The new SEPA landscape from vision to reality (and back)

Speech by Gertrude Tumpel-Gugerell,
Member of the Executive Board of the ECB
at 2007 EPCA Payments Conference
Frankfurt am Main, 15 May 2007

Ladies and gentlemen,

[Slide 1/title] Introduction

It is a great pleasure for me to “set the stage” for this year’s EPCA conference. Banks and their partners are also “setting the stage” as they turn the vision of the Single Euro Payments Area (SEPA) into reality. Over the past five years, in particular, they have made impressive progress on the creation of a common landscape for payments in euro. Let us just consider what it means for an industry consisting of more than 6,000 institutions [1] within the euro area alone to agree on common schemes, rules and standards – starting from very diverse national market situations.

The only way to meet such a challenge is to have a strong common vision. However, the former chancellor of Germany, Helmut Schmidt, stated that “People who have a vision should go see a doctor”, a sceptic’s warning that not every vision deserves to be turned into reality.

[slide 2] Turning the SEPA vision into reality

Then again, without vision, Europe would not have developed into a peaceful and powerful community within just five decades; nor would we have a successful common currency called the euro; and the SEPA project would not have been launched.

It is natural that there is a lot of scepticism at the onset of big changes. As already stated, the SEPA project requires a large amount of effort from the banking industry. At the moment, it may also cause uncertainty among many stakeholders who do not know exactly what to expect. Will there be a happy ending – and many happy end-users in the SEPA? We do not know yet for sure, but there appear to be good reasons to give it a try. Back in the 18th Century the German scientist, Georg Christoph Lichtenberg, had already put this notion into words, “I cannot say whether things will get better if we change; what I can say is: they must change if they are to get better”. This should also be the focal point for the SEPA vision, namely the objective of making euro area payments better.

In my presentation today, I will suggest that we take a look at some key aspects indicating that the envisaged SEPA landscape will really be a better place to pay.

As a side remark to this slide, the quotations you can see here were taken from the website of the European Payments Council (EPC). I should like to stress that the SEPA vision is not restricted to making cross-border payments better; it will cover all payment transactions in euro. There will no longer be any distinction between “national” and “cross-border” payment transactions. In this respect, the user experience described in these quotes only highlights some initial effects of the SEPA, but certainly does not cover the full SEPA reality in the longer term.

[slide 3] Agenda – Looking back from 2012

In a recently published study entitled “Smart security technologies in 2020”, Jacques Seneca, Chairman of the European smart cards’ business association, Eurosmart, pointed out how difficult it is to create a realistic vision, “Some people say that very little may happen, others think almost anything can happen.”

A look back at the past can give an indication of just how much can happen within a few years. This is definitely true if we look for instance at the size of the European Union (EU) and the different currencies that existed thirteen years ago. In that time, there have also been substantial changes in terms of technological development. Just think how few people were using mobile phones, e-mails or the World Wide Web in 1994. Remember, too, how limited their functions and how complicated it was to use these new technologies back then, compared with today’s vast range of convenient and more secure electronic services. The considerable progress made is especially visible in today’s payment industry and in financial services generally. It was triggered by both the powerful new technologies and the ongoing financial integration in Europe.

This little retrospective demonstrates how a “leap in time” of some years may open a different perspective on the substance and quality of ongoing change – fundamental change, which we hardly even notice if we only look at the present situation. I would like to use the same technique of a forward-looking “leap in time” to assess the impact of the SEPA project on tomorrow’s payment landscape. I suggest using five guiding questions for our travel through time to the SEPA landscape of the future. We will try to answer each of them from the perspective of a 2012 scenario, by looking back at what has been achieved by then and what difficulties have been encountered along the way.

First of all, I cannot omit the two basic payment systems policy questions for European central banks from my list of guiding questions. Therefore, we will look at the efficiency and safety of payments in the 2012 SEPA scenario. Next, we will also check whether the SEPA really contributes to the competitiveness of the EU economy and what impact it has on the banking industry. Finally, we will discuss what is perhaps the most critical question: how do SEPA services benefit users?

Let us envisage the following payment landscape in the year 2012. All banks in the euro area and a significant number of other banks operating in Europe offer the standard SEPA credit transfer. It is based on a harmonised system of bank and account number identification. All banks offer payment execution times of one working day maximum. Some banks even offer same-day value transfers as a basic service. In addition, there are also providers and products in the market which enable payment transfers within just a few seconds.

Since late 2009, it has been possible to reach all account holders in the euro area with the SEPA direct debit. Moreover, it has been possible to reach half of them for a year already. All banks in the euro area are able to process several SEPA direct debit variants with slightly different mandate flows and verification procedures. These variants serve different market segments with different levels of trust. The most popular variants are the direct debit variants used for business-to-business transactions and consumer payments.

After a period of co-branding by a couple of formerly nationally-oriented card schemes, a new European debit card scheme finally emerged in early 2011. It competes quite successfully with the international card schemes, but operates mainly in the 21 countries of the euro area (there may be more, or perhaps less, euro area countries by then).

The two smallest of the eight automated clearing houses that are still operating have just announced plans to merge their business from 2013. Market analysts expect to see even more consolidation of European infrastructures in the coming years.

Migration of most domestic payments to the new SEPA formats took place between January 2008 and December 2010. By 1 January 2011, 85% of all credit transfers and direct debits were already SEPA-compliant transactions. In particular, the SEPA direct debits have caught up considerably since their late SEPA-wide launch in the course of 2009.

Some formerly national schemes are now available to the entire SEPA community. At the same time, some local legacy schemes which have never become SEPA-compliant are being phased out. The use of paper-based payment instruments, in particular, has fallen dramatically. Also, the share of cash payments compared with non-cash payments is falling, mostly because contactless consumer payment systems are becoming an important form of paying anywhere: at merchants, vending machines, via mobile devices and at home in front of a computer, console or TV set.

A joint cross-industry initiative supported by the European Commission has led to the development of an efficient set of business rules and standards for European electronic invoicing. This involved making the necessary changes in national and European legislation, for instance regarding VAT issues and the mutual acceptance of electronic documents. In the period 2009-2010, these successful initiatives triggered two follow-up projects on e-reconciliation and e-procurement, which are both about to be launched SEPA-wide.

[slide 4] Does SEPA deliver efficient payment services?

Now – has this SEPA scenario brought about substantial gains of efficiency? For some areas, I am very optimistic that the answer will clearly be “yes” by 2012. The SEPA credit transfer will start on time and the SEPA direct debit will probably start a few months later. Everyone must be reachable by SEPA direct debit instruments at the latest by late-2009. The SEPA will bring about speedy payments. Based on the requirements of the Payment Services Directive (PSD), the maximum time span for a payment to reach its final destination will be one working day, at the very latest by 1 January 2012. For more urgent payments there is the option of using priority payments. The features described in this scenario indicate an increasing use of electronic payments over paper-based ones and advancing SEPA-wide solutions for better straight-through processing (STP). STP is especially interesting to large corporates and public administrations, but will also bring benefits to small and medium-sized enterprises. We will elaborate on this point a bit later.

For other SEPA aspects, the search for efficient market structures may take a few years longer. This applies especially to the developments which are fully driven by market forces, for instance the emergence of a European debit card scheme, the consolidation of infrastructures, and the further evolution of the SEPA governance structure. The latter will not only have to address coordination and adherence within the banking sector, but similarly will have to manage the relationships and interfaces with other stakeholder groups. Another interesting question relates to the evolution of pricing structures in the changing SEPA landscape. Many studies from the payments consultancy industry predict increasing competition on prices (I imagine that some of the authors of these studies are here today).

Another question regarding SEPA efficiency relates to how long the transition phase will last, i.e. how long both legacy and new payment schemes will co-exist. The common expectation is that the transition phase will be very expensive, and that, consequently, that there will be a clear need to move as soon as possible to the full SEPA environment.

[slide 5] Does SEPA ensure the safety of payment services?

Payment consultants and experts participating in this conference are certainly aware of the Eurosystem’s interest in the smooth operation of payment systems in the euro area, which naturally includes the oversight of SEPA payment instruments and infrastructures.

The SEPA initiative has already produced some concrete advances in the area of card security. The EMV standard is an important step on the issuing side, and other measures to enhance the SEPA-wide combat of card fraud are under way. These are necessary to bring cross-border levels of fraudulent incidents down to national ones. In particular, I expect that a common fraud database will lead to major progress in this respect, but also that coordinated measures on other significant fraud types, such as card-not-present fraud, will follow.

Now let us briefly turn to the legal environment. To guarantee European citizens the same level of protection throughout the EU, legislation on banking business and e-money have been harmonised through directives. Harmonised legislation has also been introduced to deal with money laundering and terrorist financing.

However, most important of all for the SEPA landscape, is the new legal framework of the PSD. You have all heard the news that the PSD was finally approved by the European Union legislature in April 2007. The latest implementation deadline for all EU Member States is November 2009. Regarding safety aspects, the Directive introduces user protection rules and delivers a supervisory framework for three types of payment service providers: banks, e-money institutions, and – as a new category - payment institutions. The companies applying for a licence as a payment institution are non-banks. They are entitled to compete with banks and e-money institutions in offering payment services to end users, but must adhere to the protection rules and safety requirements laid down in the PSD.

The effects of the PSD lead us directly to the next guiding question on competitiveness.

[slide 6] Does the SEPA contribute to the competitiveness of the EU economy? - PSD

The scenario description revealed that I clearly expect the SEPA to have a significant positive effect on the competitiveness of the European Union in general. The PSD will also have an effect on competitiveness as it facilitates the SEPA implementation, widens the acceptance of its new payment services and enables new types of competitors (i.e. payment institutions) to enter the SEPA market. The minimum levels of user protection rules and of service levels (e.g. for speed, information requirements) laid down in the PSD will contribute to internationally competitive market conditions.

[slide 7] Does the SEPA contribute to the competitiveness of the EU economy? - SEPA

The SEPA will make it easier to use electronic euro payments. It may also trigger the development of related electronic services for enhanced business processes. In 2012, the SEPA will offer a much higher degree of market transparency and significantly less entry barriers for national markets or single market segments.

Before the start of the SEPA project, national payments markets in Europe experienced differing intensities of competition and followed different paths of payment innovation. My expectation is that the general appetite in society for innovative payment solutions will increase along with evolving technological possibilities and the increasing transparency of products available for the SEPA market. The SEPA, therefore, has the strong potential to create a favourable climate for innovative retail payment solutions to flourish.

The SEPA and the PSD together are meant to foster competition and lead to greater innovation and more transparency in both pricing and choice of the services available to customers.

[slide 8] How has the SEPA shaped the banking industry?

The SEPA-wide market and the increasing competition from payment institutions in certain market segments may certainly become a challenge for the banks. This raises a number of open questions about future role models and the market positioning of both banks and non-banks competing in the SEPA.

First, this requires banks to review their market scopes regarding countries and service portfolios. Second, it may necessitate the restructuring of business processes and the readjustment of cooperation options and pricing models. Third, the SEPA may speed up the general trend towards the industrialisation of financial services. This trend was, for instance, outlined in a study published by Deutsche Bank Research in February 2007 [2], which describes how the next wave of industrialisation is reaching the services sector. As is already common practice in the car industry, the idea is to create a high variety of products based on standardised production platforms. This may infuse more efficiency into back-office processes and, at the same time, enable banks to offer tailor-made products to their customers. This concept might ideally address the increasing cost pressure banks are facing, but also foster product innovation and specialised customisation at the same time.

[slide 9] Do customers see real benefits? – The iceberg experience

In talking about customisation, we have already touched on some of the first aspects of the user experience in the SEPA landscape of 2012. I anticipate that these aspects will be among the most pressing issues to emerge in order to really achieve a positive SEPA scenario by 2012. It is possible that the SEPA experience at the beginning of 2008 might be something of a non-event. The reason for this is simple: the implementation of the SEPA in the banking sector does not automatically trigger the migration of users to these new services. There are a plethora of aspects which matter for users, but which are not addressed in the SEPA initiative. You can compare the aspects provided within the SEPA framework with the tip of an iceberg, and the missing aspects with the larger part of the iceberg which has remained invisible or out of scope, at least so far.

The warmth of the users’ welcome to the new SEPA services depends first of all on the way the project is communicated to customers. It would be a shame if the announcement of the SEPA transmitted to customers in the second half of 2007 and early 2008 sounds something like: “The SEPA was imposed by the regulators; it generates a lot of additional costs for the banking and payment industry, but it does not bring about much change apart from enhancing cross-border transactions”.

I would consider this type of message as a short-sighted exercise in misinformation. The truth is that the SEPA project will only have reached a very first milestone at the beginning of 2008; and nor will it have come to an end by 2010. The SEPA is the vision of a common market, a landscape that will need to evolve further to meet the existing and evolving needs of users.

[slide 10] Do customers see real benefits? – A few surveys

What about users’ needs? Until 2007, only a few surveys have tried to investigate what users expect from the SEPA. On this slide you can see an example of a survey carried out in Finland.

Surveys regarding future services might not be the easiest way to investigate customers’ interest. The risk with surveys lies in the participants’ lack of imagination about the changes ahead. This can even be seen in this example. Like the quotations taken from the EPC’s website, the questions listed here only cover the cross-border aspect of the SEPA, rather than a far more comprehensive vision.

[slide 11] Do customers see real benefits? – Situation in 2007

Let us now ask if and where customers might see the full set of real SEPA benefits. Clearly, the answer to these questions lies beyond the banking sector, closer to the customer domain. Substantial parts lie outside the influence and scope of the EPC and within the competitive domain. Basically, the SEPA initiative has so far focused on the upper, inter-bank part and has largely refrained from addressing the lower domain.

[slide 12] Do customers see real benefits? – Situation in 2007 and the iceberg

This is where the iceberg once again comes into the picture, and where some danger might appear for the SEPA initiative in general.

At this point, I would like to stress that the banks have had more than enough to do with laying the SEPA foundations in the inter-bank area. The question is now how much further they should go. When it comes to talking about bank-to-customer interfaces, we are increasingly entering the competitive domain. Already, it is sometimes difficult for the banks to balance the coordination needs of the SEPA initiative against the necessities of compliance with competition rules. An especially delicate issue in this respect is the pricing of services, including the pricing of services to customers, as well as within the industry. Some important case decisions by the European Commission on interchange fees in the cards business are expected in 2007, which may serve as general guidance to the payments market.

So, this seems to reflect the situation today in a simplified way. How do we get from here to a SEPA landscape in 2012 that is really attractive to users? Obviously, the link between the upper and the lower parts must be addressed.

[slide 13] Do customers see real benefits? – Situation in 2012 (eSEPA market)

Users will have little incentive to migrate to SEPA if the services that it offers do not fulfil their expectations. They will not be willing to change their usage habits if there are no clear improvements compared with the payment services they are used to. I see a lot of potential in this respect for services that stimulate a paperless, electronic and modern payment area. These innovative services are known as eSEPA products.

For consumers, eSEPA products may bring advantages in terms of the speed, safety and convenience of payment services. End-to-end (or customer-to-customer) STP is of interest to end-users with high transaction volumes, such as corporates and public administrations. It helps them to optimise the payment process as well as other elements of the business transaction chain as the need for manual intervention and transformation of data is eliminated. The European Associations of Corporate Treasurers (EACT) have estimated that the savings generated by using e-invoicing instead of paper invoices in the EU might easily amount to 243 billion euro – and this is only the potential saving of e-invoicing in the business-to-business area. The seamless linking of business processes along the value chain offers a vast area of potential benefits. These may materialise, in particular, in the form of reduced processing costs and processing risk, and in liquidity savings.

The iceberg analogy suggests that the development and offer of SEPA core payment services to users is not the end of the SEPA work, but rather just the start. Now, more action is necessary to adopt the core SEPA instruments and complement them with other services so that they serve the various needs of the customers. This reminds us again of the features of financial industrialisation and the need to create variety out of a common standardised platform. Or, to use another image, new ecosystems need to evolve around the core payment services.

The good news is that this work has already started. Steps have been taken at individual bank/customer level, in national roll-out committees and industry-specific fora. There are also some first initiatives at the European level. In my scenario description I gave the example of a European initiative relating to e-invoicing backed by the European Commission. This initiative is in fact envisaged and might be officially launched in the second half of 2007.

The evolution of a large variety of “customer-friendly” solutions based on the SEPA instruments is a market-driven process. SEPA-wide innovation should be driven by those competitors who are interested in offering these services – an “alliance of the willing”. However, I would like to encourage the EPC to actively support the development of innovative customer-to-bank solutions, for instance the work on consumer payments at online merchants or via mobile phone, among other reasons, because of the high coordination effort that such a SEPA-wide initiative requires.

It is important that individual provider communities shift their attention from developing purely ‘national’ payment service solutions to innovating for the euro area-wide payments market. SEPA-wide competition on scheme enhancements and innovative services replacing the current national market segmentation will ensure the evolution of a modern SEPA with high service levels for different user groups and service channels. The European Central Bank will launch a new website called eSEPA in summer 2007 with the objective of making the evolution of such innovative products for the SEPA market more transparent.

[slide 14] Back in time: lessons from the future

In principle, the future looks bright – and the SEPA landscape has all the potential to become a good place to be. Thanks to the efforts made by the banking industry, implementation is advancing. The safety of transactions will be ensured and enhanced and new levels of efficiency will be possible with increasing volumes.

However, a lot of work remains to be done in some areas. In particular, the development of a large variety of payment-related services will be crucial for the SEPA migration, because this will ensure that the core SEPA schemes are complemented with services providing at least the same level of service currently existing at the national level (the evolution of “ecosystems” or eSEPA products complementing the core SEPA services). Without such complementary products, there will be a lack of incentive to migrate to the SEPA environment.

If we wind the clock back ten years, to when the euro currency was in its preparation stage, hardly anyone could imagine how the euro area would be. Today, the euro is a commodity in more than 300 million citizens’ lives.

The key message of my presentation is that, similar to the vision of the common currency, it is also worth turning the vision of the Single Euro Payments Area into reality. As for the remaining challenges that can sometimes appear as huge and unpredictable as the hidden part of an iceberg, some comfort might be drawn from a piece of wisdom which is attributed to Saint Francis, “Start by doing what is necessary, then do what is possible, and suddenly you are doing the impossible.”

Thank you very much for your attention.



[1] In 2005, there were 6,313 institutions offering payment services to non-MFIs in the euro area (total for the EU: 8,738). Source: ECB Blue Book addendum incorporating 2005 data, December 2006.

[2] Thomas Meyer, Industrialisation of financial services, E-Banking Snapshot, Deutsche Bank Research No. 20, February 2007

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