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SEPA – from steam train to TGV?

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECBOff-site meeting of the European Payments CouncilBrugge/Bruges, 3 September 2007


Thank you very much for inviting me to present the ECB’s view of the Single Euro Payments Area (SEPA).

And thank you as well for organising this meeting in Bruges, which is considered the most beautiful town in Belgium. The EPC is quite talented when it comes to selecting locations. First Durbuy, the smallest town in Belgium. And one of the most difficult towns to reach, whether by car or public transport. And now Bruges, the most beautiful town, where even the TGV stops! It makes me wonder where the next off-site meeting will be…

But seriously, if you study the history of Bruges, you’ll see that it has had several periods when its economy grew and its culture thrived. As an old Hanseatic town, it had strong trade links with England and other parts of northern Europe. High-quality Flemish cloth was the main product in the 13th century. Bruges blossomed as an international centre of trade. Banking and trade finance services developed around the same time.

However, Bruges has also seen periods of sharp decline. Direct access to the North Sea has always been a problem, both for geological and political reasons. This led to increasing competition from other Flemish cities, such as Antwerp. When the cloth trade completely collapsed in the 15th century, Bruges was left without real alternatives.

It did recover temporarily in the 17th century by producing lace, a very labour-intensive process. Lace production brought jobs, prosperity and culture back to the city. As many as 6,000 women out of a total of 40,000 inhabitants were producing lace at the turn of the 19th century. Looking around this room, I have to conclude that the participation rate of women in that industry was significantly higher than in the payments industry of today.

The industrial revolution, however, rendered the lace industry obsolete. Bruges was unable to adapt and became ‘Bruges-la-Morte’, a town in decline, the poorest one in Flanders.

The fact that the city was “depressed”, as documented in the famous novel (‘Bruges-la-Morte’) by Georges Rodenbach, at a time when modernisation was changing the face of many urban areas, meant that the historical centre of the city remained largely intact. Moreover, King Leopold the Second [1] wanted the town to preserve and restore its architectural treasures. As a result, the town has, over the years, become an important tourist destination, building on one of its strengths and seizing new opportunities. The European integration process provided another opportunity, and since 1949 Bruges is host to the College of Europe, a university that focuses on postgraduate European studies in the legal, economic and political disciplines.

What can we learn from the history of Bruges? Over-reliance on traditional products (first cloth, then lace), not adapting to customer demands and not anticipating change (loss of access to the sea, industrialisation) do not make for a good strategy for the future. Building on strengths and seizing new opportunities is!

In my speech tonight, I will

  • convey the views of the Eurosystem on the current phase of the SEPA project, aimed at transforming SEPA from a concept into a reality;

  • outline the next steps for SEPA which should be taken to make it more attractive to customers;

  • describe the changed environment in which banks have to operate, and

  • present my views on the future role of the European Payments Council (EPC).

My main message to you will be that the EPC and the individual banks should move ahead. Those who don’t will run the risk of being quickly overtaken by the new reality, just like the cloth traders and lace producers of Bruges.

Making SEPA a reality: only four months to go

The Eurosystem supports the creation of the Single Euro Payments Area. SEPA will make it possible for retail payments in euro to be made throughout the euro area under the same basic conditions, and from a single account, regardless of location. These changes are needed to move towards a more integrated payments market. It will bring substantial economic benefits for society as a whole.

In this respect, I should say that the Eurosystem greatly appreciates the work already done by the European banks and especially by the EPC.

When addressing this EPC meeting last year, I concluded that impressive progress had been made, but that some issues of concern remained. The work on SEPA for Cards was not advancing as quickly as we had expected. And in the field of e- and m-payments the EPC was encouraged to step up its activities.

Now, a year later, I think it is fair to say that the EPC has been focusing on short-term implementation issues, and has not been able to tackle the more fundamental and strategic issues. From a project management perspective, this is understandable, as the deadline of January 2008 is approaching rapidly. However, the EPC has even taken a step backwards with its decision not to continue with the DMF-model in SEPA Direct Debits. Work on e- and m-payments has hardly progressed and SEPA for Cards remains underdeveloped.

For me, this is a sign that the EPC should re-evaluate its goals and possibly its working procedures. I will return to this issue later.

In the short term, efforts need to be stepped up to overcome short-term problems that could hamper the timely launch of SEPA next January. Not only do the EPC and the individual banks have to take action, but also all the other stakeholders. In particular, public administrations, corporates and merchants should become more active.

Let me briefly run through the Eurosystem’s key recommendations for the SEPA project, which are described in the recently published Fifth Progress Report.

To prepare for a take-up of the SEPA Direct Debit, the EPC needs to clarify by December 2007 the exact features of all elements that will be offered in addition to the core SEPA direct debits. As a minimum, the e-mandate with debtor bank validation has to be developed – and a business-to-business scheme also should be developed that is capable of attracting wide acceptance by corporate users.

The successful launch of SEPA requires the major payment banks to be able to send and receive SEPA credit transfers as from January 2008. In order to offer broad reachability for its clients, each bank should now make appropriate arrangements with one or more banks, or with clearing and settlement mechanisms (CSMs).

Infrastructures will play an important role in creating reachability. It is unrealistic and even undesirable that a single CSM will have all banks in Europe as participants. The Eurosystem therefore welcomes the work of EACHA in designing the interface specifications and business procedures to establish links between Automated Clearing Houses (ACHs). All ACHs are invited to join this work. I have been told that the first links are being built, based on these EACHA interface specifications and business procedures.

The Eurosystem sees a genuine need for at least one additional European debit card scheme. It would stimulate competition and would ensure the strategic involvement of European banks in the cards business. The separation of scheme management and processing, an objective the Eurosystem very much shares with the EPC, as well as the development of SEPA cards standards, will make it easier to create and implement new schemes.

Clear signals from banks, schemes and other market players that they are working on the setting-up of such a scheme would be seen as good news. The EPC should also reconsider the option of developing a debit card scheme itself, as it has done for the SEPA Credit Transfer Scheme and the SEPA Direct Debit Scheme. With the SEPA cards standards being defined by the end of 2008 at the latest, and the SEPA Cards Framework already in place, this seems to be a logical next step.

Finally, more communication on SEPA is needed. The key target groups at this stage are, on the one hand, corporates and public administrations in their function as large users of payment services and, on the other hand, the associations of small and medium-sized enterprises (SMEs) and consumers as the representatives of smaller users. The ECB and the National Central Banks are ready to support a special communication effort at the start of SEPA in January 2008.

Apart from these short-term recommendations, the Eurosystem urges the EPC to continue its work and take responsibility for broadening and deepening of SEPA.

Next steps: making SEPA more attractive

The SEPA project has until now been very much aimed at laying the groundwork for the core SEPA payment products and at setting the basic requirements for infrastructures and card schemes.

Banks are implementing the changes. Real products are being developed based on the rulebooks and their implementation guidelines.

However, just offering the new SEPA products will not automatically set in motion the migration from domestic products to SEPA payment products. Banks have to offer customer-friendly services aimed at facilitating the migration.

Moreover, the core and basic products will not necessarily deliver enough extra value to the customer. The exception is SEPA Direct Debit, which opens up the possibility of using a direct debit across borders. Banks need to move forward and develop future-oriented products that meet customer demands and needs.

Facilitating migration through customer-friendly services

As their top priority, banks need to develop services that will help their customers to migrate to the new SEPA products. I am aware that banks have primary responsibility for these services. However, the EPC can contribute to the availability and quality of these services by taking some preparatory action.

Corporate customers will not start to use SEPA Credit Transfer and SEPA Direct Debit if they cannot update their bank account databases automatically. It would cost each corporate tens of euro per customer to manually change the BBAN bank account details into an IBAN/BIC supplied by the customer.

An IBAN/BIC update service for corporates is urgently needed. The Eurosystem urges the EPC to act as a coordinator, ensuring that the responsible entities deliver the necessary bank account information and enabling either banks or vendors to provide corporates with this update service.

In addition, ways should be found to help creditors to use the existing mandates for the new SEPA Direct Debits. The EPC and the national banking communities should tackle this issue, in coordination with the national central banks and legislators.

In some countries, Additional Optional Services (AOS) will most probably be needed to bring the SEPA payment products up to the same service level as the current domestic products. However, these AOS are not to be implemented with an implicit objective to protect domestic markets. Full transparency on community-wide AOS is needed.

Developing future-oriented products and services

Second, banks should develop future-oriented products and services, as the basic and core payment products no longer necessarily meet the changed customer demands.

One of these customer demands is the possibility of reducing the costs of making and collecting payments. Using e-invoices and limiting the number of paper invoices being sent by normal mail would save corporates and SMEs a lot of money.

When the e-invoicing is coupled with a direct debit or with Electronic Bill Presentment and Payment (EBPP), it reduces not only paperwork on the debtor’s side but also mistakes in filling out the payment order. Of course, these opportunities are largely independent of SEPA. But SEPA does offer a better starting point and SEPA payment products even provide the basic foundation for these services.

For corporates, huge efficiency gains can also be made when the payments which they send and receive can be linked automatically and seamlessly to their businesses processes, i.e. to the value chain within their company. This has been a long-standing demand from corporate customers, one to which banks should respond. As such, SEPA should address standardisation in the customer-to-bank field.

A third domain of future-oriented products and services is e-commerce. With e-commerce still growing, most banks seem to have missed out on opportunities to offer value-added services to their web-merchant clients as well as secure payments to their private and corporate clients.

PayPal, now part of eBAY, is often mentioned as an example. It offers its service to over 100,000 websites in Europe and has 35 million European customer accounts. Total payment volume was almost 12 billion US dollars globally in the second quarter of 2007. It was up 32% from the previous year. Per quarter, over two billion dollars are processed in Europe. Global net revenues were almost half a billion dollars (USD 454 million).

The EPC and the individual banks should give more attention to e-payments, e-invoicing, customer-to-bank standardisation and other products and services that would really broaden and deepen the SEPA.

SEPA in a changed economic and market environment

While making SEPA a reality and making it more attractive, banks have to prepare for upcoming changes in the economic and business environment.

The Eurosystem is convinced that the SEPA project will bring economic benefits. Customers will profit from better services and better prices, due to increased competition.

But even for the banks, SEPA can have a positive business impact in the longer term, due to improved cost efficiency and economies of scale and scope. Our research shows that the balance between the costs of implementing SEPA and the revenues from SEPA is closely related to the length of the period of dual processing. To avoid the unnecessary costs of a lengthy period of dual processing, the end date for the use of national payment instruments should be specified. Moreover, this ‘sunset’ date for the national payment instruments should be at the start of the decade, to enable SEPA to get up to speed and prevent it from losing momentum.

Broader economic developments are however making themselves felt in the banking industry, and these in turn will influence the commercial success of banks in SEPA.

It is clear that multi-country European banks are preparing to make the most of the opportunities that SEPA offers. Especially those banks that have their IT systems in good shape should be able to adapt to the new SEPA environment. Economies of scale can be reached. A telling sign is also the increasing number of banking mergers and takeovers in Europe.

SEPA is not only an issue and an opportunity for large, pan-European banks. Small, regional banks will also have customers demanding better services and prices. The SEPA payment schemes will give such banks a chance to offer a full set of payment services even more easily than today. Increased competition among infrastructure providers in SEPA should deliver new and interesting processing solutions to precisely these medium and smaller-sized banks.

A fact of life for all banks, great and small, is that the European playing field set by SEPA and the PSD makes it easier for non-banks and international banks to enter formerly protected domestic markets. Of course, they would aim at the most lucrative and accessible market segments, such as internet savings accounts. Losing the revenues of dormant saving accounts will force many banks to change their business model.

Another stable source of revenue whose prospects have become less certain is the interchange fees for card payments and direct debits. You are all very aware of the interest the competition authorities have shown in the business models for these payment products. We are all awaiting the upcoming decisions of the European competition authority.

A further challenge to the banking sector, and one to which the banking sector has to adapt, is the growing and increasingly well-organised pressure from clients aimed at avoiding price increases or even forcing price decreases. In general, SEPA should bring increased cost efficiencies and better prices. Even if some prices do rise, this should only happen if service levels are improved at the same time.

When talking about future-oriented payment services, changing business models and pressures on revenues, we should also bear cash payments in mind. Banks often describe their cash services as ‘bleeders’ in their payments portfolio, meaning a product with very high costs and low revenues. The Eurosystem is taking steps to converge the cash services of the NCBs. Moreover, the Eurosystem encourages the banks’ measures to promote the use of the most social cost-efficient means of payment in every payment situation. SEPA for Cards represents a huge opportunity here, and banks should really try to make cards more attractive to cardholders and merchants.

New roles for the EPC: a single market needs good governance

Apart from preparing for SEPA, banks have to realise that the old ways of doing business have long gone. Banks need to take into account the latest ways of organising their payments businesses, which includes involving other stakeholders in the governance of products, as well as in the development of new products and services.

Banks should invest time and effort in dialogues with their stakeholders. Stakeholders should be informed in timely and comprehensible ways. And they should be offered the chance to provide input, also on payments issues not directly related to the existing SEPA Payment Schemes. The EPC should organise this. The EPC itself should organise stakeholder dialogue at European level. Due to the size of the SEPA area, extra care should be taken to ensure the different opinions are effectively heard.

Although banks are faced with many challenges, they are in a good starting position because of their central role in the payments business and the client relationships they have built up. Banks should use these strengths to seize the opportunities that SEPA is offering. In essence, banks have to choose between the risk of becoming ‘Bruges-la-Morte’ or the investment costs of building a flourishing business in SEPA.

I mentioned earlier that progress within the EPC has been rather limited in respect of cards and state-of-the-art payment products. It seems that the EPC has difficulty progressing beyond the lowest common denominator. However, more than the minimum will be needed to make SEPA a success.

Now that most of the design work on the basic and core products has been done, the EPC Plenary should be able to make a greater contribution to the discussion of the more challenging issues. The Governing Council is clear in its Fifth Progress Report on SEPA: there is a continuing need to deepen and broaden the SEPA. And the EPC is expected to play its role in this process.

The EPC is already the market-driven decision-making body for the European payments industry. It has shown strong leadership and it has built up a good reputation. Every payment service provider is duly represented in the EPC Plenary, and this should continue to be the case after the introduction of payment institutions. More attention should however be given to the deepening and broadening of SEPA. In addition, the EPC should organise the stakeholder dialogue at European level. And finally, it should evolve into a European platform able to analyse, discuss and confront the changing reality of the payments landscape.


In my speech tonight, I have conveyed the views of the Eurosystem on the current phase of the SEPA project, aimed at transforming SEPA from a concept into a reality.

In the short term, efforts need to be stepped up to overcome problems that could hamper the timely launch of SEPA in January 2008. Specific attention should be paid to SEPA Direct Debit and to the finalisation of all its features. An additional European debit card scheme is genuinely needed.

In parallel, preparations should get under way to make SEPA more attractive to customers. Merely offering the new SEPA products will not trigger the migration. Banks have to offer customer-friendly services to achieve this. Moreover, the core and basic products will not necessarily deliver extra value to the customer. Banks need to make progress and develop future-oriented products that meet customer demands and needs. Future-oriented products can be built on the foundations that have been laid in the core and basic SEPA products.

All this will have to take place in a business environment that has changed remarkably. Customers have become more demanding, and more active. SEPA and the PSD are creating a level European playing field in which non-banks and international banks can compete with the incumbent banks.

The EPC has finalised most of the preparatory work for SEPA. And the SEPA train is almost ready for boarding. This means that it is a good moment for the EPC to rethink its goals. For the Eurosystem, the EPC is the market-driven decision-making body for the European payments industry, with a clear role as contributor to the further development of SEPA and as the future European platform for strategic payments issues.

The start of SEPA is almost a reality. The banks and the EPC itself should however not rest on their laurels. They should move ahead, develop new products, adapt to new customer demands, and anticipate changes in the payments business environment. If banks build upon their strengths and seize the opportunities that SEPA offers, the future will look promising and ‘Bruges-la-Morte’ really will be a thing of the past.

Thank you very much for your attention.

  1. [1] Leopold II, King of the Belgians (1835 - 1909).


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