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SEPA: making the dream become a reality

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECBFirst EU/US Retail Banking Forum 15 November 2005, Brussels

Dear participants,

Firstly, I would like to say how delighted I am to have been given the opportunity to speak today. I think that this First EU/US Retail Banking Forum is a wonderful initiative and I am pleased to be able to share with you the EU perspective on a topic that, in my view, will dominate the agenda of European retail banking in the years to come.

Currency is one of the foremost expressions of political identity and a key element of integration for the society in which it is used. This was understood early on in the United States when the motto “E Pluribus Unum” (One out of many) was inscribed on all US coins as a symbol of the unification of 13 colonies into one nation, back in 1776.

The European Union decided on a common currency – the euro – 13 years ago, when it adopted the Maastricht Treaty. So far, 12 Member States have introduced the euro and more will follow suit over the next decade. The European Union is not (yet) a political union, but the introduction of the euro has been thanks to the desire of its Member States to generate stability and prosperity in Europe. In order to build this dream of a united Europe, many challenges will have to be overcome. One specific challenge, which I think our counterparts in the United States are also quite familiar with, is the tension between diversity and unity in all federal systems. However, this can be a productive tension if the right balance is achieved. For the system it is important that neither too much centralism impedes the flexibility that citizens currently enjoy, nor that too much decentralism endangers the integration into a common system. To illustrate how these differences in preferences are mirrored by the difference in payment habits, I will make a few comparisons between the use of payment instruments in the euro area and the United States.

Customers and businesses in the euro area, as in other parts of the world, are making increasing use of electronic forms of payment.

Paper-based payment instruments – cheques, for instance – lose market share. In the past, card payments have not been as frequent in the euro area as other payment instruments, such as credit transfers (wire transfers in the United States) and direct debits.

Cards – both debit and credit cards – have, however, proven to be very successful in the euro area in recent years. Statistics show that in the last five years, the use of cards has almost doubled. They are currently one of the three most popular instruments for making cashless payments. Currently, credit transfers, card payments and direct debit have an almost equal position in the euro area. The US payment system, as can be seen from the graph on the right, relies mainly on cards and cheques.

The growth of the card market can, to a large extent, be attributed to debit cards. They currently account for over two thirds of all card payments in the euro area and have recently become more important than credit cards in the United States.[1] The euro area hosts more than 30 card schemes, the majority of which are national debit card schemes available only for payments in national markets. Currently, card payments in countries other than those in which the card is issued are generally only possible via international card schemes.

To a great extent, Europe is still composed of national markets with different payment habits and industry structures. However, averages do not tell the whole truth. The use of cards – like other payment instruments – varies considerably among the euro area countries. In the euro area there are a few countries with relatively high card usage – France, the Netherlands, Finland and Luxembourg – and a few with moderate use – Ireland, Portugal and Belgium. In the remaining five euro area countries, however, cards are not as popular as other payment instruments. Instead, payments tend to be made using cash, credit transfer or direct debit. In no euro area country is card usage as high as in North America. In the euro area an average of 36 card payments are made per inhabitant. In the United States the figure is almost four times higher at 126 transactions.

There is, however, a caveat: the data are certainly not fully comparable between the United States and the euro area and even within the euro area itself we are currently working on improving the quality of these data.

In any event, we can observe that, while in many euro area countries card usage currently represents only a small fraction of usage in the United States, the position of cards on the market is strengthening everywhere.

The difference in payment habits is not only limited to cards. We can see big differences in the use of all other payment instruments as well.

Credit transfers are more popular in the Netherlands, Austria and Finland than elsewhere in the euro area. Direct debits are twice as popular in Germany, Austria and the Netherlands than in other euro area countries on average. Cheques are over ten times more popular in France and e-money has been most successful in replacing other means of payments in the Benelux countries. In the case of most payment instruments, differences in usage are ever changing.

In addition to the differences within the euro area in terms of payment habits, there is a deeper fragmentation of payment systems and instruments into national markets. Hence the motto “E Pluribus Unum” could be the title of the work programme that, to a large extent, we in the euro area still have to undertake in the area of payment and securities settlement systems. For the Eurosystem as well as the European Parliament and Commission, the realisation of a single euro payment area (SEPA) is a necessity.

Indeed, only when people in the euro area are able to use the euro within and across the national borders of all Member States can it fulfil all the expectations and functions of a modern currency.

For central bank money, this goal has been achieved with the introduction of the banknotes and coins in 2002, and it will be further perfected when we move from our current RTGS system TARGET1 to the next generation TARGET2.

For commercial bank money, the SEPA will be achieved when citizens can make payments throughout the euro area from a single bank account, using a single set of payment instruments and when this can be done as easily, cheaply and safely as it can be done within the national context today.

However, despite some encouraging progress we are still a long way from the SEPA goal of integrating retail payments in the euro area. In other words there is still no integration, as national systems remain separated from cross-border ones.

From an infrastructure point of view we have a situation whereby there are 12 different national infrastructures and one pan-European automated clearing house (ACH) covering only cross-border payments for one payment instrument. None of these infrastructures are compatible and at present are not in competition with each other despite offering more or less the same services. Indeed, the old country-based segmentation still persists, despite the single currency.

If we take the situation in the United States as a benchmark for an optimal number of settlement systems, the euro area still has a long way to go before infrastructures are consolidated. The United States has no more than between one and four infrastructures for each type of payment or security settlement system. If we compare this with the situation in the euro area before EMU in 1999 it is clear that some consolidation has taken place for securities systems (a reduction of security settlement systems from 23 to 18 and of central counterparties from 14 to 8). Of the large-value payment systems the interlinking of the respective national RTGS systems into TARGET reduced the number of large-value systems prior to the introduction of the euro from 18 to only 4 today (TARGET, EURO1, PNS and POPS).

However, for retail payment systems not much has changed. Today we still have 16 retail payment systems in the euro area for the processing of credit transfers and direct debits, down from 18 prior to 1999. A new pan-European ACH (STEP2) has been established but has so far not been able to contribute to any consolidation. The small net decrease is due to a streamlining of processing in France, which was not related or had little to do with the introduction of the euro.

The transition process from national infrastructures into pan-European ones is currently faced with obstacles stemming from negative consumption and production network externalities. Users of national ACHs have little incentive to invest in and use new SEPA-compliant clearing and settlement services based on a different set of standards and business practices unless all counterparts invest and use those services as well.

However, the SEPA is also a tremendous economic opportunity. The SEPA will be economically superior to the current patchwork of legacy systems and schemes because the economies of scope and scale would apply to a much wider economic area than in any Member State. The single currency does not only make the SEPA a necessity, but it also makes it possible. It should not remain an insurmountable opportunity.

The ECB naturally intends to do everything in its powers for the SEPA to materialise. Therefore, in the next part of my presentation I would like to make ten statements on the SEPA, addressing some key issues and emphasising our wish to make the SEPA a success.

The SEPA is an investment into the future

The SEPA will shape a common user experience of payment services. At present, cross-border retail transactions are typically executed less quickly and less efficiently than national ones and basic payment instruments such as direct debits are not available across borders. The new SEPA user experience will be one of being part of an integrated, transparent and efficient payment systems market in which a variety of services is available between all counterparties.

This will not come about at zero cost, especially not for the payment industry. So far, only very rough first estimates exist as to the potential implementation costs of the SEPA. TowerGroup expects that incremental spending by the European banking industry to implement the SEPA on European payment system infrastructures might exceed EUR 8 billion (USD 10 billion) within the next six years. Cap Gemini estimates that price reduction effects might cause an overall decrease in revenue of between €13 billion and €29 billion (minus 30%-60%, measured against their 2010 baseline scenario without the SEPA). This would mean the double challenge of increased investments and decreased revenues for banks. These challenges will come, sooner or later, and will force banks to take advantage of cost savings via infrastructure pooling.

But at the same time the SEPA is expected to bring about overall efficiency gains and saving potentials for society.

It requires changes to many legacy systems that have so far been optimised for national purposes only. Market barriers that hinder the free competition of payment services or the spread and adoption of efficient processing practices across national borders will be removed. The establishment of a common equilibrium of efficiency for the SEPA may bring economies of scale to many players, especially those with high fixed costs for either national or cross-border transactions. Small players without business or customer focus beyond a regional reach might outsource their operations to providers with an appropriate cost structure and service level, while large European banks and ACHs will have the opportunity to build and expand service networks within the SEPA and beyond.

Being an integral part of the Lisbon agenda the SEPA benchmark must be set higher to face up to global competition

The SEPA is important for Europe not only for internal reasons but also to make Europe more competitive. Therefore, Europe must set the benchmark higher than the basic SEPA services to be delivered in 2008, in order to face up to global competition. It is crucial that the SEPA project is also aiming to take full advantage of the new technologies by 2010. We understand how important it is for corporate customers to have access to modern payment services which would create major efficiency gains supporting the Lisbon agenda.

These substantial efficiency gains are mainly related to the request by corporate customers for support for an automated end-to-end, straight-through processing of payment information, as well as support for electronic invoices.

Fortunately, here in Europe some regions are already working with cutting-edge technology (for example, Nordic and Baltic countries). 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 by 2010 at the latest.

Involvement of end-users is crucial to make the SEPA a success

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. From these meetings we have learnt that the present EPC proposals for SEPA credit transfers, direct debit and cards might not be sufficient for users to voluntarily migrate from national to SEPA instruments.

In some markets end-users are now formally involved in ongoing national consultations on the SEPA direct debit and credit transfers. However, we have received complaints from corporate treasurers in some markets that they do not feel sufficiently involved, and that they have concerns that the SEPA deliverables are not ambitious enough.

It is therefore important to specifically target the corporate customers that initiate the bulk of national transactions to understand what they would expect from the SEPA in order to migrate from the national environment. The Eurosystem, in this case represented by the national central banks, stands ready to facilitate the dialogue between different stakeholders at national level. However, it is the responsibility of commercial banks to ensure that the SEPA instruments are attractive enough to get a critical mass of pilot customers bringing volume from the national environment. I will now address the main concerns relating to each specific instrument.

Priority payments must be in place by 2008

I have repeatedly 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 need to be implemented by 2008 in order to achieve a level of service for SEPA payments 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 they will be delivered instead by the Euro Banking Association (EBA).

I understand that priority payments should not be developed for EBA members only, but rather as an open standard that is available for anybody to use. This is important, and ultimately 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.

The SEPA Direct Debit scheme as presently proposed is probably not attractive enough for a critical mass of users

The present SEPA Direct Debit (SDD) scheme is a long way from meeting the benchmark set by the best national schemes, for example execution times and payment settlement times are too long. Initial feedback from the EPC Direct Debit Working Group indicates that there are doubts about the efficiency of the SDD scheme compared with national direct debit schemes, which might make it difficult to convince customers to migrate. However, SDD should not be viewed as a political project with the sole purpose of taking care of cross-border direct debit. The aim must be set much higher – to replace existing national schemes with a future-oriented scheme that is at least as efficient as the best national schemes to date; a scheme based on common standards which could also be used as a platform for services that the euro area will have in the future, such as electronic bill presentment and payment.

European SEPA for cards should be under euro area governance while cooperating with international card schemes

The SEPA Cards Framework (SCF) of the EPC, being a joint industry product, is certainly a big achievement. It is now being legally reviewed before its official release.

Of course, the ECB realises the need for the legal review and understands that it is an unexpected development and a complex procedure which was not taken into account in the initial planning. However, some pressure should be applied for a timely completion of the review, especially since card schemes are, at this stage, supposed to be developing their plans without having the final version of the SCF document.

Agreement on the SCF was obtained at the price of generality; as a result, the SCF consists of a series of high-level principles. There is a risk with the general descriptions that diverging views on what SEPA compliance is emerge during the implementation phase. In addition, SCF compliance assessment should not consist of a “checklist” procedure but should be based on detailed and precise requirements and criteria, in order to ensure a common in-depth understanding of SEPA compliance and a homogenous case-by-case card scheme assessment. The ECB is very keen to monitor how the interchange fee issue in particular will be dealt with and whether implementation in that area will be compatible with the general SEPA concept.

The ECB is neutral with respect to the various scenarios presented by the SCF. However, it would like the market to explore all options and for card schemes not to move en masse towards the same “easy” choices. National banking communities and card schemes should explore all possibilities and commit themselves to examining the feasibility and profitability of each. The ECB believes that competition is an essential market feature – of course it is not directly linked to the number of schemes operating but we would welcome the co-existence of several solutions.

In this respect, it should be noted that Visa and MasterCard have a central and critical role to play in letting other solutions materialise with which they would be in direct competition. They should not exploit their comparative advantages to boycott other initiatives. Of course, it has to be recognised that adaptation to this new environment requires a radical change in the competitive strategies and behaviours of the two schemes, which is certainly a challenge for their governing bodies.

Standardisation is an essential pillar in constructing a SEPA scheme for cards. The high-level principles of the SCF will function on the basis of interoperable infrastructure, which requires the definition and implementation of standards. The issue is addressed in the SCF, but in rather broad terms. Certainly the EMV security standard is a major step forward but more standards need to be developed and implemented for the rest of the card payment transaction chain. The SCF is not detailed enough in this respect: it should have defined the areas that need standardisation, the standardisation process itself and its deadlines. Despite the fact that this element has not been sufficiently covered, work in this direction is now under way, being carried out in different fora. We are confident that the industry realises that standards will be the basis for interoperability; that interoperability will be the basis for acceptance and, finally, that acceptance will be the key factor demonstrating the success of the SEPA for cards.

Within the general area of standards, a particular place should be reserved for security standards. Security is a very topical issue, which should be given more attention.

Finally, interchange fees are a very topical issue, both from a competition and from a SEPA implementation point of view. With regard to the second point, due to the fragmentation of the euro area market, there are substantial differences in the level of interchange fees applied in the various euro area countries. This results in different interchange fees being applied for transactions within and between euro area countries.

The way out of this situation presents a great challenge. The ECB, as an advocate of self-regulation, is certainly against the enforcement of a uniform fee by regulation. We believe that enhanced competition, market integration and increased transparency will influence costs and fee practices and promote integration.

The 2010 deadline is crucial for creating a truly integrated SEPA-compliant retail payment system infrastructure based on the same SEPA standards and instruments

As I have already explained, there is a need for national infrastructures to adopt the SEPA standards and processing by 2008. To this extent, a payments infrastructure would be labelled SEPA compliant if it is able, from 2008 onwards, to process the SEPA payment instruments. Speaking in concrete terms this would mean that national credit transfer infrastructures must be able to both send, as well as receive, SEPA credit transfers and priority payments in SEPA format.

In the next step, in order to meet the SEPA infrastructure deadline in 2010, a SEPA-compliant infrastructure would have to comply with the following four additional requirements:

  1. Open access, whereby a credit institution would have the possibility of becoming a (direct or indirect) member of a SEPA infrastructure located in another country.

  2. Reachability, meaning that a SEPA infrastructure could deliver payments to any bank in the SEPA area and, on the receiving side, be able to deliver a SEPA payment to any bank in its banking community.

  3. Transparency of prices, fees and rules.

  4. Interoperability on a technical level with other SEPA infrastructures based on SEPA schemes.

This would ensure open competition between all existing infrastructures, allowing for a market-driven consolidation to take place. Moreover, we might be able to learn some lessons from the United States in this respect, and it would be interesting to know if, for example, the United States interoperability model could be adapted for the European context. From what we understand, the Federal Reserve has promoted consolidation of retail infrastructure over time by pushing for competition based on interoperability.

Central banks would prefer to have a catalyst role in the promotion of SEPA processing retail payments, and would take a more active role only in case of market failure to deliver.

In principle, the Eurosystem national central banks prefer to leave the processing of retail payments to the banking industry itself and mainly concentrate on providing a helping hand to promote safety and efficiency. However, there are two scenarios in which the national central banks may consider taking a more active role: i) the banking industry fails to deliver such an infrastructure; or ii) the banking industry delivers only basic services that have to complemented by the individual players. In this last scenario, smaller players may be left out of the game and national central banks could step in.

National migration plans will be the first reality test of the SEPA project determining the real commitment to replacing national standards and payments

The EPC is well on its 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. The challenge we are facing should not be underestimated and the process has to be managed in the same efficient way that made the changeover to the euro such a success. Therefore, it might be a good idea to reuse some of the structures that worked so well for the changeover for the SEPA changeover as well. In real terms, this would imply that each bank becomes SEPA compliant. This would require European banks to appoint a “SEPA general” to be in charge of this project and to have an overview of all its numerous implications. Of course, the corporate customers, national central banks and other authorities must also take responsibility for their own institutions. In addition, at national level each country will have to find an effective organisation enabling efforts to be coordinated and the implementation of deadlines to be monitored. We have asked the national central banks of the Eurosystem to offer their fullest support in facilitating this process, and if so requested to also assume a coordination role.

We are also aware of the crucial role of savings banks in this reality test of the SEPA project. This is to some extent linked to the balance between diversity and unity that I mentioned in my introduction. Many European savings banks have so far emphasised their preference for keeping the diversity of national standards, rather than uniting on pan-European standards. From the perspective of a local savings bank this might make sense, but from our pan-European perspective this is more problematic as the SEPA could only be achieved if we agree on common standards. Therefore, we would welcome the support of national and European savings banks associations in explaining to smaller savings banks the need to move away from a national environment. We are confident that the central savings banks could also offer all the necessary support to overcome the practical hurdles.

Europe can learn from the United States’ experience of financial integration, including consolidation of payment infrastructures.

Today’s banking environment is already significantly different from that of 20 years ago. And over the next 10 to 20 years, it will continue to change dramatically.

Within this process, I see two basic kinds of banks forming: large, pan-European and global banks; and smaller regional players. There is room for both. Traditionally, the banking system comes from an environment of legal protection; liberalisation in this field began relatively late. Banks therefore have some concerns regarding this development. The issue is how to overcome these concerns and regard increasing financial integration as an opportunity, because I am convinced that both types of banks have a future.

There are some differences between Europe and the United States. The European Union is not a political union but EU Member States are together in an Economic and Monetary Union. The euro area is a currency union. However, there are also many similarities between what you have already achieved and our dream of what financial integration could bring for Europe. Therefore, we would be grateful to learn as much as possible from your experiences as you have already travelled this road. In this context, we would appreciate learning more about, for example, the experience of the Federal Reserve in promoting financial integration and the consolidation of retail payment infrastructure through interoperability.

We believe that we are in a good position to facilitate this process and to balance the interests of different stakeholders. We also have a profound understanding of the reality facing banks in the SEPA project. In fact it is even in our mandate to promote the fact that European banks will come out of this process as efficient and safe payment institutions.

To sum up, and coming back to “E Pluribus Unum” as a leitmotif, the ECB acts as a helping hand to create, out of the many different national payment schemes, one pan-European scheme for each of the three main payment instruments (credit transfers, direct debits and cards) in the SEPA project. This process would also enable the consolidation of national retail infrastructures into several, rather than one, SEPA-compliant pan-European infrastructures with competing operators. It is still a dream; however, I am confident that this particular dream will not remain a dream but will soon become a reality.

Thank you for your attention. I am now ready to answer any questions.

  1. [1] The number of transactions made with debit cards has grown over the past five years by 17% and the use of credit cards by 15%. All non-cash payment instruments have grown annually by 3.4%.


Europese Centrale Bank

Directoraat-generaal Communicatie

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