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The European Central Bank’s view on SEPA

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECBColloquium « Mise en place du SEPA : quel bénéfice pour l'Europe ? »Sénat français, Palais du Luxembourg, Paris, 13 February 2007.

Mr Chairman, Senators, Ladies and Gentlemen: Thank you for giving me the opportunity to present the views of the European Central Bank on the SEPA project.

When Jean Monnet, that outstanding Frenchman and great European, was asked what he would do differently if he could shape the process of European integration again, his answer was: “I would start with culture”.

We do not know why he answered like this. Was it because he became aware of all the hurdles which stem from different perceptions, perspectives and lack of trust?

Or was it because he thought starting with cultural integration would make European integration easier and long-lasting?

European integration did not start with culture, but with the economy. Today, just a few weeks before the 50th anniversary of the Treaty of Rome (signed on 25 March 1957), the free movement of capital and goods has been well and truly achieved, but other elements of the Treaty, like the free movement of services and workers, exist only on paper. European integration is clearly unfinished.

The introduction of the euro as the single currency of Europe was seen as a political project. However it has resulted in deeper economic relations, created confidence and brought economic and monetary stability.

SEPA is a new political project – European consumers, companies and other economic actors will be able to make and receive payments in euro throughout the euro area. As a result, SEPA will make payments more efficient, faster and in the medium term less expensive, although fees could become more visible than in the past.

Today you have heard all about the pieces of the puzzle which belong to the SEPA project. A project that is even more complex than the introduction of the euro. Where do we stand today? The puzzle is half-finished – the framework has been set up, but much of the substance is still missing. The missing pieces will require all the energy of the players involved for a couple of years more.

=> Slide 2 (Trois questions:)

In my speech I will focus on three issues:

  • Can commercial banks establish SEPA by themselves?

  • What is the role of the public sector?

  • Is there a need for speed, or can we sit back and relax?

1. The Eurosystem’s main goals for SEPA

=> Slide 3 (Le SEPA est un espace…)

SEPA is an area in which consumers, companies and other economic actors will be able to make and receive payments in euro, both across and within national boundaries, under the same basic conditions, rights and obligations, regardless of their location.

The aim of SEPA is to complete the introduction of the euro as the single currency and to advance European integration. This is to be achieved by creating a competitive and innovative euro area retail payments market. This market will offer higher service levels and more efficient products for making payments.

=> Slide 4 (Le SEPA se fonde sur la monnaie unique…)

SEPA consists of

  • the single currency,

  • a single set of euro payment instruments – credit transfers, direct debits and card payments,

  • efficient processing infrastructures for euro payments,

  • common technical standards,

  • common business practices,

  • a harmonised legal basis, and

  • ongoing development of new customer-oriented services.

Now, let me turn to the first issue I would like to discuss today – the role of the commercial banking sector.

2. Can banks do it alone?

Although SEPA is a political project, the European Payments Council and the national banking communities are doing a lot of the work. But can banks do it by themselves?

Yes! Self-regulation and industry commitment have proven to be new ways of changing the market. The European Payments Council has taken up – with high commitment - the task of making SEPA a reality.

When I review the state of play today, I see that the SEPA preparations are well under way; however, key steps still lie ahead of us.

Banks are working on their product offerings, which they will launch on Tuesday 1 January 2008, exactly 46 weeks from now. In this respect, the credit transfer scheme has reached the end of the definition process and is now being implemented. The same holds for the direct debit schemes, although here an important issue is still open. Without going into details, the ECB would like to see the option of a debtor bank driven mandate flow for direct debits introduced. For both schemes, testing will start in a few months. However, customer involvement in the development of the new products still needs to be organised. And user awareness of SEPA is still limited.

The infrastructures are preparing as well, with some signs in the market that true SEPA players are evolving. But some infrastructures appear to think that they can continue processing national payments only. And it is a pity that not all infrastructures have joined the work on standardisation.

Card schemes are planning for the future; they will need to operate on a SEPA level. But, in contrast to the rulebooks for credit transfers and direct debits, the EPC has only developed a framework for cards. Whether a true SEPA for cards will be established in January 2008 remains therefore uncertain. But this new framework will guide card schemes on how they will need to operate on a SEPA level.

=> Slide 5 (Les travaux préparatoires)

Regulation No 2560/2001 as example of successful political intervention

Despite the success of the self-regulatory approach, we should not forget what triggered it. Self-regulation and industry commitment have been the responses to the well-known Regulation No 2560/2001. It is a guarantee to consumers that when they make a payment in euro for a good or service in another Member State it will cost the same as it would have done in their own country. The same guarantee applies when they withdraw money from cash dispensers.

This Regulation was adopted by the European Council of Ministers and the European Parliament after years of disappointment with a lack of integration in the field of payments. As prices for cross-border transactions did not drop significantly after the formation of the internal market in 1993, the European authorities started to monitor developments more closely. The continued high fees for cross-border payments led to the adoption of this Regulation.

The intervention by the public authorities was strong and it has worked. A recent evaluation by the European Commission addresses to what extent cross-border charges have fallen since the adoption of the Regulation and whether bank charges to customers for national payments have increased.

The analysis concludes that charges have dropped dramatically. At the same time, contrary to some concerns, charges for national payments have not increased to compensate for the reduced revenue from the cross-border payments. This shows that public intervention is sometimes a catalyst for change.

Opening up markets is key

While a Regulation was issued to set in motion the politically desired changes, a self-regulatory approach is required to develop a sound business model for SEPA. Let us not forget that retail payments cannot be compared with a public utility service, but are offered in a genuine market environment.

However, almost all markets need a framework to enable them to function properly. A set of market rules should apply to create a level playing field, and the rules should be enforced to avoid anti-competitive behaviour.

Before I consider the market rules, I wish to focus on obstacles in the market and on anti-competitive behaviour.

Real split between scheme and infrastructure

The current national or scheme-bound orientation in payments has created some impregnable silos, in which scheme and proprietary processing are combined. Each silo is owned and controlled by groups of banks. These banks have no incentive to change because of the potential loss of invested capital.

For outsiders, this fragmented and closed market structure imposes a huge barrier to entry. The common standards that the EPC has developed for payment instruments and for clearing and settlement mechanisms should make more competition possible. And as a consequence, payment schemes will benefit from more efficient processing.

=> Slide 6 (La dimension européenne peut…)

Therefore, the Eurosystem has called for a split between scheme and infrastructure. This split should be at least financial and more than superficial: no cross-subsidisation between scheme and processing should exist. Furthermore, important scheme requirements as combating fraud should be organised in a processor-neutral way. Finally, the former proprietary processor should not be placed at an information-advantage concerning scheme changes which will require processing changes.

In some cases a split has been made. However, it is doubtful whether these changes are more than cosmetic. The processing centres of most card schemes [and not only the international ones] remain proprietary or closely linked to the scheme. Also, proprietary Automated Clearing House (A-C-H) processing is an obstacle to competition.

Possible fragmentation by AOS and/or ACHs, transparency needed

A potential second obstacle in the market is the development of Additional Optional Services, or AOS. The EPC has developed, as I mentioned before, new schemes for credit transfers and direct debits. These schemes will be used by banks to provide payment products all over the euro area. A market-driven migration to these new products will start as soon as they are introduced.

In some countries however, the core and basic SEPA products will have to be enhanced by AOS in order to bring the new products up to the same level of quality as experienced today by the respective banking communities. It will ease the SEPA migration in these countries.

The additional optional services may however be a threat to a true SEPA, since they could maintain the national orientation of payment systems. Therefore transparency is key, especially when these services are introduced at national level. I am pleased the EPC has recognised the need for transparency and has started to address this issue.

A third obstacle is a continued differentiation between ‘domestic’ and intra-EU cross-border payments. This could happen if the operating rules of the automated clearing houses were still to make this distinction, or if national legal obligations were to prescribe the use of specific payment systems or message formats. National banking communities or national authorities should not prevent other banks or infrastructures from entering the market.

A SEPA for cards

Fourthly, the proper functioning of the market for SEPA card payments needs some additional elements:

  • clarity regarding multilateral interchange fees, even though the Sector Inquiry Report of the European Commission provided guidance

  • the availability at the European scale of an alternative processing network

  • card standardisation,

  • the willingness of all market players to work on new initiatives.

=> Slide 7 (Nécessité d’un nouvel effort…)

The Eurosystem has voiced its expectations regarding SEPA for cards. There should be consumer choice, competitive markets and no geographical segmentation. Most importantly, the Eurosystem expects at least one European card scheme to emerge in the coming years.

The Eurosystem welcomes the fact that the EPC is starting to work on standardisation for cards; this is needed urgently to create a European market for point-of-sale terminals and for cards acquiring.

The Eurosystem welcomes the efforts of the international card schemes in preparing for SEPA and the SEPA changes they have already announced.

Although the ECB does not favour any particular initiative, the Eurosystem appreciates the work being done by the Euro Alliance of Payment Schemes to establish interoperability between the participating card schemes. This work can be seen as the first step towards a consolidation of card schemes, leading to a European card scheme.

The Eurosystem expects one or more European card schemes to emerge in the coming years. For the emergence of new European card schemes it is paramount that all European banking communities work together. Given the good track record of the French banking community in the cards business, the Eurosystem expects that they will be actively promote the creation of an integrated European cards market, and will help to build a true SEPA for cards.

Now, let me turn to the second point of my presentation: the participation of the public sector.

3. Public sector participation

I mentioned the need for a sound set of rules to let the market function properly. As some of you are members of the Senate, you will be aware how important sound legislation is for the proper conduct of business.

=> Slide 8 (Les autorités publiques…)

It is therefore very unfortunate that the adoption of the Payment Services Directive is delayed. The ongoing debate on the multilateral interchange fee from a competition policy point of view has created some complications in the planning process. We are pleased however that the European Network of Competition Authorities is now addressing these issues.

PSD delay => direct debit delay

The role of the European Parliament was discussed earlier today. I mentioned the delay in the adoption of the PSD. The ECB has followed this dossier closely in recent years. To us, it seems that the relevant articles for SEPA are relatively stable. It is more on the issues of payment institutions that debates are ongoing.

As all SEPA-relevant aspects of the Directive are seen as uncontroversial, we believe that even if the PSD is not adopted, banks can work on the development and implementation of SEPA and, in particular, its direct debit products. The actual offering of the products, especially in the cross-border context, would however be difficult without the PSD having been adopted and transposed into national law.

We have nevertheless heard from several banks that SEPA direct debit products could be rolled out by 1 January 2008 in a purely national context. This would certainly help to achieve critical mass, which is necessary to process this new SEPA payment instrument efficiently. For instance, tax authorities, which are domestic players only, can immediately use the SEPA direct debit for tax collection. They are not faced with a multi-country and multi-jurisdiction “client base”. For corporates with a multi-country base the approach will be different.

=> Slide 9 (L’adoption rapide…)


Another issue in which legal clarity is vital is the possibility and the extent to which banks can rely on multilateral interchange fees to set up viable and mutually beneficial payment schemes.

The Commission feels that the Sector Inquiry Report, together with the forthcoming MasterCard decision and the Cartes Bancaires case, will provide sufficient guidance to the market. In general, the Sector Inquiry Report focuses on the possibility of misuse of interchange fees (fee level and/or fee structure) based on market power.

The Commission is not against interchange fees per se. This has been emphasised by the responsible Commissioner, Ms Kroes. She has publicly stated, referring to interchange fees, that the European Commission is “not arguing for their abolition. But it is clear that the present level of interchange fees in many of the schemes we have examined does not seem justified”.

Market participants and public authorities need to come to a mutual understanding.. Such a mutual understanding could be based on a framework which would provide clarity on the use of multilateral interchange fees (MIFs) in payment schemes as well as on their calculation methodology. It should be founded on ‘payment-economics’, meaning the understanding of the way the market functions with regards to payment systems. This framework should then be agreed in principle by competition authorities.

For example, the concept of a MIF could be endorsed as a means to balance the revenue-cost ratios between issuer and acquirer. This would make the offering of the payment instrument beneficial to both banks involved. As a consequence, innovative payment schemes can be introduced in the market and can be properly maintained. From a payment system policy view, this is an important goal. In this market, competition and the drive for efficiency will still be very much alive.

Take-up of the new products by public administrations

Public authorities in Europe have played a major role in the formulation of the SEPA concept, but are lagging behind in preparing for its implementation. Public authorities initiate more than 20% of all retail payments. Given the fact that reaching a critical mass is vital for the efficiency of payment systems, public authorities could play a huge role in the SEPA migration by becoming launching customers of, or early adapters to, the new SEPA instruments.

=> Slide 10 (Le soutien politique…)

On this point, I would like to compliment the French banking community, the Banque de France and the French public authorities working together on the preparations for SEPA. All are active participants in the French national committee for SEPA. I hope this active involvement of the public authorities will lead to an early use of the SEPA products, and so be a stimulus to the success of the entire SEPA project in Europe.

Now, let me turn to my final point: how quickly do we need SEPA?

4. Does it matter how quickly banks move?

I would say: as quickly as possible. The aims of SEPA are too important to accept delays in the implementation. All efforts should aim to deliver the SEPA products as of 1 January 2008. The momentum that has been gained in recent years should be maintained for the coming years.

Individual banks should not try to find excuses for not delivering on time. And they should also be well aware that some banks, in particular the internationally active banks, already have made substantial investments in developing their SEPA product offerings. These internationally oriented banks see the great opportunities SEPA has to offer them and their clients.

=> Slide 11 (Le processus menant…)

SEPA benefits

To get a clearer insight into the benefits of SEPA, which is the main topic of this Colloquium today, the ECB has initiated a SEPA impact study. The aim of the impact study is to carefully analyse the possible economic implications that SEPA may have for the various stakeholders, and mainly the banks.

At present, only an estimation or, at best, limited information is available to measure the economic opportunities and challenges of SEPA. The ECB tries to enrich and complete its understanding about the potential economic consequences of SEPA for different scenarios and stages of the SEPA project.

Furthermore, it envisages providing a clear picture of the expected economic impact for major SEPA stakeholders, and in particular for banks. The preliminary conclusions from the impact study are:

  • The overall impact on costs and revenues for the banking industry is broadly moderate and less substantial than is often assumed.

  • The financial impact of SEPA varies according to different scenarios and stages of the SEPA project.

  • In the short run, the co-existence of SEPA schemes in parallel with the national schemes is expected to lead to initial investment costs and a relatively neutral impact on the revenue side for the banking industry.

  • In the longer term, when national schemes are replaced by SEPA schemes, the costs for banks are expected to decrease because of potential economies of scale and scope and innovations (such as electronic invoicing). The revenue side will however also be (negatively) affected as competition will increase.

  • Moreover, it seems that the impact on costs and revenues will be determined by the approach chosen by the banks. Banks that take a forward-looking view and opt for additional services which will automate the payment process will create new business opportunities.

  • The changes which are required in the initial phase of setting up SEPA are substantial, and benefits can be reaped especially by those institutions that embrace new technological developments and provide innovative services.

The ECB SEPA impact study shows that a short dual period is needed to reduce costs of SEPA migration.

=> Slide 12 (La dimension européenne permettra…)

Market-driven consolidation

The Eurosystem sees that SEPA is a market-driven process. All market barriers to open and fair competition should be removed. The European market will be big enough for four to six ACHs to achieve economies of scale (10 to 12 billion transactions annually), good business cases and good value propositions to their clients (banks).

A market-driven consolidation should also take place in the ‘market’ for card schemes. However, the Eurosystem expects that the European market will be big enough to host more than two SEPA-compliant card schemes. Separate from the schemes, the processing of card transactions should consolidate to reach economies of scale, while remaining a competitive market.

In the longer term, alignments could be sought in the clearing and settlement of giro payments (credit transfer, direct debit) and the clearing and settlement of card payments.

End-to-end STP payments (‘eSEPA’), e-invoicing, e&m payments

SEPA operations and technology were also discussed this morning. The SEPA project is not a ‘one-shot operation”. It is an effort taking several years, which aims to make the current fragmented euro retail payments markets into a single domestic market.

The EPC is developing the building blocks upon which the SEPA project is founded. Now that these building blocks are almost in place, it is time to move the retail payment market to the next level – an electronic environment where the SEPA payment instruments are used electronically and are combined with value-added services.

Our challenge is to take full advantage of the technologies in place and offer customers convenient, secure and efficient services that will make their lives easier and at the same time will benefit the economy by securing end-to-end straight-through processing. This is what we refer to as eSEPA.

To be truly successful with SEPA we must strengthen the cooperation between the different stakeholders. We must act now and agree on common standards that will ensure that any electronic device – mobile telephones, internet, PDAs (personal digital assistants) etc. can be used for value-added services and thereby guarantee that the whole value-chain from customer-to-bank-to-customer is paper- and cash-free.

Direct charging of payment transactions

The introduction of the SEPA instruments could coincide with the introduction of greater transparency in the pricing of payment products. The ECB believes that transparency in services and prices would add crucial information for customers.

=> Slide 13 (Le SEPA et l’introduction…)

The introduction of more direct charging for payment transactions is however not something to be taken lightly by banks. It takes time and effort to make customers aware, especially if they are used to the idea that making a payment is completely free of charge.

6. Conclusion

Let me conclude by mentioning once again the Eurosystem’s main policy goal and the key measures for making SEPA a success.

=> Slide 14 (Le SEPA a pour objectif…)

Re-statement of key policy messages from the speech

The aim of SEPA is to complete the introduction of the euro as the single currency and to support European integration.

The self-regulatory approach chosen for SEPA is working well, even though it took a European Regulation to set the process in motion.

The preparations by banks, infrastructures and card schemes are now well under way, but important steps still lie ahead. Public authorities can support the project by providing legal clarity to the market with the Payment Services Directive. Furthermore, they should be among the early users of the new SEPA payment instruments.

The first benefits to come from SEPA will be the new SEPA instruments. Secondly, SEPA will create a European playing field, which will bring significant economies of scale, mainly in processing. But markets need to be opened up to foster competition. A third benefit is that SEPA will allow for the introduction of payment innovations that respond to the needs of European customers. And finally, the SEPA will provide benefits for banks, especially to those banks that quickly seize the opportunities that SEPA offers.

Thank you for your attention!


European Central Bank

Directorate General Communications

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