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SEPA – three months to go and full steam ahead?

Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB
European Finance Forum
Frankfurt am Main, 8 October 2007


Thank you very much for inviting me to present the ECB’s view on the Single Euro Payments Area (or SEPA). I really appreciate these opportunities to exchange views with market participants, and I am looking forward to your questions later on.

In less than three months, SEPA will start. SEPA will make it possible for retail payments in euro to be made throughout the euro area as easily, safely and efficiently as domestic payments today. But SEPA means more than new pan-European credit transfers and direct debits. Multinational companies are centralising their payments departments in a single payments unit which handles all European transactions. Some multinational banks are doing the same thing: creating payment factories for Europe. The payments processors are quickly adapting to the new European environment: takeovers, mergers and cooperation agreements are the order of day. For retail payments in Europe, the borders will disappear.

Last month, I delivered my yearly speech to the European Payments Council. I would like to thank Gerard Hartsink again for the constructive working relationship between the EPC and the Eurosystem with regard to SEPA. In that speech, I compared the SEPA project to a train. And my implicit question to the EPC was: is SEPA a steam train – technologically-backward, slow and difficult to operate? Or will SEPA be a TGV – modern, fast and easy to run?

As you may know, a high-speed railway line has recently been built in eastern France and the train service between Frankfurt and Paris has been upgraded. The travel time is now only four hours, two hours shorter then before. The service is offered jointly by Deutsche Bahn with its ICE trains and SNCF, the French operator, with its TGV trains. Many technical changes to the trains were necessary, as well as intensive testing, to enable the trains to be driven safely in both countries. It is a model of cross-border cooperation, the technology is adapted for cross-border use and a cross-border service is offered to passengers. The borders have truly disappeared…haven’t they?

On the way back from Paris to Frankfurt, just after the scheduled stop at Forbach, the last station in France, and shortly before Saarbrücken, the first station in Germany, the train came to a sudden, brutal and complete stop. It would not move. The train driver announced that there was a technical problem, and that he would try to fix it. But the train just would not move. It was ‘reset’ completely. All the power was turned off, including the internal lights. It still would not move. And for two hours it stood there, stranded on the border between France and Germany. Finally, a locomotive arrived to tow this technological showcase into Saarbrücken Hauptbahnhof. Apparently, the border between France and Germany had not disappeared…

So, what does this tell us about SEPA? Are there any parallels? Is there a risk that, after many years of preparing, designing, developing, implementing and testing, SEPA payments will come to a stop at the border? We shall see in a few weeks’ time.

In my speech tonight, I would like to:

  • convey the views of the Eurosystem on the current phase of the SEPA project;

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

  • and I will consider some issues specific to the German retail payments market.

Making SEPA a reality: only three months to go

With less than three months to go before it starts, SEPA has reached a critical phase. Let me briefly run through the Eurosystem’s key recommendations for the SEPA project contained in the recently published Fifth Progress Report.

To prepare for a take-up of the SEPA Direct Debit, all its features need to be clarified by December 2007. As a minimum, an e-mandate solution has to be developed, making it possible to create and process the mandate via the internet. A business-to-business direct debit scheme also should be developed that is capable of gaining wide acceptance from corporate users.

The Eurosystem sees a genuine need for at least one additional pan-European debit card scheme. It would stimulate competition, and banks should realise that without an additional scheme they would only have two to choose from. Moreover, a European scheme is more likely to ensure the strategic involvement of European banks in the cards business.

Finally, more communication on SEPA is needed. Even corporate customers are largely unaware of SEPA, even though they would have very good reasons for migrating to SEPA. Moreover, in order to reach a critical mass of payments, their role is crucial. Banks need to explain to all their customers what SEPA is and what it will mean for them in their daily lives. IBAN and BIC should not remain mysterious acronyms, but should be presented as keys which will open the door to the European payments market. Banks should present their detailed product offerings for SEPA now: the rules, the service levels, the prices. Banks should assist their customers in changing over to these new products. In this sense, communication on SEPA should be as intensive as it was for the changeover to the euro. I would be very interested to hear from you today what preparations are under way in your banks.

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

Next step: making SEPA more attractive

The SEPA project has until now aimed to lay the groundwork for the core SEPA payment products and to set the basic requirements for infrastructures and card schemes. Banks are implementing the changes. Some have successfully completed the SEPA testing programme offered by SWIFT. Real products are being developed, based on the rulebooks and their implementation guidelines.

Facilitating migration through customer-friendly services

As their top priority, banks need to develop services that will help their customers to migrate to these new SEPA products.

Corporate customers will not start to use the SEPA Credit Transfer if they cannot update their bank account databases automatically. If customers had to provide their IBAN and BIC, it would cost each business tens of euro per customer to manually change in their company databases the domestic bank account number plus the ‘Bankleitzahl’ into the IBAN plus BIC. Just imagine how much work would be needed for Volkswagen, Siemens or Deutsche Telekom to manually change their employees’ banking details. Or for the ‘Bundesagentur für Arbeit’ to manually change the banking details of all those who receive unemployment benefits. Such companies and institutions need to be able to send to their bank or to a data provider their complete file of banking details and receive back a file containing the IBANs and BICs. Such an IBAN/BIC update service is therefore urgently needed.

In addition, ways should be found to help creditors to use the existing mandates for the new SEPA Direct Debits. Energy suppliers, insurance companies, newspaper companies, telecom operators, landlords and others would far prefer to keep using the current direct debit products if they were unable to switch to the SEPA Direct Debit for existing customers. The EPC and the national banking communities should tackle this issue, in coordination with the national central banks and legislators. This should be feasible, especially if customer rights are not negatively affected by the changeover.

Developing future-oriented products and services

The second way of making SEPA more attractive is for banks to develop future-oriented products and services. The basic and core payment products now defined in SEPA only meet the basic and core customer demands, but do not meet the needs of the modern, informed and demanding customer.

One of these demands is to reduce the costs of making and collecting payments. Using e-invoices and limiting the number of paper invoices being sent by post would save companies a lot of money. When e-invoicing is coupled with a direct debit or with Electronic Bill Presentment and Payment (EBPP), it not only cuts the amount of paperwork on the debtor’s side but also reduces mistakes in filling out the payment order.

For companies, huge efficiency gains can also be made when their payments are linked automatically and seamlessly to their businesses processes, i.e. linked to the value chain within their company. This has been a long-standing demand of many corporate customers, one to which banks should respond. As such, SEPA should address standardisation in the customer-to-bank field. The recently published World Payments Report 2007 mentions this as a condition for a successful take-up of SEPA by corporates. Other conditions include a comparable quality and price level for SEPA products, and clarity on a common end-date.

Messages specific to the German market

Let me now focus on the German retail payments market. I have already mentioned the need for migration services aimed at automatically updating domestic account numbers plus the ‘Bankleitzahl’ into IBAN and BIC, as well as the need to enable the use of existing direct debit mandates for the new SEPA Direct Debit.

The EPC is the market-driven decision-making body for the European payments industry. Some market participants, also here in Germany, have their doubts on the future for the EPC. The Eurosystem however sees a clear role for the EPC as contributor to the further development of SEPA.

In several countries, retail payments are processed end to end within two working days, or even on the same day. Banks in these countries will most probably offer Additional Optional Services to bring their SEPA payment products up to the same service level as the current domestic products. But SEPA does not stop at the border. If foreign banks offer better services, some customers will prefer to use these foreign banks. Banks all over Europe might have to improve their service levels, such as the processing time, if other European banks offer better services. Merely waiting for the Payment Services Directive to become effective, which is to offer T+1 by 2012, might no longer be sufficient in a competitive, integrated, European payments market.

The Payment Services Directive was disputed because of potentially creating an unlevel playing field for banks. However, a good compromise was reached in the end. Payment institutions will focus on a limited set of payment activities and will be subject to adequate supervision and oversight.

As for the World Payments Report, some newspapers said it offered a relatively pessimistic assessment of the progress of the SEPA project. As you know with journalists, good news is no news. If you read the full report, you will see that it contains a different message. It places SEPA in the broader economic and regulatory context and gives a clear message to banks: “Over the next two to three years successful banks will rely on their major strengths to develop effective strategies to meet the intense challenges of increasing competition in the SEPA marketplace from ACHs, payment service providers, new non-European entrants, and later, payment institutions”.

When talking about future-oriented payment services, changing business models and pressures on revenues due to increased competition, we should also bear cash payments in mind. Research has shown that cash services are a loss-making business for banks; it is a product with very high costs and low revenues. The Eurosystem is taking steps to harmonise 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. Germany’s payment system, which in general is considered efficient, still has room for improvement, especially due to the high use of cash compared with other west European countries. SEPA for Cards represents a huge opportunity here, and banks should really try to make cards more attractive to cardholders and to merchants. With VISA entering the German card market with its new V PAY card product, alongside EC Karte and Maestro, banks will have more choice. We will monitor these developments closely, and we expect that the increased competition will lead to better services and lower prices for cardholders and merchants.


In my speech tonight, I have conveyed the views of the Eurosystem on the current phase of the SEPA project.

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 the finalisation of SEPA Direct Debit. An additional pan-European debit card scheme is genuinely needed.

Moreover, communication efforts need to be intensified. Basic information should be provided to all customers. And customers are anxious to receive the new SEPA product offerings. Without clear communication, SEPA will not get off to a good start. Without active promotion, the migration will be a non-starter.

In parallel, preparations should get under way to make SEPA more attractive to customers. Merely offering the core and basic SEPA products will not trigger the migration. Banks need to make progress and develop future-oriented products that meet customer demands and needs.

In the German retail payments market, specific attention should be given to IBAN/BIC conversion, the use of existing mandates for the new SEPA Direct Debit and the general service level, such as the processing time. Moreover, German banks need to rethink their business strategies to survive and thrive in the new payments market. SEPA for Cards has an enormous potential in Germany.

The departure of the SEPA train is imminent. With increased communication efforts, I am sure that, for retail payments in Europe, the borders will disappear. Perhaps at the outset it will not be used as often as we would like. But ultimately SEPA payments will travel swiftly, smoothly and safely across what once used to be the border.

Thank you very much for your attention.


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