Stumbling toward the finish line

By Sharon Stephenson

Flashback to 1999: John F Kennedy Jr dies in a plane crash, the Scottish Parliament is officially opened and Shakespeare in Love is named Best Picture at the 71st Academy Awards.

“The introduction of the euro as the single currency of the euro area will only be completed when SEPA has become a reality.”

January 1, 1999 will also be bookmarked in the collective European imagination as the year that unleashed the single Euro currency onto 11 member states: France, Spain, Germany, Italy, Portugal, Greece, Finland, Luxembourg, Belgium, Austria, Ireland and the Netherlands.

And when the New Years hangovers subsided, three hundred million citizens in countries that had previously spent a large chunk of the last millennium waging war against one another woke up in a borderless euro zone to the reality of an integrated monetary policy, political convergence and a common currency.

Almost a decade on and despite the criticism that the euro has done little to create a cohesive European market, much of the initial scepticism has been swept under the carpet by more pressing issues such as the global economic crisis. Yet, for reasons as varied as the member nations' languages, one of the key euro-related initiatives, the Single Euro Payments Area (SEPA), is still far from a reality. A natural bedfellow of the euro that has been on the drawing board since 2002, SEPA is aimed at harmonising national euro payment schemes and was launched on 28 January 2008 to make it cheaper and easier to move money around the continent.

Essentially, SEPA is the area where citizens, companies and other economic entities can make and receive payments in euro within Europe, whether within or across national boundaries under the same conditions, rights and obligations, regardless of their location. All such payments will be considered domestic, because once SEPA is fully achieved, there will be no differentiation between national and cross-border euro payments. The geographical scope of SEPA includes the 27 EU member States, along with Iceland, Liechtenstein, Norway, Switzerland and Monaco.    

While the euro bought some transparency to consumers, banks and businesses on a cash level SEPA is, if you like, it's non-cash equivalent, introducing common payment schemes (business rules and standards) for the straight-through processing (STP) of electronic payments between banks, businesses and consumers across the EU region. 

Technically speaking, the harmonised SEPA payment schemes based on global ISO standards are a set of inter-bank rules, practices and standards necessary for the functioning of payment services. A payment scheme defines, for example, the relevant currency, the format of the account and bank identifiers and standard messaging formats for banks. In essence, the harmonized SEPA payment schemes can be regarded as an instruction manual that provides a common understanding between banks on how to move funds from account A to Account B in SEPA.  

As two of the political drivers of the initiative, the European Commission and European Central Bank, outlined in a statement, "the introduction of the euro as the single currency of the euro area will only be completed when SEPA has become a reality".

So there's no doubt the political will is there to make the full adoption of SEPA a reality. Or of the benefits that will accrue: last year 15.7 billon credit transfers and a further 17.7 billon direct debits were processed across the Euro area. Industry players point to how efficiently the euro payments market will work once SEPA is fully implemented, while consumers will be able to make secure payments domestically and across borders without having to open separate bank accounts to handle business in different European countries. SEPA aims to introduce common payment schemes for euro credit transfers and direct debits. As a result, bank customers enjoy increased choice of financial service providers.

And then there's the issue of healthy competition within the payments arena. According to a study conducted at the behest of the European Commission, the replacement of legacy national payment systems by SEPA holds a market potential of up to €123 billion in benefits, cumulative over six years and benefiting the users of payment services.     

On the corporate side of the fence, the payback is even more bountiful: having shared standards allows merchants to easily accept and process payments with any card issued by a bank in SEPA.  National borders no longer need to be a barrier to growth and businesses can have a more direct financial relationship with consumers across the Euro region and can even expand their operations across the continent. Similarly, B2B transactions across borders will enjoy similar 'upgrades' and will require much less overhead, be more transparent, secure and quicker than before.

On a wider scale, industry experts and the European Commission alike expect SEPA to stimulate economies by lifting legal, commercial and technical barriers associated with the myriad of local payments regulations and processes in place today.

It certainly looks impressive on paper. Yet the process of translating the framework into services for customers and businesses has been hamstrung by delays, prevarication, cross-border fighting and ill will, sometimes on the part of the banks that question how much they have to gain.

Around two percent of payment transfers in the SEPA region are cross-border payments, so many banks feel there is not much of a business case to justify the investments they have to make to adapt their payment systems.

Several have been reported as saying that it is "nothing more than a political agenda being foisted on us by the European Commission and the European Central Bank". Nor has the scheme won favour with all participating governments, a factor likely to be exacerbated by the global financial crisis, which has caused further concern about the cost of implementation in these economically straitened times.

The body charged with co-ordinating the European banking industry in relation to payments, the European Payments Council (EPC), estimates that, based on current market rates, it would take 30 years to accomplish migration to SEPA if left to market forces.

In January 2008 banks started migrating customers over to the new payments system. By summer 2010, some 30 months after the introduction of the SEPA Credit Transfer (SCT), around nine percent of payments within the EU were processed as SEPA transactions. Although this is a five percent improvement on the past year, the low usage can't have caused too many celebrations amongst the suits at European HQ. Nor the fact that milestones such as the introduction of the SEPA Direct Debit (SDD) Scheme was delayed by a year.

Earlier this year, the European Commission and the European Central Bank established the SEPA Council to promote the realisation of an integrated euro retail payments market by fostering consensus between all major shareholders on the next steps towards the full realisation of SEPA. The SEPA Council brings together the demand and supply sides of the payment market.

On November 1, 2010 the EPC released updated and enhanced versions of the SEPA Credit Transfer (SCT) Scheme Rulebook and the SEPA Direct Debit (SDD) Scheme Rulebooks. From this date, all banks in the euro are reachable for cross-border SEPA direct debits as mandated by EU law. In practice, this means that any consumer who holds an account in the euro area, which provides the option to make euro direct debit payments at a national level, can now make cross border payments by SDD as well. At the same time, companies are now able to collect payments by SDD across the euro area, resulting in enhanced business opportunities.

November 1 also marked another milestone in the long and winding SEPA journey - the EPC called on EU lawmakers to set an end date for migration to SEPA schemes through regulation.

According to EPC Chair Gerard Hartsink, "The single element now required to achieve an integrated euro payments market is a clear deadline for the transition to the SEPA payment schemes".

"The majority of the market participants recognise that a clear deadline for migration to SEPA is now all that's required to achieve an integrated euro payment market. Therefore, the EPC calls on EU lawmakers to set an end date for migration to the SCT and SDD schemes through EU Regulation. Earlier this year, the Commission introduced a concept for a regulation to establish end dates for compliance of euro credit transfer and euro direct debit schemes with "essential requirements". In the Commission's own words, this approach would lead to a new and competing credit transfer and direct debit schemes emerging, complying with essential requirements."   

However, Hartsink admits to some concerns regarding the possible forthcoming regulation, including its failure to establish definite end dates for the phasing out of existing national euro payment schemes.

"This would prevent the realisation of potential financial benefits that could be reaped from migration to a set of harmonised SEPA Schemes," says Hartsink. "Existing national euro payment schemes could become compliant with the 'essential requirements'. As a result, domestic transactions would still be handled by national schemes whilst the SEPA Schemes would be used exclusively for cross-border transactions. This scenario is called a 'Mini-SEPA'."

There is also the fear that regulation could allow for multiple competing and 'interoperable' euro credit transfer and direct debit schemes. "This concept would do little to overcome the fragmentation of the euro payments market and disregards that an optimally efficient payment environment would require that all payment service providers of all payment service users adhere to the exact same scheme rules and standards (which does not prevent competition on SEPA payment products and services). The EPC does not understand why the European Commission contemplates now a scenario so radically different from the approach it has promoted over the past decade. The shared understanding has always been that SEPA aims at the replacement of a multitude of national euro credit transfer and euro direct debit schemes by a single set of SEPA payment schemes."

The envisaged regulation could also render obsolete substantial investments made by early movers both on the demand and supply sides who, in response to previous calls by regulators including the European Commission, have already renewed their payment architecture to comply with the SEPA Schemes developed by the EPC, says Hartsink. "Banks and other stakeholders shouldered these investments based on the shared expectation and understanding that national euro payment schemes would be phased out. The change of emphasis to 'essential requirements' and multiple competing schemes, however, fundamentally contradicts this original assumption upon which these investments were made."

This makes it even more critical that the European Parliament and the European Council must issue regulation that sets end dates for the phasing out of existing national euro credit transfer and euro direct debit schemes, he adds.

"This will ensure that the high costs of running multiple payment schemes in parallel can be eliminated. A regulatory intervention based on the European Commission's considerations published in March and June 2010, would effectively derail the entire SEPA project and eliminate the extensive benefits SEPA offers bank customers. The EPC welcomes the recent announcement by the Commission that a public hearing will be held to ensure that all market participants are consulted on the most appropriate approach to a regulatory intervention related to SEPA."