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Keeping up the momentum: achieving the SEPA objectives on time

Gertrude Tumpel-Gugerell
Member of the Executive Board of the European Central Bank,
Off-site strategy meeting of the Coordination Committee of the European Payments Council,
Durbuy, 3 October 2005

Ladies and gentlemen,

Thank you very much for inviting me here a second time to present the ECB’s views on the Single Euro Payments Area (SEPA).

Last year, on my return journey from Durbuy to Frankfurt, my company car, which was brand new and had just been purchased by the ECB, broke down. Somehow this experience overshadowed my trip and I saw it as a bad omen for the crucial year that lay ahead for the SEPA.

The main reason for me to come back to this beautiful but rather remote little town here in the Belgian Ardennes is to congratulate you for proving that prophecy wrong. With the recent decisions on the card framework and the rules on direct debit and credit transfers, the European Payments Council (EPC) has taken a major step forward. At the same time, I am also here to encourage you not to lose momentum. For me, the SEPA project is like a train: all the banks are now aboard, the journey has started and the destinations are clear. Today, however, we are here to discuss the speed of the train. In my view, complacency would be fatal. I think it is important to understand that if the train were to slow down, the whole project would be in danger.

[Today, Germany celebrates the 15th anniversary of its unification. Of course, the European Union is a different political entity to a nation with one people. Yet, it is worth drawing a comparison between Economic and Monetary Union and the currency union between the German Democratic Republic and the Federal Republic of Germany: it would have been unthinkable in the newly unified Germany to sustain regionally fragmented payment systems, yet we have long discussions about creating a single payments area in Europe. The introduction of the Deutschmark in the new Länder led to the integration of the payment systems and the banking sector as a natural consequence. As Willy Brandt said, “What belongs together will grow together”.]

In my speech, I will take as a starting point the SEPA project as we saw it one year ago when we last met here in Durbuy. From this perspective, I will start by presenting the ECB’s assessment of where the SEPA stands today. For me, the SEPA should not be seen in isolation and exclusively as a political project. Therefore, in the second part of my speech, I will concentrate on why SEPA is so important for promoting financial integration in the euro area. Financial integration is in the interest of the banks themselves, since only an integrated European financial sector can face up to the challenges of global competition.

Where is the SEPA project today?

My main message of Durbuy last year was to introduce the distinction between “SEPA for citizens in 2008” and “SEPA for infrastructure in 2010”.

Assessing what has changed since last year, I would say much progress has been made on the first objective, while the second is still less clear.

First objective: a SEPA for citizens in 2008

Last year, we made a formal commitment to deliver the SEPA instruments, but had no concrete plans. Today, we have three resolutions on SEPA credit transfers, direct debits and cards, which were adopted at the EPC Plenary of 21 September 2005. Thanks to the dedicated efforts of hundreds of bankers, who participated in various working groups over the summer, the EPC has achieved a major milestone by sending the SEPA Direct Debit Scheme and the Credit Transfer Scheme out for national consultation before they will finally be rubberstamped at the EPC December Plenary. Moreover, the SEPA Cards Framework was endorsed by the EPC Plenary at its last meeting. It is now up to the national banking communities to come up with proposals on the way in which national card schemes will comply with this framework.

It is clear that the SEPA train is on track and heading towards its first destination. Even though some difficult issues remain to be resolved, the EPC has proved itself in the leadership role that is necessary to ensure the delivery of a SEPA to citizens in 2008.

However, in my view, there are some obstacles on the tracks that make the ride on the SEPA train not quite as smooth as it should be. However, these obstacles can be overcome.

SEPA for Cards

Last year I expressed my wish to see improvements so that cardholders can use their cards in the same way both nationally and within the SEPA from 1 January 2007. In the past year, the EPC has drafted the SEPA Cards Framework. This has not been an easy task, given that, initially, several misconceptions prevailed in the market, for example, that the EPC wanted to set up a new card scheme to compete with Visa and MasterCard!

Since then, a lot of work has been done and the EPC, and therefore the banking community as a whole, has succeeded in its mission to define the operating framework for cards within SEPA. However, consensus among the parties involved was reached at the price of rather general and high-level formulations.

Certainly many powerful messages are included, such as the necessity for EMV implementation. However, it also has to be said that a lot of crucial aspects were left for the implementation phase, such as the issue of interchange fees and how they will fit into the general SEPA for Cards concept.

The implementation of the framework will raise several practical issues, which will have to be addressed homogenously across the industry. It will also be necessary to clarify how standardisation work can proceed at the necessary pace to allow the implementation of a SEPA for cards within the set time horizon.

Much remains to be done during the implementation phase, and this task will not be any easier than the formulation of the framework itself. However, we are confident in the EPC’s commitment to this work.

SEPA Direct Debit

Last year, I referred to the challenge faced by the EPC to make up for the initial delays in delivering a pan-European direct debit scheme. Today, I am pleased to learn that the SEPA Direct Debit Scheme has been adopted at the most recent EPC Plenary and has been sent to the national banking communities for consultation. However, some crucial elements are still missing from the current proposal. Although there are different national direct debit models in Europe, which work very well within their national contexts, the difficulty lies in combining all of these different practices. I expect the banking industry to combine the best features from all of these models so that the end customer will not suffer any deterioration in service. In particular, direct debit transactions should not take any longer than under national schemes. Moreover, for its success, all debtors within SEPA must be reachable through the SEPA Direct Debit Scheme. The banking industry should come up with a proposal on how to achieve full reachability within SEPA. Last but not least, I also hope that the banking industry will soon be able to present a scheme management framework.

Priority payments

Last year I stressed the importance of complementing the basic SEPA credit transfer, which has a three-day execution time, with a service for same-day value payments. Priority payments would already be necessary by 2008 in order to achieve a level of service at SEPA level that is at least on a par with the best performing national markets. Recently, we have learnt that priority payments are outside the scope of the EPC, but that it will instead be delivered by the Euro Banking Association (EBA).

I understand that priority payment should not be seen as an EBA club-type solution, but rather an open standard that is available for anybody to use. This is important, and in the end it does not matter for us whether the standard is developed within the EPC or elsewhere, as long as it is open and available from all banks.

Involvement of users

This time last year, nobody had formally asked end users about their expectations for the SEPA. The Eurosystem has since arranged a number of meetings with consumer organisations, SMEs, merchants and corporate treasurers to find out what they want. The Eurosystem is now discussing with banks how best to integrate these expectations into the SEPA project. This means finding a balance between limiting the scope to what can realistically be achieved in the short term (2008) and the need to extend the medium to long-term scope (2010 and beyond) of the project in order to further meet customer expectations.

Demanding customer expectations (full end-to-end, straight-through-processing)

Last year, I emphasised the request by corporate customers for support for an automated end-to-end, straight-through-processing of payment information. Today, we have learnt that businesses would also like to receive support for electronic invoices, and that this could result in substantial efficiency gains. We understand how important it is for corporate customers to have access to these modern payment services, and that this would also create major efficiency gains supporting the Lisbon agenda.

Support of key decision-makers for investments

Last year, we did not know whether decision-makers within the banking field were ready to support the SEPA project when it came to making the necessary investments. Now we know from discussions with board members of major euro area banks that the investments for 2008 are undisputed.

Second objective SEPA for infrastructure in 2010

However, the 2010 objective still only exists on paper, and some hope that the date will pass unnoticed. More progress and further commitment are therefore needed. As I said last year, “SEPA can never be built on cross-border instruments alone. SEPA requires giving customers the possibility to use highly efficient pan-European payment instruments that work similarly both within the ‘small town’ (Member State) and beyond its borders (the entire euro area).” The vision is for a unitary system, because a dualism between national and European systems is not sustainable.

Of course, market forces and investment cycles are very important in this process. I will therefore present the 2010 objective in a slightly different way than I did last year by acknowledging that SEPA for infrastructure will rather evolve gradually in the following three phases:

First, the adjustment of infrastructures by 2008 for the processing of SEPA payments in parallel to national payments (in this respect, it is important to focus specifically on how to ensure technical reachability for the pan-European direct debit scheme);

Second, the irreversible migration of a critical mass of national credit transfers, direct debits and cards to SEPA instruments by 2010 and the achievement of complete interoperability between SEPA-compliant infrastructures;

Third, and beyond 2010, I expect a reduction of the number of retail systems in operation in the euro area by means of competition and the phasing out of national instruments.

However, what is key for me is that the banking sector understands that SEPA and, in particular, the 2010 objective is not just a political obligation, but rather a unique opportunity for the European banking sector.

Let me expand on this further.

Why is SEPA so important?

Six years after the introduction of the euro, the payment landscape in the euro area is still a patchwork of national systems, reciprocally segmented by their specific traditions and evolved national structures. While citizens pay for goods and services using the same euro coins and banknotes throughout the euro area, their bank accounts are still part of national banking systems in which direct debits or large-sum credit transfers across national borders are either impossible or prohibitively expensive. For a currency union and a single market, this is an unacceptable state of fragmentation.

Some of you have told me that you recognise that there political will exists among European policy-makers to reap the potential benefits of a single financial market and achieve measurable gains for customers, corporations and households.

Is it political will alone which drives the process – because it can be enforced by regulation – or is there anything in it for the banks themselves?

The cost of “halfhearted" solutions

I strongly believe that SEPA offers an important economic opportunity for the European banking sector which should not be missed. Of course, the costs of providing European instruments in addition to existing national solutions are non-negligible for banks in the short term. Yet there are other potential costs involved that are far more relevant. These are the costs associated with “half-hearted” solutions, which fulfil the European requirements, without planning for further changes to the systems. Running systems in parallel would be like having two currencies in use. During the changeover period, pressure from merchants and banks helped to speed up the process because, otherwise, the logistical cost would have been too high. Consumers embraced the new currency as they did not want to have to keep two purses.

Have all participants taken their best players to the races?

The recent decisions by the EPC, namely to introduce common rules for cards, direct debits and credit transfers, have opened the gates for a new race between the banks. But have all participants entered their best players in the race? Will the programme add more complexity or will it be useful to streamline infrastructure and make better use of platforms by reducing the number of platforms and creating new business opportunities through the opening up of segmented systems?

What is the impetus to push for consolidation?

I know that the meaning of 2010 as a deadline for the implementation of the pan-European infrastructure has changed over the past 12 months. As I mentioned earlier, to expect a complete transformation of the infrastructure would be unrealistic. But what is the impetus to push it forward? The customer does not care what happens behind the screen or the walls of the computer room. The public authorities will leave it to the banking industry to organise the transition. There will be a tendency to keep the revenue structure for as long as possible, thereby posing a risk that the technology will evolve too slowly.

Take, for example, the case of the airline industry: established airlines only rethought their cost structure after cheap carriers started to take away large shares of the market. The airline industry in Europe is in the process of consolidation, and those who started restructuring first are now in a better position.

I understand the Scylla and Charybdis of recovering costs from payment services and reshaping the design and the structure of these (new) services as well.

There is scope for restructuring in Europe

Although it is difficult to compare the EU with the US banking system, three observations can be made:

  • On average, European citizens have two branches per 4100 inhabitants, while US citizens have one per 3700.

  • Non-cash-payment services seem to be quite efficient in many European countries, although they are mainly organised within national borders.

  • The profitability of US banks is higher, and payment services are a major source of revenue (up to 45%).

This shows that there is scope for restructuring in Europe: increased use of non-cash versus cash transactions and the consolidation of underlying system-wide infrastructure could provide cost savings in the medium term.

Additional efficiency gains building on what has already been achieved over the past two decades within national borders will make banks stronger and benefit their customers and will prepare the ground for further cross-border consolidation. In a market where there are many players, competition is high. The opening of borders for transaction business will therefore intensify competition. Revenues based on market power will come under pressure and a new equilibrium will be found. Thus, a carefully planned transition is of the utmost importance.

But what is the alternative? Aggressive competitors will appear in any case. Do we wait until they force the established service industry to change their price structure, or can the “first movers” keep the benefits of their innovations? If we look at different regions, profitability based on innovation and service quality is the better way forward.


In conclusion, I should like to stress again that the preparations for SEPA are key prerequisites for further financial integration, which is important for increasing the competitiveness of the banking sector. Banks in the euro area stand in direct competition with banks that are operating globally. Insulated national systems cannot be sustained for ever. Even if they are currently run efficiently, in the medium term they will be undermined by international competition. The creation of standards that allow for financial integration and consolidation in Europe will strengthen the European banking sector in order to face global competition.

Europe must take the full advantage of new technologies

The EPC is well on the way to having defined a set of standards for basic SEPA services to be delivered in 2008. This is a first and necessary step that the ECB fully supports. This now has to be made concrete through national migration plans at the beginning of 2006. However, alone, this will not be sufficient to face up to global competition. Europe must set the benchmark higher by also aiming to take full advantage of new technologies. In my view, this is part and parcel of the SEPA project, even if it might take some more time to achieve. Fortunately, in Europe we already have some regions which are working with cutting-edge technology. Our challenge is to find a way for early movers and advanced banking communities to start to deliver future-oriented solutions in the short term in the certainty that the rest of the euro area will follow at least by 2010.

European banks must keep up the momentum of SEPA

To spell it out: the SEPA train should run full steam ahead. The ECB, the Eurosystem as well as the European Commission can contribute by ensuring that the tracks are clear. European banks are still in the driving seat. Yet, if the train was too slow, the economic benefits of the project would not materialise, customers would turn away and, ultimately, the process would be run by someone else as global competitors rather than European banks would then bring about consolidation and restructuring in Europe’s banking sector. Therefore: do not lose steam!

Thank you for your attention.


European Central Bank

Directorate General Communications

Reproduction is permitted provided that the source is acknowledged.

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