Notes on the meeting held at the European Parliament, Brussels
The Single Payment Area in Europe
Outstanding questions about the timetable and content of the EU Commission’s Payments Directive and discussion of some of the remaining potentially contentious issues on the road to the Single European Payments Area (SEPA) featured at the Graham Bishop European Finance Forum meeting in Brussels on May 10th.
Graham Bishop opened the meeting by suggesting that at a time when there is scepticism amongst Europe’s citizens about the benefits the EU brings to them, the fact that the European payments system is not working as it should is likely to fuel this mood. He pointed out that given the economies of scale in the payments field there is great scope for commercial advantage to be gained from embracing efficient payments systems. Moreover, improving the payments infrastructure is both a commercial and political necessity.
For the European Commission, David Deacon outlined why it believes harmonising the payments system is so important. He pointed out that all economic actors and society in general could gain from SEPA. For example at the moment, large pan-European companies have to have as many as 25 treasury sections - one for every country in which they operate. It is estimated that the costs to the EU economy of nation-state based payments structures could be as high as 2-3 % of gross domestic product.
One of the problems of improving the system, however, is that the vast majority of each country’s citizens do not make cross border payments and therefore are not inconvenienced to the same degree as the relatively small proportion of those that do or business and commerce. SEPA is not just about cross-border payments, but about opening up all currently isolated national markets to competition. Often, he pointed out, the markets which provide the cheapest payments services also have some of the best quality services, including execution times.
The range between the cheapest and the most expensive services is wide. On debit card payments for example, where each card is essentially a national card even when it is part of a global brand, costs to a merchant from allowing a customer to use a card can vary from as little as 5 cents per €100 spent in Belgium to one euro per €100 spent. Since the costs are often ad valorem, they rise the more is spent. For supermarkets, for example, profit margins may be as little as 2%, so payment costs with cards can halve the net profit of a transaction.
The Commission’s aims are to see technical barriers blocking a single payments area removed, to see common commercial standards established, to eliminate anti-competitive practices and to promote new competition in the market, he said. “We want one payments solution for the whole of the EU,” he said. At present, he said, lorries delivering supplies to supermarkets as part of a supply chain are more efficient that the EU payments system. This is holding back innovation, the development of e-commerce and adding enormously to the costs of doing business. He pointed out that small and medium sized businesses in specialised product niches are, today, being prevented from selling into some European markets because of inadequate payments structures. There is heavy pressure from corporate treasurers to move quickly. SEPA he said should permit a big technological leap forward and great scope for rationalisation, especially in the banking sector.
Deacon conceded, however, that banks which were inefficient and operating in protected markets could suffer from SEPA as they faced competition from more effective rivals.
There is an additional concern with cards. Banks have an incentive to market the cards which charge merchants the most, not the least, for their services, since these bring bigger profits to the banks at the expense, ultimately, of consumers. This was the subject of a recent interim report by Commission competition department.
As for specific issues, Deacon suggested that removing technical barriers such as ensuring that information technology systems in different countries could communicate was relatively easy. It is more difficult to align commercial standards. What for example happens when a cross border payment is refused because there is no money in the account of the consumer who has bought the goods. Getting this right will be more difficult.
On the timetable he said that the aim was to get systems for cards, credit transfers and direct debits up and running by 2008. The goal was to have a single payments area in the EU by 2010.
Both target dates are ambitious he agreed, but the Commission does not want to see two payments systems running in parallel, a national system and a European system in the longer term. SEPA he said would fundamentally change the structure of EU payments since some payments which are now national would, once the capability was there, become cross border payments. However this would only happen if SEPA products improved on price and quality of existing national products.
The Commission supported the industry led initiative for SEPA and the role of the EPC (European Payment Council) to remove technical and commercial barriers. The proposed Directive played a supporting role in that it would aim to remove legal barriers, promote competition, ensure an adequate but proportionate level of prudential protection for the financial system and avoid entrenching a banking monopoly on payments. The Commission recognised, he said, that consumer protection is important to promote consumer confidence in modern payment instruments.
Wolf Klinz MEP intervened to urge caution and not to create an atmosphere in which citizens began to expect too much in terms of lower costs or better quality of payments services and then were disappointed, yet again, by a European initiative. He reminded the meeting that heavy investment would be needed to make SEPA a reality, even in countries which currently have relatively efficient systems.
Deacon responded that, while aware of such concerns, the fact remained that in countries with expensive payments systems the combination of SEPA and internet access to foreign internet banks could produce significantly lower charges for individuals. There will be small, but widespread, cuts in costs to consumers, but they are likely to be so small they will not always be visible to citizens and this must be taken into account.
Jean-Michel Godeffroy, for the European Central Bank, stressed from the outset that SEPA must be seen first and foremost as a political project. Like the single currency, it is part of the effort to foster solidarity amongst the different peoples of Europe. There will be benefits from SEPA for those making cross-border payments, but, as already pointed out, most citizens do not make cross border payments and will not notice this.
He said that an effort will have to be made to convince Europe’s citizens of the value of SEPA as it will not be possible to force citizens to use IBAN and BIC identification codes, and some may not want to. It will be easiest to convince younger, sophisticated people, familiar with internet commerce, of the value of SEPA, and harder to deal with the reservations of the older, less sophisticated. He insisted that it would be vital for governments and public administrations, who, especially treasuries and finance ministries, to set the pace. After all, payments are a big part of government activity and there will be no excuse for banks to hold back if public administrations are moving forward.
As for the specific role of the ECB, he said that its role in the payments structures of the EU was authorised by the EU Treaty and that, as an EU institution, it shares the European vision. He said that it is apparent that major EU banks recognised the political dimension of the project and this is one of the reasons they support it – demonstrated by their support for the European Payments Council (EPC).
He identified five policy lines: direct debits, credit transfers, card payments, payments infrastructure and payments standards. One of the problem areas is cards since it is agreed that policy should avoid the easy solution of leaving the entire market to international card systems. Competition is a priority.
On the new legal framework for payments, he said that there is a very big problem of timing. If the goal is to get SEPA products operating by Jan 1, 2008, each country needs to have new rules agreed well before then so the Directive will be need to be finalised by the end of this year, at the very latest. But there are many issues still to be hammered out. The ECB, for example, favours efficiency and competition - though not at the expense of consumer protection and systemic risk containment.
Issues about the meaning of particular words are also very important. In the case of “deposits” for example, if an institution which is seen to be taking “deposits” fails, it will, if it is seen by consumers as a deposit taker, be classed as a bank in their minds whether it is or not. A failure would thus be a threat to the banking system, illogical though this might be in law. So the definition of payments institutions will have to be done very, very carefully. But some participants questioned if consumers would make a simple read across to bank stability.
Sharon Bowles MEP warned that when the Parliament gets to a detailed analysis of the Payments Directive, many MEP’s will come to the task applying their personal experience of payments systems. She herself, she said, had experience in business of cross border cheque payments and understood how superficially small issues, such as the physical size of a cheque and the fact that, therefore, cross border cheques often had to be dealt with manually, added to the costs of payments.
Addressing some of the details in the proposed Directive she said that she believed that the use of the word “deposit” as initially proposed, was a drafting error which could easily be cleared up – and the Commission agreed with this. On Title 1, she said that all currencies could not be covered, dollars for example have to be settled in the US and this affects timing issues.
She warned that there is no appetite in the Parliament’s ECON Committee to remove Title 2 of the Directive, though it seems that some in Germany are pressing for this. Some non-bank institutions in the payments system will need capital requirements. But the Parliament’s Internal Markets Committee might want to take Title 2 out. There is a debate about whether non-bank institutions in the payments system will need capital requirements; it seems likely most will favour some requirement. She did not think that Title 3 would be controversial but Title 4 did raise important political issues.
The Commission and the ECB, she said, want a fee-based system, not a system that is paid for, un-transparently, by the “float” of funds in the payments network. She suggested that a D+1 payments structure would exclude the possibility of a free, float-based, structure. It may, she argued, also be hard for banks which are currently giving a “free” domestic payments service, to do the same cross border on the D+1 timescale.
There are issues about where fees are deducted, since this impinges on the question of what is the precise amount of money that is actually paid. Issues of compensation when a payment goes wrong or of notification when a payment is made are also important. It is no use learning three days after you have instructed a payment that it has not been made when the system is D+1 day for payment.
As for outsourcing by less efficient banks, this is not a simple matter either, since customers of the outsourcing bank will still have to deal with its, probably, untrained staff when trying to set up the payment in the first place.
David Deacon interjected to say that Title 2 of the Directive is very important since it deals with vital issues such as citizens who do not have bank accounts and immigrants who are making small payments to their home countries, payments which today, in aggregate, are greater than aid flows to poor nations.
He said that the Commission did not want to exclude the possibility of “free” transfers. D+1 did however make it easier to compare charges.
Jean-Michel Godeffroy intervened on the issue of the transparency of pricing to point out that citizens in general are happy to pay for some products and services but payment services are not one of them. This is a political problem. He added that banks will be able, and will probably have to, customise services and offer value added services and this is allowed for in the proposals. But policymakers want these decisions to be made by individual banks, not national banking associations; otherwise you will get fragmentation by member state.
Graham Bishop expressed concerns about the fast-track legislative process and the difficulty lobbyists would have in following, and pressing for changes, in the Directive. One participant underscored this concern adding that timing would be even more challenging if issues of the un-banked and immigrants became a central feature.
The meeting closed by expressing its thanks to all the speakers - with particular thanks to Sharon Bowles and her assistant, Carol Hall, for the help in arranging the meeting in the Parliament.
The next meeting is provisionally scheduled for 10th July 2006 and the topic will be Clearing and Settlement as it is expected that DG Comp will have published its comments and DG Markt will have published its Regulatory Impact Assessment by then. In view of the likely interest in the subject, that will be the only topic on the agenda.
© Graham Bishop
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