The Lisbon Agenda – what can banks contribute?
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECBIFB seminar "The Future of Payment Systems in Europe" Lisbon, 23 February 2006
Ladies and Gentlemen,
It is a great pleasure for me to be here in Lisbon today and to speak to you about the integration of payment systems in Europe.
When I flew in this morning I saw one of the two large bridges that span the Rio Tejo and I was (once again) impressed by its size and beauty. Bridges like the Vasco da Gama Bridge are enormous technical achievements. They also symbolise the ability of humankind to overcome seemingly insurmountable barriers. Bridges cross large rivers and deep vales. They bring together landscapes and people that nature has separated. It is their character as unifiers that led us to choose bridges as the common feature of the euro banknotes. European integration is about building bridges and creating the political and economic infrastructure that enables people to cooperate and trade with each other. This approach has brought us prosperity and peace in Europe.
In my view, payment systems have a lot in common with bridges. They constitute the infrastructure that allows the financial sector to function well. Modern banking is unthinkable without the sophisticated network of linkages and connections that payment systems provide. I know that Portuguese banks have developed very well in this respect. Since the mid-1980s, when the banking sector was opened up, you have led an impressive transformation process. You have created a financial sector in Portugal that is cutting edge, in particular when it comes to payment systems. In my speech today I would like to encourage you to take the next step: to build the bridges and to create the infrastructure that integrates Portugal closely with the other European countries. After the introduction of common banknotes and coins, Europe now needs common payment instruments and joint standards that are as good as the current domestic instruments and standards.
I am grateful that I can deliver this message in Lisbon, because Lisbon is not only the city of bridges but it has also become a synonym for promoting growth and employment in Europe. The goal of the Lisbon partnership for growth and employment is to modernise our economy in order to secure our unique social model in the face of increasingly global markets, technological change, environmental pressures and an ageing population. In this context, the financial sector plays an essential role. Further integration and consolidation will strengthen the competitiveness of Europe’s financial sector. Strong banks will make a significant contribution to help Europe become a more competitive and dynamic economy by 2010. Therefore, I see a strong link between the Lisbon agenda and the SEPA project, not only in terms of a common deadline, but also in terms of focusing on the modernisation of infrastructures and supporting innovation.
The focus on today’s presentation will be on how the ECB would like to see the SEPA project evolve between now and the end of 2010. I will also give some recommendations to the banking industry. For a more detailed assessment of the SEPA project I would ask you to refer to the fourth progress report on the SEPA, which the Eurosystem published last Friday.
Let me start by mentioning the overall objective for the SEPA project, which is to remove all remaining national barriers for payments within the euro area, allowing for substantial economies of scale as well as a customer experience similar to the situation in national markets today. So, a cardholder should be able to use his or her card in the same way throughout the euro area without differentiation based on the country of issuance. Furthermore, a customer should also be able to choose a bank anywhere in the euro area and be able to make cashless payments from a single payment account using SEPA credit transfers and direct debits.
However, the SEPA also goes far beyond the ambition to make the euro a truly domestic currency. In line with the Lisbon agenda, SEPA aims to exploit new possibilities offered by progress in information technology as well as increased readiness among the population for e-banking at the end of the decade. Even today, European payment systems often occupy a leading position in the world in terms of automation. This competitive edge has to be preserved and exploited by bringing innovative solutions to European customers. Having said this, I would also like to mention that the SEPA should still take into account the needs of individuals who might not feel at ease with modern technologies.
I have heard several banks expressing concerns about the risk of decreased profitability because of the SEPA. This argument assumes that the SEPA would negatively affect the revenue side of payment business. However, the possibilities of improving the cost side must also be taken into account, and might be important. Currently there are big national variations in the revenues that banks generate from their payment businesses. When the SEPA eliminates national barriers, it will foster greater competition and, as a result, exert downward pressure not only on banks’ revenues, but also on processing costs. In addition, general and large-scale standardisation will result in better opportunities to share development costs and software products.
In the past we often referred to the SEPA instruments as superior, creating a natural incentive for users to abandon the well-known national payment instruments. Today we still think that this is true in principle, but have realised that it is not always helpful in practice, because it is often very difficult to find objective criteria to compare the situation in different countries. Moreover, it is human nature to value more what you already have and are used to than something that is new and the benefits of which are not so clear. For this reason we are more and more inclined to favour SEPA core services with different options rather than to try and find for example a one-size-fits-all SEPA direct debit for the whole euro area.
Therefore, in the next part of my presentation I would like to give a few concrete examples of how the ECB would like the SEPA services to evolve in a way that could suit different kinds of users. The general direction of moving away from manual processing and paper-based instruments is very clear in order to obtain efficiency gains for the society. In this respect we cannot allow the speed of development to slow down to adjust to the slowest by merely agreeing to the minimum common denominators. Our experience shows that the risk of such an outcome occurring could be substantial if the SEPA scope were to be decided based on what a majority of banks agreed on. It is therefore necessary to balance the process of defining the SEPA scope by taking into account the views of customers. Thus, the potential for e-SEPA needs to be fully exploited, taking into account that e-banking will substantially develop by the end of the decade. Nevertheless, we will still have to bear in mind that it would be unrealistic to expect all customers to adjust to the new technologies by 2010. Therefore, the SEPA services shall support both paper-based (except cheques) and electronic payments utilising the most efficient solutions available. At the same time, SEPA services shall provide customer value above the current services to provide customer incentives for change. In order to fulfil these objectives I would like to present the following recommendations from the ECB to the banking industry on how to contribute to make SEPA a success:
1. Provide the new common SEPA version of credit transfers, direct debits and card payments by 1 January 2008
By 1 January 2008, the Eurosystem expects existing retail payment infrastructures to process both “old” national instruments and “new” SEPA instruments, which means that they will have to be in a position to receive and process payments made with the pan-European instruments in parallel to national payments made in each country. In practical terms, this means that for an interim period, retail payment infrastructures will be required to process pan-European and national standards and to convert between the two. More specifically, this would mean that Portuguese credit transfer infrastructures, for example, must be able to both send and receive SEPA credit transfers and priority payments in SEPA format.
2. Establish interbank rules and conventions for all SEPA instruments
In 2005, the EPC and its working groups presented rulebooks for SEPA credit transfers and direct debits for national consultations with the aim of finalising the work by mid-December 2005. This was not possible and therefore the ECB urges the EPC to approve the rulebooks in the next EPC Plenary on 8 March 2006. It is vital for the first project delivery that the present achievements are frozen and cannot be continuously challenged. However, the ECB also urges the EPC to identify the issues which will need further elaboration beyond March and to ensure that these are covered as well by September 2006 at the latest. What else do we need?
Basic SEPA credit transfer;
Full end-to-end STP processing; and
A same day value option
Corporate treasurers have expressed strong concerns that the basic credit transfer would not include necessary elements for straight-through processing like generic customer-to-bank and bank-to-customer standards. These should offer the possibility to include structured remittance information and a code for automatic reconciliation. These enablers for full end-to-end STP are essential to make the SEPA at least as efficient as the most efficient national environment today. Moreover, many of the most substantial benefits from the SEPA are closely linked to potential improvements in STP rates for corporate customers.
In the present version of the rulebook, the execution time for credit transfers is a maximum of three banking days, corresponding to the present national practice in those countries with the longest execution times. However, as the European Commission is now considering in the New Legal Framework a reduction of the maximum execution time to one day from 2010, I would recommend the EPC using this as a new benchmark for the basic service. According to our Progress Report we will in any case explore the feasibility of this option. For many customers in countries with lower benchmarks, this would already imply a substantial improvement. Nevertheless, we should not forget that several banking communities have already moved to same-day value. Therefore, it would be necessary to complement the basic SEPA credit transfer with an option for same-day value payments. These priority payments would already be necessary 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. We would expect that not only large-value systems like EURO1 and TARGET would be able to guarantee same-day settlement, but that several SEPA-compliant retail infrastructures would also make these services available.
Basic SEPA direct debit;
Option for the business-to-business market; and
Option for mandate handling by debtor‘s bank
The present basic SEPA direct debit scheme is too general to fit all types of customers. Currently the scheme is mainly adapted for mass payments from consumers to corporates, utilities or public administrations. However, such a scheme does not fulfil all requirements needed for efficient business-to-business transactions, for example execution times and the time before a payment is final are too long. Furthermore, higher-value B2B transactions require a safer mandate handling. Therefore, the ECB has urged the EPC to develop an option for business-to-business transactions by September 2006 in order to give customers a choice in 2008. As I mentioned in my introduction, it is very difficult to determine a single direct debit model that fits all requirements. Therefore, it is more important to have a basic scheme with sufficient options to cater for different types of efficiency. By way of example, the handling of mandates differs fundamentally between countries; in some countries the mandate is given directly to the creditor without involving banks while in others the mandate is given to the debtor’s bank. The risk incurred by giving the mandate directly to the creditor is normally combined with extended rights to reject direct debit transactions. The basic SEPA direct debit follows the first model. However, in countries such as Portugal, which use mandates acquired by banks, there could be a degrading of the direct debit service and security if mandate handling was restricted to creditors only. This could also put a strain on the development of e-banking services such as electronic bill presentment and payment, and the possibility of monitoring and updating mandates via a self-service function as in Portugal, where mandates are available for management and consultation 24 hours a day, 365 days a year, in ATMs and banks’ internet networks.
Moreover, as the aim of the SEPA is to enable the replacement of existing national schemes with a future-oriented scheme that is at least as efficient as the best national schemes of today the basic model must contain both a B2B option as well as a second mandate handling channel via debtor banks.
5. Complete the SEPA Cards Framework
The cards industry is entering into a very dynamic phase and national card schemes need to reconsider their competitive position and develop their strategy. This also concerns the very efficient national schemes, such as the scheme operating in Portugal, which is very advanced and technologically innovative. It should be remembered that in no case should the SEPA bring about a deterioration of the services offered.
The SEPA Cards Framework, approved by the EPC, is a very significant step in the building of the SEPA, although it is formulated at a rather general level, leaving some room for interpretation. The EPC shall define compliance criteria to be used in the assessment procedure of schemes’ compliance with the SEPA Cards Framework. The assessment procedure itself should be clearly defined.
In addition, references to standardisation in the SEPA Cards Framework are rather broad and work in this field should be intensified with the definition and adoption of standards for every stage of the transaction, in particular concerning fraud prevention. Commitment to EMV is certainly a major step forward, but its implementation should be uniform and other fraud combat measures pursued.
Interchange fees are another crucial topic that needs to be investigated and principles for an interchange fee policy shall be developed; the Eurosystem is of course aware that safeguards must be taken when addressing this sensitive topic from a competition point of view. Finally, the SEPA Cards Framework seems to accommodate interchange fee differences across geographical sub-groups while geographical criteria are not relevant within the SEPA; the EPC is thus invited to reflect on this.
6. Establish process for standardisation of value-added services
For corporate customers access to modern payment services key. They need support for an automated end-to-end, straight-through processing of payment information, as well as support for electronic invoices. It has been difficult for the EPC to take these requests into account in the first round, even if this could lead to substantial efficiency gains for society as a whole.
However, we need 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. Therefore, I would recommend the EPC to establish a process for defining SEPA standards for value-added services as well, such as e-invoicing in collaboration with customers.
In some countries we already have national standards for e-invoicing that are working well, but without a common SEPA standard, development will not take off on a European level. This is clearly an example where we cannot let development be hampered by the slowest mover. Instead we need to create incentives for competition and progress by early standardisation of future-oriented services.
Plan for the SEPA migration process;
Process for monitoring and evaluating SEPA compliance; and
Enforcement procedure for the SEPA requirements and standards
The ECB has always promoted the SEPA as a market-led project based on self-regulation. We have not yet seen a convincing plan of how the implementation of SEPA standards and instruments would be dealt with by national banking communities on a central level. We also expect that the EPC will soon find efficient arrangements for scheme management, which might constitute a natural platform for monitoring and evaluating SEPA compliancy. For the SEPA cards framework there is as of yet no clearly identified entity to confirm SEPA compliance of card schemes, but more a kind of wishful thinking that this could be a responsibility that is delegated to each individual card scheme and bank without any central compliance assessment. How will the EPC ensure a harmonised way of monitoring SEPA compliance and enforcing SEPA requirements where necessary?
The EPC needs this plan for the SEPA migration process, and each national banking community should establish a convincing national migration plan which fits into the overall SEPA migration plan. The challenge we are facing should not be underestimated and the process has to be managed in the same efficient way that made the cash changeover such a success. Thus, at national level, each country will have to establish an organisation which is effective in coordinating efforts and monitoring implementation deadlines, etc. The national central banks of the Eurosystem will offer their full support and take over a coordinating role if needed.
8. Develop a SEPA communication strategy
If we compare the publicity campaign preceding the introduction of the euro banknotes and coins with the information made public about the SEPA so far there is a stark contrast. Most people, public administrations, merchants and SMEs are not aware of SEPA. Even many large enterprises, which should normally be in the forefront as pilot customers, are still outside the debate. It is crucial that the banking industry takes the lead to inform and educate its clients without further delay. Therefore, during 2006 the EPC should develop a communication strategy in cooperation with the various organisations representing the major stakeholders (banks, users, public administrations). This would allow for the actual information campaign for the mass market to be launched in early 2007, when the implementation phase is already under way. Other user groups require information earlier. For instance, corporate customers and software vendors need information on new technical standards as early as possible in order to start developing the necessary information and communication technology. To provide the relevant information to these users, the EPC could set up a technical information centre.
The SEPA process is on track. The EPC has made significant progress. The European Commission and the Eurosystem are working closely together to support the banks in the process. Attractive new services should convince customers to switch to SEPA instruments.
However, there is still a lot to be done. As the customer side has so far not been directly involved in the EPC work and as the basic schemes now proposed are still too basic to provide incentives to all user groups, the EPC has a special responsibility for further enhancing the attractiveness of the basic credit transfer and direct debit with more service options. After four years it is time to conclude debates about concepts. The SEPA migration process will be the next challenge. While the EPC will also have to play a role in coordinating the implementation process, the major work will depend on you. Banks will need to introduce the new instruments and to explain to their customers how these instruments work.
Will banks benefit from SEPA? Yes, if they reduce their costs. There are substantial opportunities to reduce costs linked to infrastructure. Abolishing the different procedures for domestic and euro area payments will also reduce costs. Moreover, SEPA is an opportunity to replace manual handling in parts of the payment processing chain through efficient electronic procedures. Investment costs for the SEPA instruments and procedures can be seen as a business evolution that previously occurred in a purely national context.
Banks can contribute to the Lisbon agenda. SEPA will modernise the European payments industry by 2010. European customers will have more efficient services. A successful SEPA will make the consolidation of the financial sector in Europe easier and will create synergies.
Allow me to conclude my speech by returning to the image of the bridges. Bridges are not built overnight. They are the product of major efforts and laborious processes. Once erected, they quickly become embedded in the flows of the traffic as if there had never been a barrier before. I am optimistic that the SEPA project is very similar. At present, we mainly see the effort and the costs that it will entail. However, SEPA will generate significant benefits. In a couple of years, customers will take them for granted as do the people that cross the Vasco da Gama Bridge here in Lisbon every day.
Thank you for your attention. I am now ready to take questions from the floor.