 44

7.3.3. Rights and obligations of users and providers 47

8. COMPARISON OF THE OPTIONS IDENTIFIED 51

8.1. Reasons for the proposed intervention 51

8.1.1. Type of policy intervention 51

8.1.2. Type of legal instrument and level of harmonisation 53

8.1.3. Scope of the regulatory intervention 54

8.2. Cost, Benefit and Risk analysis of the proposed regulatory intervention 58

9. MONITORING AND EVALUATION OF RESULTS 60

ANNEX 1: PROBLEM DEFINITION 63

ANNEX 2: RISKS AND COST ANALYSIS OF THE PROBLEMS IDENTIFIED 78

ANNEX 3: THE SEPA PROJECT 81

ANNEX 4: ISSUES OUTSIDE THE SCOPE OF THE REGULATORY INTERVENTION 85

ANNEX 5: PRUDENTIAL REQUIREMENTS 88

ANNEX 6: CORE RIGHTS AND OBLIGATIONS OF PROVIDERS AND USERS 100

ANNEX 7: DISTRIBUTION OF IMPACTS AMONG STAKEHOLDERS AND COST-BENEFIT ANALYSIS 110

EXECUTIVE SUMMARY

This impact assessment has been conducted by the Commission's services in order to prepare the proposal for a Directive on Payment Services. It formed the basis for discussion and input from a wide range of external stakeholders and deepened the analysis of likely social and economic impacts. It is aimed at meeting the specific commitments of the Commission under the Lisbon and Sustainable Development Strategies by keeping EU intervention as simple as possible. Finally, it explains why a particular action has been chosen and why the proposed response is an appropriate choice. This impact assessment report does not prejudge the final form of any decision to be taken by the Commission.

Commission’s consultation with stakeholders, analysis and fact finding studies revealed five core problem areas in the EU payment services market:

1. High cost of the payment system to the economy due to inefficient use

The payment system allows for the successful conclusion of 231 billion payments per year in the EU representing a total value of EUR 52 trillion[1]. Studies estimate the cost impact of the payment system to society to as much as 2–3 % of GDP. Cash is the main cost driver and accounts for as much as 60–70 % of the total cost of the payment system. Instead of efficient electronic payment services, for which the costs range between a few euro cents the cost per transaction when paid for in cash ranges between EUR 0.30 to EUR 0.55. The sectors most affected by the high cost of cash usage are the payments industry and merchants e.g. the payments industry is often cross-subsidising cash operations with revenues form electronic payments and account management fees.

2. Deficiencies in EU payment infrastructures and services

The infrastructure for payments in the EU is predominantly national, based on national markets, user habits and national currencies. These national payment systems have not yet adapted to fit the Single Market. They are not geared to handle cross-border payments as efficiently as national ones.

The few existing cross-border payment systems suffer from a lack of critical mass and operate with much higher unit costs than their national equivalents. Cross-border payments amount to only 3 % of total transactions.

Common technical standards and business rules are missing to allow for competition between national payments systems and cross-border payment systems. The lack of standards also prevents consolidation of payment systems and the redundancy of systems creates higher costs for providers, users and the economy.

3. Large differences in the efficiency of payment services in the Single Market

Despite the fact that the Single Market exists since 1992, the Internal Market for payment services is hugely fragmented. The introduction of euro in 1999 has provided for a market for euro cash payments but the integration of the market for electronic payments has only started. This is evident in the huge differences in efficiency and prices for electronic payments between Member States.

Whilst it is difficult to compare efficiencies of national markets, the figures that do exist show substantial differences. The price of providing basic payment services related to a bank account varies between Member States by a factor of 1:8[2], e.g. from EUR 34 a year for the average customer in the Netherlands to EUR 252 in Italy. It is not only on price that large differences are seen between Member States. For example in some Member States payments are executed in real time or same day, but in others three days or even longer is the rule.

4. Lack of efficient competition and a level playing field in the payments market

The payment industry is a network industry and a certain degree of co-operation between competitors is necessary (e.g. to establish common standards) in order for the system to function efficiently. This cooperation should be limited to clear tasks and go no further than is absolutely necessary.

However, the Commission received many complaints from new market entrants from the non-bank sector, about substantial barriers to entry to the payments market and an unlevel playing field. New players are often faced with difficulties when trying to join existing national payment systems and infrastructures, which are a prerequisite in order to be able to compete.

The payments sector has been subject to several industry wide reports and investigations about uncompetitive governance structures and anti-competitive market practices by competition authorities not only in the EU, but also in other jurisdictions. Finally, this has led the Commission to open a sectoral enquiry of competition in the payment sector in 2005.

5. Fragmented legal framework for payment services

Very often efficient national payment services and systems are not available on a cross-border basis due to legal and technical barriers. For instance direct debits which are a common and cost-efficient service to pay for utilities are not available for payments in different countries. Similarly most of the popular and cheap national direct debit cards are not operating across borders.

As illustrated by this fundamental problems the current state of the EU payments market is unsatisfactory. Without an efficient, well-functioning and integrated payments market the full potential of the Internal Market remains unexploited.

Therefore the Commission’s established the following objectives for its policy intervention:

The Commission’s ultimate objective is to integrate national payment markets and to create a Single Payment Market where improved economies of scale and competition would help to make it more efficient and reduce the total cost of the payment system to society.

The Commissions’ initiative focuses on electronic payments as an alternative to expensive cash, as electronic payments are recognised to be more cost-efficient and stimulate consumer spending and economic growth. Modern economies are based on an intricate web of payments. Payments allow economic actors (business, households and governments) to complete a commercial transaction face to face or at distance. Payment systems are based on professionally managed infrastructures. Efficient electronic payment systems for remote transactions are particularly important in order to exploit the maximum potential of the Internal Market for goods and services.

The intermediate objectives to reach the overall objective of the Commission’s policy intervention are:

6. Enhanced competition between national payment markets by opening up markets and ensuring a level playing field,

7. Increased market transparency for both providers and users, and

8. Standardised rights and obligations of providers and users of payment service in the EU, with strong emphasis on a high level of consumer protection.

How will the proposed policy intervention address the identified problem areas and contribute to achieving the set objectives:

The Commission held several rounds of public consultations which helped to identify problem areas and policy options to address those barriers that could potentially create an obstacle for a Single Payments Market and might therefore be covered by the Commission’s initiative.

9. Reasons for and impacts of the type of policy intervention and choice of legal instrument

Based on the results of the consultation the Commission concluded that out of the five problem areas identified, areas (1), (2), and (3) are best addressed by market-led initiatives, while regulatory intervention would mainly be needed in area (4) and (5) in order to reach the ultimate objective of a Single Payment Market.

- Role of the public sector

Consequently the Commission’s proposal will focus on the removal of legal and technical barriers and provide the market with a legal framework for consolidation of the historically fragmented European payments landscape. The proposed scope, legal instrument and full harmonisation approach are aimed at responding to the needs for subsidiarity and proportionality.

Harmonisation of the legal framework can better be effected by EU legislation than by national legislation. EU legislation will rationalise and simplify the current ‘patchwork’ of national rules for payments and provide the market with a single set of consistent and coherent legal rules. At this moment the legal landscape is fragmented. Each Member State has its own set of national rules governing various and different aspects of payments; prudential conditions for providers to enter the market; transparency conditions for users; rights and obligations of users and providers of payment services. Studies conducted by the Commission and consultations with industry, users and experts showed that the differences in national legal frameworks were an important impediment to the development of a Single Payment Market.

- Role of the industry and self-regulation

The Commissions’ regulatory intervention is based on a strong role for self-regulation. The current proposal will only together with the successful completion of the Single Euro Payments Area (SEPA)[3] achieve the desired objectives of a Single Payment Market resulting in economic savings to payments industry and users.

Banking industry made a commitment to develop these common technical and commercial standards in the SEPA roadmap. In 2002 the European banking industry has set up the European Payment Council in order to create SEPA consisting of the delivery of common standards and services for euro payments by 2010.

Based on the free provision of services and common EU standards for technical and commercial interoperability of payment schemes and infrastructures, providers will have the chance to compete in a Single Payment Market. Over the long term, common European payment standards would provide the basis for consolidation and rationalisation, eliminating the duplication of investments for maintaining different systems[4], reducing operational costs for providers and businesses.

SEPA is certainly the most important integration initiative of payment markets and infrastructures in the near future and will focus on euro payments, where the expected economic gains are most substantial. However, it is expected to serve as role model and benchmark also for non-euro payment systems and will inevitably, through the enlargement of the euro zone, cover most of the Internal Market. The proposed legal framework will facilitate this initiative and provide the framework for the integration of the whole EU market.

10. Reasons for and impacts of the chosen scope of policy intervention

Against the above background the Commission undertook to deliver the current proposal for a Directive, focussing on three key areas for EU legislation which were identified during stakeholder consultation:

- Market access and prudential rules

The first building block of the Directive for a new legal framework is the harmonisation of market access requirements for non-credit institution payment service providers and introduction of a specific license for payment institutions.

An assessment of the potential social and economic impacts of keeping the differentiation of market access conditions between Member States found that the unlevel playing field is detrimental to the functioning of the Single Market and creates substantial barriers to market entry. The Single Market principle of the free provision of services, including payment services is currently insufficiently realised in the EU. Fragmented market access requirements distort competition and lead to higher prices for users and high profits for dominating providers in national markets and lower levels of innovation.

- Transparency and information requirements

The second building block of the new legal framework is aimed at overcoming the fragmentation effect of divergent national and EU rules on information requirements which constitute currently an impediment to cross-border service provision a high level of consumer information and an efficient EU payment services market.

The proposed package of transparency and information requirements should enhance transparency and thereby improve user confidence, facilitate user choice of the most appropriate payment service and eliminate the fragmentary effect of divergent national rules permitting the reaping of significant economic benefits of market integration for both users and providers. It is also essential to achieve this transparency and better information if another of the fundamental objectives of the policy intervention is to be fulfilled – improving competition by giving users transparency and choice.

- Rights and obligations of users and providers

The third building block of the new legal framework will be formed by harmonised core rights and obligations of users and providers in the interests of certainty and efficiency. In the identified areas the impact analysis showed that EU legislation would be more effective than self regulation or national legislations to achieve the objectives and bring about the desired efficiency gains.

The starting point for the assessment of social and economic impacts of these alternatives was the need to enhance the trust of users in remote or electronic payments in order to push back the use of cash in particular removal of obstacles (caused by mistrust) to the further use of cheap and efficient means of payments. Another important criterion was to give legal certainty to providers so that they could set up cost-efficient, fully automated straight-through processing of payment services without fear that efficient operation would be hampered by legal disputes.

However it was particularly for these rules that input from stakeholders showed that it would be disproportionate to apply them universally to all payments or all users. Therefore in order to avoid unwarranted costs for a limited number of rules, adjustments were made where a foreign currency was involved, for corporate users or where one of the payment service providers was located outside the EU. These adjustments were kept to a minimum in order to preserve the level playing field. At the same time the underlying objectives were preserved and the regulatory burden kept to a minimum.

The estimates of the potential costs and benefits of the establishment of a Single Payment Market yield a positive result:

- The overall social cost of payment services could be reduced if the share of electronic payments would be increased and the use of expensive cash reduced. Best practice shows that modernisation of payment systems and increased use of the most cost-effective services[5] can half the average cost of producing payments over a period shorter than ten years. If all countries would reduce the use of cash, for example by using debit cards up to the level of the three countries with the lowest share of cash payments, this would increase banks profits by EUR 5.3 billion[6].

- Integration of the European payments market and infrastructures will strengthen competitiveness of the financial sector and offers a unique opportunity for banks to reduce their operational costs. Cost Income Ratio of the banks for payments stands at an unfavourable 90 % – a ratio that worsens the overall Cost Income Ratios of the banks from 55 to 64 %. Payments on average represent 24 % of banking revenues and 34 % of the operating costs of the European banks. Improved efficiency and consolidation of redundant payment infrastructures could positively impact the competitiveness of the banks.

- Through further product standardization and consolidation in the processing of payment transactions economies of scale can be maximised and efficiency of payment systems improved . For example if unit cost levels were to decrease to 20 percent above the best practice level in Europe, this would generate EUR 10 billion additional profits overall. Or if the costs of producing payment service could be reduced to the levels of the most efficient countries huge savings could be made, e.g. the cost per transfer in Belgium are around 20 cent while the cost in Germany are as much as 60 cent.

- Tangible benefits for businesses and their competitive position at large could be created by integrating electronic payments into the electronic business processes (e.g. e-invoicing) of enterprises . If banks would offer EU-wide, standardised, faster and more economic end-to-end automatable payments, conservative estimates project savings of EUR 50–100 billion per year for businesses.

- Free provision of services in a Single Payment Market and increased competition would allow retailers to use the services of the most competitive providers and benefit from real cross-border card acquiring, e.g. merchants would pay 20 times less for debit card acquiring and 9 times less for credit card acquiring (equivalent to savings of 4–5 % of sales value of each transaction)[7].

- A Single Payment Market facilitates the removal of current differences between national payment infrastructures and convergence of price levels , creating the potential for enormous savings and a seamless payment experience for consumers and businesses. If the current price differences, of a factor 1:8[8] in Member States converged around the present European average, users in more expensive countries would gain substantially, e.g. Italian and Spanish users would see savings of respectively EUR 5.4 billion and EUR 1.3 billion[9].

PROCEDURAL ISSUES AND CONSULTATION OF STAKEHOLDERS

Gathering opinions and information from interested parties is an essential part of the Commissions’ policy-development process.

Consultation methods, collection and use of expertise

From 2000–2002 the Commission prepared[10] a Communication and two working documents[11] and seven surveys for a public consultation on a possible legal framework for payments and to assess the current state of the market in Member States. In 2003 the Commission prepared a Communication[12] for wide public consultation on the possible scope and content of a new legal framework. The final proposal was prepared in 2004–2005 in intensive collaboration with the two permanent expert groups and consultation with stakeholders and based on six working documents of the Commission services containing the possible draft provisions. Stakeholders and experts have also been involved in the preparation of the impact assessment report and have been consulted on a draft prepared in February 2005.

Consultation of stakeholders, main sectors targeted

The Commission has consulted stakeholders from a broad variety of sectors and professions and covering the geographical scope of the EU–25, throughout the regulatory process in line with its commitments under the EC Treaty[13]. The Commission drew upon the expertise of two permanent expert groups[14] and numerous bilateral meetings. From 2002–2005 the Commission has consulted stakeholders, in particular the payments industry, on all working documents for the preparation of this Directive. The Commission has benefited significantly from the input given by stakeholders. The responses and how they have been taken into account are presented below.

The sectors consulted are basically the following: payments industry (banks, infrastructure providers e.g. network, processing, clearing and settlement providers etc), banking associations (EU level as well as nationally) and the European Payments Council, payment cards organisations, e-money providers, mobile payment and telecom providers, associations (Eurocommerce), industry general, corporate treasurers (EACT, TWIST), SME organisation (UAPME) and national and European consumer associations (BEUC, FIN-USE), payments experts, consulting firms, lawyer firms, universities.

Results of the consultation and how they have been taken into account

In spring 2002, the Commission started work on a common legal framework for payment services by taking stock of all the problems with regard to the EU payments legislation[15] and invited for comments from all interested parties. This working document aimed at launching a wide and open discussion on what should be done to further enhance the functioning of the Single Payment Market.

All respondents[16] saw a need to encompass possible industry self-regulation by regulatory measures on EU level in order to achieve a Single Payment Market. Views varied, however, on the scope and degree of the legal measures required. As a general rule it was deemed that new legislative provisions should be limited to those necessary to ensure a well-functioning use of payment services throughout the European Union.

As policy objectives for the Single Payment Market the following ones were suggested: Security; reliability; efficiency; transparency; strengthening the position of the customer; and competition.

All respondents considered the objectives of rationalisation and consolidation of existing EU instruments to be desirable. The current legislation was regarded as fragmented, overlapping and even in some case contradictory. A future legal framework should update and draw together the various pieces of EU law into a coherent legal instrument. Consequently the Commission prepared an inventory of national legislation and practises on several of the issues raised[17].

In order to prepare structured analysis of market obstacles and legal barriers and to gather views and comments on adequate solutions the Commission published a Communication[18] in 2003. The subsequent consultation[19] clearly confirmed 21 obstacles and commented on weather they were best addressed by self-regulation or EU legislation.

Table 1: The Barriers identified in the communication |

Barriers to a Single Payment Market |

1.Right to provide payment services to the public |

2. Information requirements |

3.Non-resident accounts |

4.Value dates |

5.Portability of bank account numbers |

6.Customer mobility |

7.Evaluation of security of payment instruments and components |

8.Information on the originator of a payment (SRVII of FATF) |

9.Alternative dispute resolution |

10.Revocability of a payment order |

11.Right of refund in case of disputes in distance commerce |

12.Non-execution or defective execution |

13.Obligations of contractual parties related to unauthorised transactions |

14.The use of “OUR”, “BEN”, “SHARE” |

15.Execution times for credit transfers |

16.Direct debiting |

17.Removing barriers to cash circulation |

18.Data protection issues |

19.Digital signatures |

20.Security of the networks |

21.Breakdown of a payment network |

The early consultations were taken into account when formulating the general approach and the objectives for the project for a new legal framework for payments. From 2004–2005 the Commission consulted Member States experts and stakeholders on the legal and technical details of the proposal[20]. Commentators have generally been very supportive of all the major objectives of the project and have helped to fit the rules to the needs of industry and users:

Payments industry regards harmonisation of legal barriers in Member States legislation as being equally important with the development of common payment standards and services for the creation of a Single Payments Market. Legislative intervention should focus on issues concerning the relationship between provider and user and should leave it to self-regulation of industry to define the rules governing the relationship between providers. The scope of the regulatory intervention should be limited to removing the identified legal obstacles. Full harmonisation of these obstacles is of major importance to payments industry to prevent future fragmentation and provide them with the much needed legal certainty over the legal framework of the Single Payments Market. Industry would also prefer directly binding rules to a long transposition process.

During consultation on the detailed rules of the proposal industry provided valuable input to ensure that the rules fit to business practices and do not intervene in the well-functioning of existing systems. Industry fully supports the objectives and has approved of the technical quality of the rules of the proposal. However, some controversy exists on rules which are regarded as being too consumer protective, for example, the strict liability of providers for the correct execution of payments or the limit of EUR 150 for the loss of a payment card where the user has not acted fraudulently. Furthermore providers from the banking sector would prefer competition from non-bank competitors restricted and subjected to bank capital requirements, whereas hybrid and non-bank providers, which have been operating legally in some Member States, such as Telecom operators providing mobile payments, are concerned about overregulation in particular if capital charges are applied.

Consumers: Support the Commission’s initiative which is responding to the request for more transparency of payment services and which codifies core rights of users and providers concerning the key characteristics of efficient payment services. It also establishes the same high level of consumer protection without difference to the country of origin – objectives, which users did not find sufficiently realised by the self-regulatory initiatives of industry. Users would also be the main beneficiaries of efficient cross-border payment services and convergence of prices for payment services in the Internal Market. Though the proposal provides for some explicit exceptions to full harmonisation for national provisions which guarantee a higher level of efficiency and protection for users some reservations remain, concerning the disappearance of national consumer protection rules in favour of a harmonised framework.

Corporates/retailers: In general businesses have been very much in favour of the Commission initiative not only because they believe that the proposed legislation will create a Single Market for Payments also because it defines a benchmark for efficiency and opens the perspective for interoperable EU-wide payment services which businesses have been asking banks for a long time, without tangible results. Businesses expect huge savings from integration of payment systems and improved efficiency (estimated of savings from the implementation of a common standard for electronic invoicing and payment are in the area of EUR 50 billion. Currently businesses have huge costs (EUR 35–60/invoice) for processing an invoice manually. Full automation could reduce this cost by 70–90 % representing savings of EUR 25–50 per invoice). Corporates and retailers also expect a highly positive impact on competition through increased transparency, opening up of markets for new providers from the non-bank sector and more competitive services offers. Merchants, who have particularly complained about the low levels of competition in card acquiring expect to benefit from real cross-border acquiring and lower prices through increased competition.

The ECB and national central banks welcome the Commission’s initiative for a Single Payment Market also as a necessary step to facilitate effectiveness of self-regulation and the creation of SEPA by industry. The Eurosystem supports the harmonisation of core rights of providers and users but had reservations on EU-wide market access for non-bank providers even though this reflects the current market situation in a large number of MS. In particular the ECB criticises the proposed level of prudential requirements for payment institutions and the lack of capital requirements.

The Economic and Social Committee generally endorsed Commission’s initiative[21]. Views follow the positions of consumers and the payment industry in the Commission working groups which are reflected in the proposal.

Member States: All MS unanimously support the main objectives of creating a Single Payment Market and the means of establishing a new legal framework as formulated by the Commission. MS favoured a Directive over a directly binding legal instrument in order to harmonise existing legal obstacles in national legislation. MS support industry self-regulation to address problems in the ‘interbank[22]’ space such as the lack of EU-wide payment services and infrastructures. Regulation was deemed to be the appropriate means to overcome legal obstacles and necessary in areas where market failure seemed to have led to a mismatch between supply and demand side requirements and the lack of common standards leads to fragmentation and low levels of competition. A few Member States expressed reservations on full harmonisation of prudential rules for payment service providers[23] and certain liability rules (e.g. strict liability) which might interfere with existing civil law provisions in MS.

The European Parliament has indicated its strong support for the creation of a Single Payment Market for consumers and businesses. The European Parliament endorsed[24] the Commission’s Communication concerning a new legal framework for payments.

PROBLEM DEFINITION

This section provides the reader with a brief outline of the five main problem areas affecting the efficient function of the Single Payment Market. A more detailed discussion and background material on all five problem areas can be found in Annex 1: Problem definition .

High cost of the payment system due to inefficient use of payment services

The payment systems intrinsic value is to provide an economical and effective way for society to settle obligations for the purchase of goods and services.

Therefore the most relevant indicator to assess if the payment system fulfils its function properly is the macroeconomic cost of the payment system and efficiency of various payment services. Though, it is difficult to obtain comprehensive figures on the aggregated cost for the EU payment system estimates[25] range from 2–3 % of GDP. A poor result, compared with the best in class, e.g. Belgium, the Netherlands and Sweden, who are clear cost leaders with a payment system that costs society between 0.3–0.5 % of GDP or countries such as Norway which show the way to half the total cost of the payment system in a period not much longer than 10 years in a joint effort of regulators and industry.

The key question for policy makers is therefore how to provide a market framework that fosters efficiency of the payment system. For that it is important to understand the factors which influence the costs of the payment system.

A more detailed breakdown reveals that cash, above all, is the main cost driver and accounts for as much as 60–70 % of the total cost of the payment system, or in other words 2 % of GDP while use of cost-efficient self-service channels and fully electronic payments which have been widely adopted in particular in Nordic countries operate at much lower cost levels. The higher cost of cash is mainly due to the expensive infrastructure needed to distribute and recycle cash, though there are certainly ways to lower these costs, savings are limited by the need for manual handling. In contrast to this, electronic payments can pass trough the system with almost no manual intervention and the cost depends primarily on the level of development of such STP-payments[26], consolidation and efficiency of the particular electronic payment system.

If the total cost of the payment system is an aggregate of the cost of cash and electronic payment channels the question arises which factors determine the usage patterns for different payment services and could potentially reinforce the transitional process away from expensive cash to electronic payment services.

The two main factors found and well documented in studies[27] are:

11. the price of payment services for users

12. the ease of use of different services.

These studies show that cost-based pricing of payment services triggers customer behaviour and the right price signals can drive customers to select more efficient payment services rather than less efficient ones. When prices paid by users reflect the real cost value of the service, they provide an incentive for users to select services that meet their needs at the lowest possible private and social cost. This promotes the efficiency of the payment system.

Unfortunately, today awareness of users of the real costs of different payment services is limited. But sectors which are aware and bear an important share of the costs of cash, namely the banking industry and retailers are highly supportive of the efforts to reduce the percentage of cash and also stress the need to raise awareness of users of the real cost of cash and the more cost-efficient use of electronic payment services[28].

However, at present the EU market framework does not provide enough price transparency for users and a ‘level playing field’ for the efficient competition of payment services, several factors (legislation, public opposition to changes in the global price structure, cross-subsidisation and non-cost-based pricing) distort the economic selection process. Several studies[29] illustrate that price distortions in the payments market are leading to a situation where inefficient payment services (e.g., cash, cheques) are chosen by users at the expense of more efficient ones.

Substantial costs savings could be achieved from increasing the level of fully electronic payments and payments related processes (integrated electronic invoicing). Studies[30] show that 70 percent of the costs in the payments value chain can be addressed by a reduction of costs at the front end, i.e. the providers interface with the customer because the use of cash or paper-based payment services demands several steps of manual intervention.

The savings come from fully automated sending and receiving of invoices and payments. These and much higher cost savings for corporate customers and the public sector have been confirmed[31] and are stemming mainly from the fully automated handling of payments, reduced software, risk and interest costs and better cash flow position. Average costs for manual manipulation to invoice senders are about EUR 2–8 for each sent invoice and about EUR 25–50 for received invoices. In Nordic countries there are 1.2 billion business to consumers (b2c) invoices and 1 billion business to business (b2b) invoices sent every year, amounting to savings from automation of EUR 15 billion/year. In Europe there are roughly about 20 billion invoices. Estimates of corporate users on the savings which could be obtained from fully integrated electronic payments are in excess of EUR 50 billion/year.

Fragmentation of EU payment infrastructures and services

- Cause and effect of the current fragmentation of payment systems in the EU

Payment systems in the EU were originally created with the aim of meeting national requirements and based on national currencies. As payment systems evolved within national borders, most systems chose to operate on proprietary standards for the processing, clearing and settlement of credit transfers, direct debits and card payments. At a domestic level 97 % of the total payments volume is processed. In the past it was therefore sufficient to maintain a limited number of correspondent banking relationships or become a member in one cross-border payment system in order to deal with the low percentage of cross-border payments (currently 3 %). The current infrastructure for cross-border payments is mainly based on international payment schemes for cards or the EBA STEP2 clearing system for credit transfers. Taking this as a starting point, existing systems had no incentives/business case to invest in technical interoperability with other systems for these few cross-border transactions and consolidation on an infrastructure level between national and cross-border payment infrastructures has not made much progress.

Certainly it is a difficult task to eliminate the national differences in the information technology and commercial arrangements used by payment systems via an EU wide technical standard and respective scheme for technical and commercial interoperability. But the EU payments infrastructure remains highly fragmented as long as such standards are not put in place. Fragmentation complicates significantly the processing of cross-border payments relative to domestic transactions and creates barriers to the efficient delivery of payment services. Common standards are seen to facilitate consolidation of the historically fragmented European payments landscape, allow rationalisation of systems and infrastructures with the associated cost saving for industry and users.

Also the lack of common standards is a key barrier to competition between different national payment markets. Fragmentation of technical standards and proprietary non-interoperable systems prevent providers from competing on the service level of products offered to users and are not consistent with a Single Payment Market.

The current fragmentation of payment systems across Europe has also negative consequences for users such as limited availability of cross-border payment services, high costs, unreliability and lock-in in proprietary technological solutions and markets.

The establishment of the European Monetary Union and the introduction of euro have created the potential for huge savings. Development of an efficient EU payment market could help to overcome the current fragmentation. An efficient payment infrastructure which enables the quick and smooth flow of payments at a low cost in the whole EU is also key for trade in the Single Market and the competitiveness of the EU economy.

The business case for an integrated payment market lays in common standards and consolidation of infrastructures. Because payments in a single currency area could be processed without regard to their country of origin, economies of scale would drive down processing costs and new pan-European processing solutions would become possible and if the price and service levels of the best operating national payment systems would be met a critical mass of banks currently operating under the national schemes will be willing to migrate to the new systems. This is reinforced by the fact that banks today face huge costs for processing payments. For the processing of 231 billion transactions/year banks in Europe spend on average 33 % of their operating costs.

Also infrastructure providers would be able to develop payment services for and compete in a much wider market based on a common technological platform and standard. The use of state-of-the-art technology and wide take up would allow enormous economies of scale. Software development and IT hardware costs will be limited for providers and should decrease over time, because mainstream technology will be freely available and IT vendors will take up given technical standards.

Common open EU payment standards are also the precondition for adding value to services in the payments value chain for users. Stakeholder would be able to take advantage of the best services offered in the Single Market, without difference to the origin of the provider or location of the payment system. For this to be realised users demand[32] interoperable payment systems in Europe, which allow for the same user experience across Europe and enable users to chose the most competitive provider.

- Barriers to integration of national and cross-border payment systems

There are a number of barriers for consolidation of payment infrastructures in the EU. Barriers include the current lack of common open payment standards, the lack of commercial and technical interoperability between schemes and infrastructures, the investments that need to be made to change systems, vested commercial interests, market power and governance structures.

Firstly, before consolidation of infrastructures would make sense, common technical standards need to be developed and business models to be aligned. In such a situation, greater economies of scale, lower costs per unit and savings from shared software development would form clear incentives for any individual provider to enter a Single European Payment Market.

Secondly, any change from existing to new pan-European payment schemes means banks are faced with sunk costs for existing systems and new investments for the migration to pan-European schemes (including customer migration). Banks are ‘locked into’ their national legacies and proprietary standards, which may have been improved over time to reach higher levels of efficiency representing some kind of local optimum. Banks have also educated their customers to connect to their system in a specific way. Commercial users (enterprises and governments) usually have huge IT applications which need to be adapted as a consequence of changes in the bank’s system. The available software solutions for this communication and processing channel differ widely in each country and across Europe.

Thirdly, savings are rather difficult to be realised for a provider on a stand-alone basis. Not only risk providers who adopt new standards first, to be faced with first mover disadvantages (e.g. if the mass of providers do not follow). The process of integrating and consolidating national payment systems is also likely to produce losers and winners. This creates a situation of huge potential gains depending on collective action and substantial risks for the individual provider on the other hand, making a “deadlock” the likely outcome. If all players involved adopt a wait-and-see attitude, the switch to EU-wide payment systems will not take place and all providers will be trapped in a deadlock: nobody is keen to be the first to change, unless a coordinated migration is organised, the first-mover is uncertain whether others will follow.

However, once a critical mass of players migrates, the process becomes self-reinforcing: the more providers make the switch, the more interesting it becomes for other providers to do the same, leading to more migration, etc. Therefore only binding industry commitments and legal certainty deliver a reliable basis for migration and investment decisions of individual providers and national payment communities.

Fourthly, achieve EU-wide acceptance of new payment services. For example a new pan-European direct debit scheme will mean that some banks with a strong commercial customer base will have an interest in developing this scheme while other banks with a large number of private customers will be more reluctant to grant access to their customer base. Therefore, some banks will make the new service available to their customers while some might decide not to do so. But this is exactly the crux: pan-European reach can only be achieved if all providers participate and make themselves available as intermediaries for paying others. This is a clear hurdle pan-European schemes need to overcome.

Finally, commercial protectionism is another major problem. Currently national payment markets do not compete and providers in national markets with high-margin do not need to be afraid of competitors as fragmentation of technical standards and the local governance makes it a very costly undertaking for new competitors to enter the market. A Single Payment Market, common standards and interoperability will take away these barriers and will so potentially increase competition.

Large differences in the efficiency of payment services in the Single Market

Price levels are the most obvious indicators for the efficiency of payment services in different markets. Though it is difficult to compare prices in different countries taking into account national peculiarities, the huge price differences for payment services, of a factor 1 to 8[33], between EU Member States are negative evidence for the lack of integration of the EU payments market[34].

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According to studies[35] the competitive and regulatory environment has the most important impact on price convergence in national markets. Opening up national markets through the removal of legal, technical and commercial barriers and enforcing competition leads to a decrease in price levels and drives innovation.

Another indicator for the efficiency of payment services are service levels. One of the most obvious is the execution time of a payment. While in some countries the standard execution time for payments is the same day or next day providers in other countries the settlement of payment transactions (e.g. credit transfers) takes 3 days[36] and sometimes weeks for private customers (e.g. cheques).

Critics[37] could argue that there is a lack of incentives for banks to innovate and improve efficiency as long as their earnings are partly driven by the inefficiencies of the system (e.g. income on float that is earned for the time the payment order is placed, but not executed and the final crediting of funds on the account).

For businesses, this delay can have a substantial impact on cash flow, working capital and processing costs causing serious problems and this situation has been widely criticised by corporate customers and SMEs. Additionally, systemic delays in final settlement create significant counter party risk, the underwriting of which creates additional revenues for banks.

As the technical ability to settle payment transactions instantaneously is already available users require that payments are made faster and cheaper by banks[38] to allow companies and individuals to transfer funds from A to B in an efficient manner. It is an inefficient drag on the rest of the economy if “artificial” delays in the availability of funds negatively affect the cash flow of companies and individuals, finally impacting on the efficient allocation of capital.

Lack of efficient competition and a level playing field in the payments market

The extent to which market forces and competition determine levels of efficiency and prices in payment markets is unsatisfactory. Competition between existing players and levels of market entry of new providers are very low.

Numerous complaints[39] and several national and European cases[40] of insufficient competition and anti-competitive behaviour of incumbents in the payments market have led the European competition authority to start a sectoral inquiry in payment services. The concerns relate to 1) competition between banks’ as the traditional providers of payment services and 2) the market access and level playing field for new payment service providers entering the market.

The current regulatory situation seems to create a lack of competition in many payment services. Banks often enjoy a privileged competitive position in payment markets and the sometimes existing bank monopoly in payments excludes many innovative new players from providing payment services who want to enter the market. For example merchants pay in markets where there is only one bank providing card payment services fees which are 600 times higher than in other more competitive and less strictly regulated national markets.

Concerning legal requirements for market access, studies undertaken in this context have shown that limiting provision of payment services to fully-fledged credit institutions (i.e. banks) has a negative impact on competition and restricts access more than is necessary for the financial integrity of the payment system. In order to make outside competition work and achieve improved levels of service, in particular in markets with low efficiency and high prices, the often substantial technical and other commercial market entry barriers (e.g. scheme rules) need to be removed. Furthermore specific measures might be needed to allow new entrants to enter the market and be able to compete on a level playing field with banks.

Also the current market framework and the way payment services are provided hardly allow customers to make an informed choice and benefit from the most efficient offer in the Single Market. Users, in particular merchants and businesses complain about the lack of transparency and comparability of payment services. Furthermore, the multilateral fixing of fees between banks and other business and rules have led to vocal complaints of users that these practices inhibits free competition and created a barrier to the well-functioning of the Single Market.

Fragmented legal framework for payment services

The regulatory framework for electronic payments consists of rules and legislation partly set at the European level, and partly (and in a more detailed fashion) at national level. Although there is an “acquis communautaire” on EU payments legislation, which allows the Single Market to be considered as one single jurisdiction, the present legal framework is regarded as fragmented, overlapping and in some cases contradictory, generating an unsatisfactory situation for all stakeholders[41].

The existing legal framework for payments is to a large extent based on national rules. All Member States have their national "rulebook" governing payment business and services. Its codification differs with regard to the content, level of details or degree of consolidation in one act. This has developed independently in each country and will continue to do so. New legislative developments will notably deal with the appearance of new payment means and methods which may give rise to new legal risks and problems. It is likely that the resulting national legal provisions in Member States will not necessarily converge but further fragment the Single Market, and thereby create conflict of law situations for the Single Market.

The Commission has undertaken studies that have confirmed divergence in national rules[42]. Such national diversity creates obstacles to an efficient Single Payment Market in the Single Market and hinders the integration of the payment infrastructure and further consolidation with a view to lowering the costs of transactions. For instance, the rules relating to the revocation of a payment order differ depending on where the order was placed within the Single Market.

RELEVANCE FOR THE EU

HAVING IDENTIFIED THE PROBLEM AND ITS UNDERLYING CAUSES, IT IS NECESSARY TO VERIFY IF IT IS APPROPRIATE TO INTERVENE AT EU LEVEL AND WHETHER THE EU IT IS BETTER PLACED THAN THE MEMBER STATES TO TACKLE THE PROBLEM.

The conditions for which are discussed in more detail below.

Firstly, the problem falls under the powers given to the Union[43] to ensure the proper functioning of the Single Market for goods and services which also requires a Single Market for Payments. European citizens and businesses are unable to obtain the full benefits of the Single Market, because of deficiencies in the integration of cross-border and national payment infrastructures and services, limited availability of pan-European payment services (e.g. recurring payments) and lack of interoperable standards allowing different national payment systems and providers to compete and users to use payment instrument without difference to their location in the EU.

The smooth functioning of payment and settlement systems is also a crucial aspect of a sound currency and is essential to the conduct of monetary policy[44]. Payment and settlement systems are a transmission channel for monetary policy and have a significant bearing on the functioning of financial markets. Payments systems are significant contributors to the broader effectiveness and stability of the financial system, in particular to consumer confidence and to the functioning of commerce. These systems are also crucial to the maintenance of banking and financial stability.

Secondly, the problems affecting the Single Payment Market cannot be sufficiently solved by the Member States. The necessary harmonisation of legal rules which provides the basis for the development of efficient EU/euro-zonewide payment services could not be effected by one Member State alone. Co-ordinated action and a common legal framework are necessary to address the deficiencies in the payment market.

To ensure a level playing field and fair competition between providers and also between different payment channels (e.g. cash vs. electronic payments) non-discriminatory legal treatment in the Internal Market should guaranteed. There should not be a difference in the legal treatment of a provider or payment service in country A and country B otherwise there is a risk that this could undermine the free provision of services and the freedom of establishment. Similarly users should enjoy the same high level of protection wherever they are in the Union and without difference to the country of origin of the provider or the payment service.

The creation of a Single European Payment Market is in the interest of Member States as they would benefit from increased efficiency of the payment system and improved competitiveness of enterprises and the economy. A lack of EU action might risk restricting the potential consolidation and integration of payment systems across the EU. To establish a balanced set of norms for the Single Payment Market can be can be better achieved by the Union.

COMMISSION´S OBJECTIVES

On the basis of the problem analysis the following overall objectives for the Commission’s policy initiative have been defined:

To create a Single Payments Market based on Article 95 (1) of the EU Treaty and increase efficiency of payment services in the EU.

Modern payment infrastructures contribute to the competitiveness of the EU economy. Only if citizens and businesses are able to transfer money as rapidly, reliably and cheaply from one part of the European Union to another as is now the case within each Member State they can fully benefit from the fundamental principles of the free movement of goods, services, capital and labour.

Reducing the costs of payments and transaction costs for economic actors will improve competitiveness of the EU economy and efficiency of payment services in the EU. The economy needs efficient, consumer-friendly, low-cost and safe payment and billing solutions to foster trade and growth. This is of particular importance for goods and services that are delivered via new technologies such as services and digital content delivered via modern communication technologies.

In order to achieve these ultimate objectives, three strategic intermediate objective s have been defined:

1. Enhanced competition between national markets by opening up markets and ensuring a level playing field

Opening up currently national payment markets for existing and new providers from other EU Member States will increase competition and foster market entry. Increased competition is aimed to provide a healthy framework for a future Single Payments Market. It should promote consolidation of redundant payment infrastructures, improve efficiency through better economies of scale and stimulate innovation.

The operational objectives in this area are:

- Operational objective 1 = Removal of legal barriers to market access and a level playing field of prudential requirements for payment service providers

- Operational objective 2 = Increased number of providers and payment services in national payment markets

- Operational objective 3 = Increased cross-border provision of services of existing and new providers

- Operational objective 4 = Reduced number of payment infrastructures due to consolidation

2. Increased market transparency for both providers and users

Increased transparency between offers from payment service providers and conditions for payment services will improve consumer protection and facilitate an informed choice. Standardised information requirements make it also easier for providers to offer standardised and fully-automated services across borders. This is expected to contribute to greater variety of services, more competition and improved efficiency.

The operational objectives in this area are:

- Operational objective 1 = Consumers will receive standardised conditions for the payment services offered in the market.

- Operational objective 2 = Consumers will be able to compare the key elements of different service offers and benefit from greater transparency on prices and fee calculation methods.

- Operational objective 3 = Providers are able to offer payment services across borders under the same standardised conditions with regard to information requirements.

3. Standardised rights and obligations of providers and users of payment service in the EU, with strong emphasis on a high level of consumer protection

Standardised rights and obligations of payment service providers and users will help to overcome the current barriers for a unified payment services market. The current legal framework of national rules leads to national fragmentation of markets, a lack of availability of cross-border payment services and standards. The currently fragmented framework also protects national markets from outside competition and is an impediment for cross-border service provision. A uniform basis of core rights and obligations will allow providers to develop EU-wide service propositions. Users will be able to transfer money under the same conditions and with the same ease from one part of the European Union to another.

The operational objectives in this area are:

- Operational objective 1 = Users are able to rely on the same conditions wherever they use payment services in the EU

- Operational objective 2 = Providers are able to develop and roll-out payment services for the entire EU market under the same legal conditions

The necessary instrument to help in achieving these intermediate objectives is the creation of a new legal framework for payments in the EU .

The Commission’s initiative for an integrated and efficient EU payments market is one of the key actions of the Community Lisbon programme[45] and makes an essential contribution to the Lisbon partnership for growth and employment[46], and is in line with recent EU financial market policy objectives[47].

MAIN POLICY OPTIONS TO REACH THE OBJECTIVES

This section is aimed at assessing the different policy options suited to achieve the set objectives. It should also help to assess in the following sections if regulatory intervention is needed, what the impacts are and if the proposed intervention proportionate.

Type of policy intervention at EU level to create a Single Payment Market

Alternatives

1. No action at EU level

2. EU-regulatory policy approach

3. Market self-regulation

4. Combination of a new EU legal framework and market self-regulation

13. No action at EU level

The no-action option means keeping the current fragmented legal framework in the EU which has been one of the main triggers for the confinement of payment services to national borders. It also means not to address the shortcomings identified but leave it to national authorities and market self-regulation by payments industry to achieve a Single Payment Market.

The main benefit of such an option is that there is no need for adaptation of national payments legislation and the costs of change of national payment systems to common EU standards are zero. In most cases national legislation has shaped payment habits and national payment systems have catered to the particular needs of their home markets.

However, this situation has not solved the huge differences in efficiency between national payment markets and has acted as a barrier to competition and for integrating financial markets and is lacking efficient solutions for payments for goods and services in the Single Market. This solution also means keeping the legacy of national legislation making it difficult for providers to overcome and cater for a wider Single Market. The evolution of national legal provisions will not necessarily drive to a convergence, maintaining the legal obstacles to achieve an efficient Single Payment Market and resulting in inefficiencies.

Furthermore market self-regulation and national regimes are not likely to tackle the inexistence of a level playing field across the EU and the lack of a consistent legal framework for an integrated EU payments market. This approach would not provide the necessary trust and legal certainty for market participants.

14. EU-regulatory policy approach

This option is to solely entrust it to legislation to create a Single Payment Market. Legislation could create a harmonised market framework for payment services in the EU. It could establish the essential rules for the provision of payment services for both the relationship user and provider and between providers.

Regulation could regulate the main rights and obligations of the involved parties, minimum standards for efficiency and security of the payment system. It could also define the necessary common standards and business rules for the exchange of payments between different systems and across borders. By that it would offer a very cost-effective approach to provide both providers and users with the necessary legal certainty and protection of their rights to contract without difference of their origin.

However, this option does not leave room for self-regulation of industry. It also might be difficult to take into account the complexity and network character of payment systems. It is not enough for the development of comprehensive pan-European payment market that a single provider or user is willing to operate in a single market framework. It takes a large number of market participants to co-ordinate and to agree on terms for acceptance and standards for the operation of pan-European payment system.

15. Market self-regulation

This option would mean to encourage industry to take appropriate measures for the creation of a Single Payment Market which would result in the removal of technical and commercial barriers including adoption of common standards, development of viable business models for EU-wide payment services and interoperability and consolidation of infrastructures.

The adoption of Regulation (EC) No 2560/2001 has potentially created the necessary incentive[48] for the payment industry to modernise cross-border payment infrastructures. However, there are clear limitations for self-regulation in mastering the challenges of creating a Single Market. A self-regulatory initiative will not be able to overcome existing differences in the legal framework and address the problems of a level playing field for providers and different payment service. It is also unlikely that it will fully remove the barriers to efficient competition in national markets.

Furthermore, the development of common standards and alignment of payment service schemes takes a considerable amount of co-operation between competitors. This makes it rather difficult for self-regulation – without involvement of regulators and the commitment of users – to solve the issue of (binding) adoption of standards and schemes, which is necessary for reaping the benefits of consolidation and improved economies of scale.

16. Combination of EU legislation and market self-regulation

This option combines the advantages of the previous two options of EU regulation and self-regulation and mostly off-sets their drawbacks if they were to be pursued on a stand-alone basis.

In this scenario EU legislation could establish a coherent and comprehensive EU legal framework for payments, achieving a high degree of consolidation, legal certainty and simplification of legislation. But the regulatory intervention would be much more limited leaving it to industry to solve the issues of standardisation and product harmonisation and establishing rules concerning the relationship between providers.

On the other hand self-regulation could focus on the issues where market-driven solutions are clearly superior such as the definition of specific services targeted to customer needs. In the Single Euro Payments Area project (see detailed description in Annex 3: The SEPA Project ) the European banking community has committed itself to build efficient infrastructures (pan-European clearing and settlement systems) for the main payment services in the euro currency (credit transfers, direct debits, credit and debit card payments) that could cater to the European market instead of national markets. The EPC adopted a roadmap – subscribing to the vision that all payments in euro should become domestic by end 2010.

This option would allow taking account of the advantages and flexibility of self-regulation to adapt to a fast-moving market and specific needs. It would draw on industries initiative for an SEPA while EU regulation would complement industry’s project by taking away legal obstacles for the SEPA project and providing a harmonised framework for an even wider market, the Single Market.

Type of legal instrument

Alternatives

1. Regulation

2. Directive

17. Regulation

An EU regulation could contribute considerably to solving problems of legal clarity and simplicity because – since there would be no transposition into 25 national legislations – the risk of diverging national legal texts would be eliminated. Also it seems that payment service providers and users would prefer a directly legally binding instrument.

18. Directive

A Directive could be a more sensible solution as it would harmonise the main legal rules and remove existing legal barriers but could be transposed into national law taking into account the huge differences in national payments legislation. Member States have expressed a strong preference for this solution.

Scope of the regulatory intervention

Alternatives

1. General scope of the regulatory intervention: geographical, currency

2. Specific scope of the regulatory intervention: which of the legal barriers identified during the stakeholder consultation should be addressed?

19. General scope of the regulatory intervention

The choice for the general scope is whether the regulatory intervention should cover all payment services provided in the EU, national and cross-border and in all currencies.

The logic of the Internal Market would suggest that all payment services regardless of the country of origin or currency should be covered by the regulation. Such scope would be justified in order to address the problems identified in both national and cross-border payment systems and markets (see part 3) and to achieve the economies of scale and efficiency gains expected from a consolidation of national (97 % of payments) and cross-border payment systems (3 % of payments). However, the differences between currency areas (e.g. settlement of e.g. dollar payments outside the EU) and level of development of payment infrastructures (e.g. for payments arriving or destined to third countries) would have to be taken into account.

industries SEPA project. This step by step approach would allow focusing first on the efficiency of payments in euro as there progress can be achieved easier and more quickly and maybe at a later stage assess further regulatory steps. However, it would leave potential efficiency gains of consolidated national and cross-border payment systems and an integrated Single Payment Market untouched.

20. Specific scope of the regulatory intervention

The extensive stakeholder and expert consultations carried out by the Commission highlighted 21 concrete legal obstacles which could potentially be addressed by the regulatory intervention (see list under 2.3.).

On the question which of these 21 obstacles affecting the Single Market for Payments should be tackled in the current proposal a specific impact assessment was made by the Commission with the input of stakeholder consultations which is summarised in the following chapter.

However, for reasons of principle the question of cash and cheques, bank accounts and security of payment systems are considered outside the scope of the regulatory intervention. For detailed discussion of the reasons on the issues which have not been included in the regulatory proposal consult Annex 4: Issues outside the scope of the regulatory intervention .

EXPECTED IMPACTS FROM THE DIFFERENT OPTIONS IDENTIFIED

This section deals with the expected economic and social impacts of the different policy options and considers the risks and uncertainties in the policy choices. A detailed discussion of the impact on stakeholders can be found in Annex 7: Distribution of impacts among stakeholders and cost-benefit analysis .

Impacts of the alternative types of policy intervention

Based on an in-depth analysis of the current barriers for a Single Market (see part Problem definition) five problem areas are clearly identifiable affecting 1) the relationship between users and providers and 2) the relations between providers:

21. Inefficient use of payment services caused by distortions in the price and legal framework

22. Deficiencies in pan-European payment infrastructures and services

23. Large differences in the efficiency of payment services in the Single Market

24. Lack of efficient competition and a level playing field in the payments market

25. Lack of a coherent legal framework for payments

Which of the five problem areas are best addressed by market self-regulation and which should be in the scope of the regulatory intervention, if any action is taken at all?

The matrix on the different policy options below summarises the advantages and drawbacks of each of the options.

Advantages | Drawbacks |

No action | No change cost for national and cross-border payment systems but high opportunity costs No change in the legal framework, therefore no compliance and adaptation cost Maintains ‘competitive’ advantage for some players in protected markets No risk of change for market participants | Maintains inefficiency of national markets and national and cross-border payment systems and is unlikely to create a Single Market Complicates trade in the EU through the lack of efficient EU-wide payment systems The legal framework and the market for payment services remain complex and non-transparent Delays restructuring and improved competitiveness of the financial sector Maintains distortions in competition Users in high-margin low efficiency markets will pay the price for the fragmentation Corporate/merchants suffer from not integrated, non-standardised and uncompetitive payments |

EU regulatory approach | Simplifies and provides EU-market with a consistent and harmonised legal framework Facilitates restructuring and improved competitiveness of the financial sector and economy. Sets the framework for the development of pan-European payment services including efficient cross-border payments by setting standards, harmonising rights amongst providers and between providers and users, defining the business rules of schemes and infrastructures Eliminates distortions in competition reduces inequalities between providers creating a level playing field Improves market transparency | To rely solely on regulation to solve the problems of the Single Payment Market might entail the risk of overregulation, stifling innovation and resulting in not market conform solutions Cost for legal compliance of providers would potentially be higher if a Single Market should be established solely by regulation Cost of possible accompanying measures for restructuring payment service contracts, service propositions and payment systems |

Market self-regulation | Market self-regulation (consolidation, streamlining payment services and adopting common standards) would improve competitiveness of the financial sector Integration of national and cross-border payment systems would facilitate trade and greatly benefit users of payment services Cross-border payment service provision would have beneficial effects on less efficient national markets Consolidation of redundant infrastructures and improved efficiency of services reduces total cost of the payment system Common standards and streamlining of payment services leads to improved economies of scale and more efficiency | Legal barriers for Single Market and uncertainty over legal framework would remain Risk of self-regulatory initiative to fail due to strong vested national interests opposing change and opening up the market Investment cost of measures for restructuring of payment systems for providers and corporate users Common standards and streamlining of payment services might lead to disappearance of some national well established services in exchange for common services with lower service levels Price convergence might not point downwards after integration which will disappoint users and would not be e beneficial outcome for the Single Market In a Single Market (some) national systems might no longer be competitive which poses a threat to their providers Profitability of some non-competitive traditional providers is threatened by market consolidation and increased competition |

EU regulation + self-regulation | Competitiveness of the financial sector and the economy is improved in the long term at the potentially lowest regulatory cost. Provides legal certainty through a consistent legal framework for the whole EU market and greatly simplifies the single market Reduces in the midterm legal compliance costs for provider and users Common standards and streamlining of payment services leads to improved economies of scale and more efficiency Facilitates the development of pan-European payment services including efficient cross-border payments and the consolidation of infrastructures through self-regulation Distortions in the selection process of payment services are reduced. Eliminates distortions in competition, reduces inequalities between providers creating a level playing field Might foster market entry of new and alternative providers Improves market transparency Integration of national and cross-border payment systems would facilitate trade and greatly benefit users of payment services | The drawbacks of the specific options can be very much limited and counterbalanced through the combination of EU-regulation and self-regulation Cost for legal compliance of providers and users very limited because only a core set of harmonised rules Investment cost of measures for restructuring of payment systems for providers and corporate users are off-set in the long-term through high potential for improved efficiency Risk of ‘lower service levels’ limited due to minimum standards for efficiency, liability etc. are defined in the regulatory framework and a benchmark set for industry self-regulation Price convergence in the long-term should point downwards if regulation ensures that the market follows fair competition (Some) national systems might no longer be competitive and profitability of some non-competitive providers is threatened by market consolidation and increased competition |

According to the above analysis and the advantages of the different policy options it seems that for problem areas (1), (2), and (3) a strong role of market self-regulation is clearly desirable to create modern, cheap and efficient pan-European payment services and infrastructures. Industry’s proposal for the creation of SEPA is focussing on solving the market co-ordination problems in area (1), (2), and (3) as far as relations amongst providers are concerned. It will address in particular the need for common technical standards for payments, service agreements between providers and infrastructure requirements.

What industries proposal will not address in problem area (1)–(3) are rights and obligations in the relationship between providers and users , including adequate protection of users and minimum standards for efficiency of all payments in the EU. Therefore, as a complement to industry’s initiative, the regulator should set out the necessary incentives for the development of competitive, time and cost efficient EU payment services and provide a coherent legal framework, which guarantees legal certainty for market participants and adequate protection for users.

Based on the scope and depending on the success of industry delivering on its roadmap for SEPA, the Commission believe that for the moment regulation can be restricted to the definition of general principles, applicable to all payment services in a non-discriminatory way, based on which there should be no barriers to make payments as easily, safely, efficiently and inexpensively as within national borders.

In the problem areas (4) and (5) the role of the regulator is clearly predominant. The assumption that market forces will create the necessary infrastructure can only work if market forces function efficiently. That means that e.g. conditions for market access in the Single Market are the same, providers can compete on a level playing field, good governance and non-discriminatory access are respected in payment infrastructures, technical market entry barriers are removed, conditions for payment services are transparent to the user so he can make an informed choice and preferences are shaped by economic rationality.

The Commission considers that for the moment it is not necessary to intervene directly in the relationship between providers and relevant arrangements on technical standards and infrastructures. There is certainly a market co-ordination problem but industry will address this problem in its SEPA program. Therefore, at the current point in time, the Commission considers it not necessary to mandate a specific standard or rules for payment schemes and the setup of the payment system. As long as there is no obvious market failure, market forces shall determine the design and success of schemes and the consolidation of infrastructures.

Following the limitation of regulation to aspects of the relationship between provider and user, leaving aside the relationships between providers the current proposal does not solve problems of competition in the infrastructure area and problems based on the lack of interoperable standards – which industry has taken on responsibility to solve. The regulatory intervention in this case would only have an indirect impact on the relationship between providers. Incentives for competition are reflected in price signals and customer behaviour in the immediate market but not in the rest of the value chain. Therefore the functioning of market forces and price signals are of crucial importance. That means interference in transmission mechanisms such as distortion of real costs and prices of payment services or a lack of transparency have an important impact on the efficient functioning of the market.

In this scenario strong monitoring of results of the interplay of regulation and self-regulation and to what extent it benefits EU citizens and businesses is necessary. While the Commission is convinced of the advantages of self-regulation it will continue to study the efficient functioning of incentives for market forces to govern pricing, for providers to innovate and reduce the macroeconomic costs of the payment system and for technical and organisational barriers to market access to be removed. If monitoring should confirm market failures in these respects the Commission will not hesitate to propose binding legislation.

Impacts of the choice of legal instrument

The analysis of impacts of the choice of legal instrument is trying to assess the likely consequences of each option.

Legal certainty | Timeliness | Impact on stakeholders | Subsidiarity, proportionality | Financial cost |

Regulation | √√√ | √√√√ | √√√√ | √ | √ |

Directive | √√ | √√ | √√√ | √√√√ | √ |

A Regulation could contribute considerably to solve the problems of legal clarity and simplicity since there would be no transposition into 25 national legislations consequently the risk of diverging national legal rules would be eliminated. Also it would be the swiftest solution as there is no transposition necessary. Also a regulation was requested by part of the market. Notably payment service providers have a strong interest in knowing conclusively the comprehensive list of essential, necessary and sufficient legal requirements in order to comply and act under conditions of legal certainty. A Regulation would certainly be suited to ensure the elimination of legal barriers to the development of pan-European payment services. However such an instrument could not take into account the differences in Member States legal systems. The interaction of a Regulation with the host of national rules that were to be left untouched could create problems.

A Directive could be a more sensible solution as it would harmonise the main legal rules and remove existing legal barriers but could be transposed into national law taking into account the huge differences in national payments legislation. This seems to be a very important point given the great differences between payment markets, infrastructures and payment habits in Member States which are largely due to the legacy of national legislation. Often there exist different legal acts for the regulation of different types of payment services and payment service providers. For this background, most Member States argued that a directly applicable EU legal instrument such as a regulation could pose problems when interfacing with the trunk of national rules.

Alternatives: Full harmonisation versus minimum harmonisation

According to stakeholder consultations legal certainty and subsidiarity are the two most important aspects concerning the choice of legal instrument. Therefore a key question is if the issues identified for regulation should be fully harmonised or if minimum harmonisation is better to meet stakeholder requirements.

Today, diverging national rules prevent the economic rollout of pan-European payment services, as providers might have to adapt important aspects of their statute and their services to national rules, potentially the interrupting provision and full automation of services. Payment service providers would clearly benefit from the legal certainty that full harmonised EU legislation could provide, as they do not have the uncertainty that host Member States may evaluate the level of protection of their statute or services and find them not to be equivalent to their own or they may simply have contradictory legal requirements than the home Member State. In the same way users would enjoy the same familiar level of protection when using payment services from other Member States as they do in their own State. Even if mutual recognition, based on a high level of harmonised rules, would protect users and providers from some of the detrimental effects, it would not allow to reap the benefits of market consolidation and competition which potentially take place in an Single Market with the same rules and a level playing field for providers and users. Full harmonisation would certainly be an efficient means for achieving a well-functioning Single Market because it creates a simple, coherent framework to the benefit of the industry and consumers.

On the other hand, minimum harmonisation based on the home country principle combined with mutual recognition of legislative provisions can facilitate the offer of greater choice of services to the benefit of consumers but does not alleviate the problems of fragmentation of markets and legal environment.

Impact of the potential scope of the regulatory intervention

Identifying the most important impacts of the general scope for the regulatory intervention can be done very quickly and an overview can be found below:

Covering all payment services provided in the EU, national and cross-border | Pro: The economies of a Single Payment Market lay in the consolidation of national payment systems, touching not only the 3 % of cross-border payments but improving efficiency of all 56 000 million/year payments in EU including 97 % of national payments. To restrict the scope to cross-border or intra-EU payments only would jeopardise the smooth functioning of the Single Market as a whole and would further fragment the market along national borders. The EU is the biggest trading block in the world and has huge numbers of payments flowing in and out of the EU. For the part of these payment services, which are provided by EU service providers to EU citizens and businesses, users need legal certainty when making or receiving a payment to or from a party outside the EU. Also EU citizens travel extensively outside the EU and expect to be protected by the same rules governing their contract with the payment service provider in the EU, even when they use their e.g. credit cards outside the EU. Contra: The disadvantages from such a wide scope are that all payment services and system will have to adapt to the new EU rules, even if they only cater for a purely national payment clientele. |

Scope excluding payment services in non-EU currencies | Pro: Payment systems in the EU are currently fragmented along former and existing currency areas. Former national payment systems, dealing with payments in the Member State’s currency should migrate into pan-euro payment systems – processing national and cross-border payments. Consequently a new legal framework for a Single Payment Market should provide for all payments no matter which currency and if they are national or cross-border. Contra: Payment industry but will focus in their SEPA project on euro payments only. Its view is that economies of scale and technical complexities currently do not merit the development of separate infrastructures for cross-border payments in non-euro currencies. But it is expected that following the enlargement of the euro area these non-euro payments would migrate into the soon to be created euro infrastructures. The payment industry also voiced concern about a second point: that the proposal could cover all currencies and all transactions including those in non-EU currencies and where only either the payer or the payee are located in the EU. In such cases where for instance the payment service provider is strictly liable for the execution of a payment transaction they are concerned about potentially higher costs which have ultimately to be borne by the user. Therefore the industry would like to see the scope of regulation restricted to EU currency payments carried out inside the Single Market. |

Specific scope of the regulatory intervention:

This section is dedicated to the question which of the legal barriers identified during stakeholder consultation should be addressed in the scope of the regulatory intervention and in what way. The Communication of December 2003 concerning a New Legal Framework for Payments in the Single Market identified 21 concrete legal obstacles and possible solutions out of which 7 where discarded as being outside of the scope of the regulatory intervention (see Annex 4: Issues outside the scope of the regulatory intervention ). An assessment of the other 14 legal barriers and the ways in which they could potentially be addressed in the regulatory intervention sometimes has significant impacts and therefore a more detailed discussion and analysis of each of the policy elements and potential impacts was carried out and can be found summarised in three chapters in Annex 5: Prudential requirements and in Annex 6: Core rights and obligations of providers and users . An overview of the impacts of the different policy options in the three mean areas of regulatory intervention can be found below.

Market access requirements for payment service providers

Alternatives

1. Keep status quo of nationally fragmented market access requirements

2. Harmonisation of market access requirements for non-credit institution payment service providers and introduction of a specific license for payment institutions

26. Keep status quo

At present it is very difficult for payment service providers who operate legally in countries without a licensing requirement to gain access to the markets of Member States which insist, for prudential reasons, on a licence. Undertakings, which are not credit institutions but provide payment services are subject to very different legal requirements from one Member State to another. The same activity undertaken by such a payment service provider may need a licence as a credit institution in country A, an e-money licence in country B, a special license in country C and is considered as an unregulated activity in country D. In more than half of the Member States the payment services that have been included in the draft Directive for the scope of business of the new license for payment institutions, have not been regulated in the past or the providers would need only simple registration to provide these services.

The second reason for reassessing the status quo is the lack of competition in payments markets. Several payments market are currently characterised by substantial barriers to market entry. Fragmented market access requirements distort competition leading to high prices for consumers and high profits for dominating providers in national markets and lower levels of innovation. To foster competition deregulation of the market and improved access to the provision of payment services and participation in payment systems (former “banks only” infrastructures) are needed.

Under the new Special Recommendation VI of the OECD Financial Action Task Force (FATF), in order to combat terrorist financing and money laundering, each payment service provider must in future be registered or licensed. Several such money transmitters and other newcomers (e.g. telecommunication operators) have complained that meeting the requirements under a banking licence – designed for the full range of banking activities – is too expensive and burdensome for simple payment service providers and is disproportionate given the reduced risks of such an activity.

This situation would potentially be further severed by a different transposition by Member States of Special Recommendation VI on the establishment of a registration or licensing regime for money remitters. In case the Commission takes no initiative for the licensing of money remittance, each Member State will keep or create its own regime: State A considers that this activity needs a banking license, State B only a simple registration. Although a company registered in State B may benefit theoretically from the EC Treaty right to provide this service[49] also in State A, it is practically faced with huge difficulties to legally provide payment services in State A. The Commission has received several complaints about this situation from money remitters and other potentially affected payment service providers.

The differentiation of market access conditions between Member States is detrimental to the functioning of the Single Market. The regulatory status quo produces a situation that results in overregulation in some areas and problems of unregulated activities in others and a missing level playing field. The Single Market principle of the free provision of services, including payment services is currently insufficiently realised in the EU as there is no clarity on the freedom to provide payment service, except for those undertakings which provide these services with a credit institution or an electronic money institution license[50].

According to the EC Treaty rules (Article 49) on the freedom to provide services in the Single Market, a legally exercised activity in one Member State can ipso facto be legally exercised in other Member States, except if the general interest justifies the contrary. However, to apply the mutual recognition principle on the basis of the general provisions of the Treaty without establishing harmonised minimum requirements for payment services might bear the risk of disputes before the European Court of Justice. Mutual recognition might be easier to achieve by establishing an EU-passport regime based on harmonised licensing or registration requirements, for payment service providers.

27. Harmonisation of market access requirements for non-credit institution payment service providers and introduction of a specific license for payment institutions

The EU could harmonise the licensing requirements for payment service providers. For this purpose it would create, in addition to the credit institution and the e-money institution license, a specific license for all other non-bank payment service providers. This specific license for payment institutions would create the basis for more competition in national markets based on a passport regime within the Single Market. It would also transpose OECD Special Recommendation SR VI and address the issues related to money laundering and terrorist financing.

The European licensing regime for payment service providers would be based on a hierarchy of the level of risk of the payment service provided.

According to this methodology in the future, there would exist four different types of providers who can all offer payment services but are subject different levels of prudential requirements proportionate to the level of risk they pose: (i) providers who use deposits to fund payment transactions will continue to be subject to the existing prudential requirements for credit institutions (ii) providers who use e-money to fund payment transactions will continue to be subject to the existing prudential requirements for electronic money institutions (iii) providers for all other payment services that do not involve deposits or issuance of electronic money would be subject to the new low risk category of payment institutions (iv) post giro institutions authorised in accordance with their statute and applicable legislation to provide payment services.

The new low-risk category of payment institutions should embrace in general non-credit institution providers, providing payment services, which is not connected to deposit taking or e-money issuing. The primarily intended services that could be provided by such institutions comprise: money remittance services, payment services based on a credit line such as debit, deferred debit or credit card payment services, issuing payment cards, acquiring services for payment transactions.

This new licensing regime would also reflect market developments in recent years, that were closely related to the boost in information technologies, triggering the development of innovative products and market entry of a new generation of providers very often from the non-bank sector such as telecom operators, money remitters, card issuers and acquirers, payment aggregators, electronic billing and payment providers, micro payment providers and alike.

This option has the positive effects of harmonising the regulatory regime for payment service providers in the EU and of creating a level playing field for all providers.

Discussion (for more detailed analysis consult the relevant chapter in Annex 5: Prudential requirements)

The new category of payment service providers apart from credit institutions and e-money institutions is not connected to deposit taking or e-money issuing activities. The services that can be provided by payment institutions comprise amongst other ancillary activities, money remittance services, payment services based on a credit line such as debit, deferred debit or credit payment services, issuing payment cards, acquiring services and issuing of guarantees for payment transactions. These are ordinary payment services which despite their importance for the provision of payment services are not ‘systemically important’: the failure of such a payment service provider does not trigger disruptions or transmit shocks across the financial system.

Member States that currently have a regulatory regime, with prudential requirements for payment service providers different from those for credit institutions following the abovementioned reasoning; have in fact not had any history of bankruptcy in the sector, have a higher number of non-credit institutions providers and new market entrants and have consequently experienced an increase stimulus for competition to the benefit of users.

Therefore it might be concluded that a new regulatory regime for payment institutions different from those for credit institutions does not pose a threat to financial stability. The risks involved in the provision of payment services outside of those accompanying deposit taking and the issuing of e-money could be reflected in a risk appropriate regulatory regime. Providing a level playing field means treating the same risks in the same way. Prudential requirements should be proportionate to risks and should not overburden smaller providers and new entrants to the market, which are not primary financial service providers. In particular quantitative solvency requirements, such as capital charges, similar to the ones applied to credit institutions seem to be disproportionate to the risk and are inappropriate for the services concerned.

After consideration and discu