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The road to SEPA

By Nick Senechal, VocaLink

As banks begin their SEPA testing and governments look to transpose the Payments Services Directive into national law, Europe’s payments industry is poised to enter a new visionary age. In the words of the European Council’s Lisbon agenda of 2000, they will play their part in helping Europe:

“to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”

To support this vision, payment instruments will be convenient to the end user, consistent across all member states and facilitate business, saving business many €billion in efficiencies. Sending a payment from Leiden to Lyon will be as easy and cheap as from Bonn to Berlin. This will enable consumers and businesses to do their business where they want to, and know that the payment part of the transaction would not be a barrier to effective trading.

This vision is so compelling that the European authorities first saw that the market would lead these changes, led by customer demand and fulfilled by entrepreneurial financial institutions. But this vision underestimated the forces of inertia within the existing (mainly domestic) payments systems, deeply embedded in banks and businesses within each national community. The Commission has responded by “encouraging” banks and other players to offer their customers a “SEPA” through a combination of actual and threatened legislation. The European Council’s Regulation 2560/2001 began the process of “domesticating” former intra EU cross-border transfers, (and as a by-product removed a significant revenue stream). The Payment Services Directive, long in drafting but now agreed in content, takes this process to the next level by mandating:

Clear rights and obligations of payment service providers and their customers;
Transparent service levels (especially to the consumer);
Enhance information between provider and customer;
A legal framework for direct debit across Europe;
Facilitating competition from non-bank payment institutions;

By November 2009 the PSD will be adopted as national law within EU, EEA and Switzerland and the challenges for banks become clear – can they develop an effective means to manage direct debit mandates and associated reference data? Are they on track to deliver all SEPA payments by D+1 before 2012? Have they identified suitable strategies (and partners) to offer value-added services? Is there more value to be found within the financial supply chain (and how)? The investment VocaLink has made in our new payment platform means we are ideally placed to help banks adopt this change.

However on the road to SEPA, a practical dialogue has been established between the Commission, the European Central Bank and the banking community. This follows the realisation that whilst the PSD places obligations on the bank as to how to treat its customer, no one bank can guarantee a payments service without the co-operation of other banks. The European Payments Council has thus gained stature to become the voice of European banks – effectively a self-regulatory body, developing common standards for SEPA Credit Transfer, SEPA Direct Debit and Debit Card, and then requiring the formal adherence of banks. This “minimum regulation, maximum self-regulation” trade off between commission and EPC has achieved a common standard for the euro currency zone, such that banks are expected to offer new instruments at least for cross border payments before they are legally obliged to in 2009.

So after a decade of activity the beginnings of an integrated payments market are in place through basic compliance. The next stage will be the greatest challenge – migration to the new standards which will have to grow to take on the needs of corporates and consumers, and Europe’s non-euro currencies. Above all the most competent players can exploit the market for payment services across broader market, provided they can chart a path of migration from today’s multiplicity of domestic instruments. To do this effectively will require them to offer new and value-added services which better fit their customer’s developing needs – more convenient, faster, more spontaneous and information-rich, across the whole of Europe.

The PSD and SEPA have worked to level the playing field for these challenges; for banks, the game is just about to start in earnest.