A new landscape

In less than four months the concept of a Single European Payments Area (SEPA) will become reality, bringing European solidarity to a currently fragmented marketplace of national payments schemes and securing an “area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”.
Since the European Central Bank (ECB) launched the euro in 1990, a series of milestones, such as the adoption of the EU regulation on cross-border payments in Euros (December 2001) and the launch of Euro notes and coins (January 2002), have steadily paved the way for the replacement of numerous disjointed country-specific payment schemes with a new pan-European payments system, that will enable the fully automated processing of mass payment transactions in euros.

In 2004, the European Payments Council (EPC) published a roadmap defining the key requirements that would need to be met by the banking industry to make SEPA happen.  Three years on, the payments market in Europe is moving ever closer to its vision of a truly homogenous market, with around 490 million customers making more than 70 billion cashless payments transactions every year about to feel the benefits.

The change is being driven by two separate, yet complementary, initiatives, the EC’s proposed Payment Services Directive (PSD) and the payment industry’s vision for SEPA.  The past few months have seen developments for both the PSD and SEPA, which in turn raise issues and opportunities for corporates dealing with payments within the EU and EEA.

PSD: what next?
While there has been a lull in public developments around the PSD since its approval in late March 2007, much work has been going on in the background pending publication in the Official Journal (expected in October 2007).  The jurists-linguists process is now almost complete and focus is beginning to turn to how Member States will transpose the PSD’s requirements into national law.  Key questions here for each Member State include: who will be the competent authority or authorities (for there could be more than one)?  Should supervision of prudential requirements of payment institutions be separated from the regulation of conduct of business rules?  Should a Member State avail itself of the various derogations in the PSD, such as the waiver of the authorisation requirements for small payment institutions?

At a pan-European level, co-ordination will inevitably be required both to support harmonisation and to facilitate implementation by November 1, 2009.  Some working groups are beginning to emerge – both the Commission and the EPC have formed working groups, but until it is clear who will be responsible nationally for enforcing the PSD’s provisions, no committee of European payments regulators/supervisors as such has been proposed.

Certainty of the PSD’s text has however meant that the most forward looking financial institutions are now examining its implications for them and discovering a couple of things: first, the law of unintended consequences continues to hold true; and second, there is a silver lining to every cloud, particularly around the new payment institutions regime.

SEPA: implementation and migration
The ECB’s Eurosystem’s Fifth Progress Report published in July 2007 is aptly entitled: ‘Single Euro Payments Area (SEPA) – From concept to reality’. We are now only four months away, from the official launch of SEPA in January 2008. Accordingly, the Report focuses on gaps – either short-term (which could hamper the timely start) or longer term (which could have a negative effect on its success and hence begins to focus on migration to SEPA as well as implementation).  Such ‘gaps’ include clarity on remaining outstanding aspects of the SEPA direct debit scheme prior to 2008 and the need for urgent work on the security of payments.

The Report also calls for various actions most notably from DG Competition to resolve the outstanding interchange fee cases as soon as possible, “as the current uncertainty in the market is hampering the transformation of existing domestic schemes and the start of potential new schemes offering a European alternative”. As one element of its general observation that all stakeholders affected by SEPA must be involved, the Eurosystem specifically calls upon public authorities to convert their political support for SEPA into operational commitments to use SEPA compliance products and services.  Both these actions would provide real momentum.

Momentous changes for payments industry
Significant change is already impacting  the payments industry: in mid-June, Visa announced a co-branding agreement between Visa Europe and the ZKA (the German credit industry association) – in direct support of SEPA, it allows German banks to issue debit cards co-branded with Visa’s V PAY (alongside their own electronic cash logo) giving holders access to the extensive and continuously extending V PAY acceptance network across Europe; in early July, LINK and Voca merged to create Europe’s largest payments processor, VocaLink, which shortly afterwards announced its new Euro Clearing and Settlement Mechanism, again in direct support of SEPA, with reachability being a key feature of this pan-European credit transfer scheme; and then in late July, the Eurosystem re-affirmed its view that “at least one additional” European debit card scheme is needed, alongside Visa and MasterCard.

There is undoubtedly further to travel on the road to making SEPA a reality.  However, with such pioneering steps already being taken by the industry, it looks like this is a journey that will drive change and innovation that will in turn inevitably make the marketplace more and more competitive.  For the European corporate this will of course have potentially positive consequences, and it will certainly keep the banking industry on its toes for some time to come.