Payment Services Directive: The end of the cash era?[de] 

At the end of 2005, Internal Market Commissioner Charlie McCreevy launched a legislative initiative to remove obstacles in EU payment markets.

After months of fierce debate, the Payment Services Directive was adopted by the EU Council of Ministers in March 2007. The dispute pitted the UK and Sweden against the Mediterranean bloc of France, Italy and Spain. The former trumpeted a more liberal approach to regulatory requirements for non-bank service providers, while the latter fought for a stricter set of rules, in particular concerning the granting of credit.

The final deal obliges non-bank providers to limit the duration of cross-border credit conceded to 12 months, but does not introduce any time restriction for national operations (see EurActiv 27/03/07).

The EU Parliament's green light came a month later, and it was published  in the EU's Official Journal on 13 November 2007 (see EurActiv 25/04/07). The definitive entry into force of the new set of rules is foreseen for November 2009, by which date member states are supposed to have finished transposing the directive into national law.

The Payment Services Directive (PSD) aims to create a true European market for payments while improving national businesses at the same time, offering consumers more and cheaper services.

In addition, the directive is key for the sound establishment of the Single Euro Payments Area (SEPA), an initiative by the European banking sector which seeks to introduce the same procedures and obligations across the EU for credit transfers, direct debits and payment cards (to learn more about the difference between SEPA and PSD, see EurActiv 24/07/08). The deadline for the implementation of the three targets is the end of 2010 (see EurActiv 29/01/08).

A European market for payments

The first objective of the directive is to tear down the legal and technical barriers that have thus far prevented the creation of a European market for payment services. With the new rules in place and the SEPA agreements in force, European consumers and business will be able to use a single bank account regardless of their country of operation.

Moreover, the execution time for payments will be capped at one working day. A shopper will have the right to demand to use an amount deposited into his or her bank account by the end of the business day after the date of the payment's execution - the so-called "D+1" rule. This will apply both throughout the eurozone and for cross-border payments. Currently, banks can legally take up to five days to make a payment.

The PSD is expected to be very useful for consumers too because it establishes the legal basis for cross-border direct debits, an instrument increasingly used to pay bills or to carry out regular payments.

Thanks to the direct debit system, householders can forget about queuing at post offices or filling calendars with dates to pay different bills: an automatic payment order easily solves the problem. However, at the moment this is not possible in a simple cross-border manner between all EU countries. The rent of a Erasmus student studying abroad must still be paid in the old time-consuming and delay-prone way. The PSD, together with SEPA, should make this a distant memory.

Another significant improvement is the ability to use debit cards across the EU. Debit cards are increasingly used by consumers as they are widely accepted and allow expenses to be managed much more easily and quickly. They are particularly suitable for small purchases, for which retailers often do not accept the use of credit cards.

This useful financial instrument, currently often not permitted in another EU country, will now be made available by the PSD and the SEPA initiative.

New payment providers

In Japan, all you need for shopping on a Saturday is your mobile phone. After the purchase, the telephone is passed over a reading machine which, interacting with chips or smart cards embedded in the handset, executes the payment and deducts it from the remaining credit.

In London, paying for the Tube in cash is already old-fashioned as the large majority of commuters use pre-paid contactless smart cards (the Oyster card) to access the Underground. 

A growing number of supermarkets across the world provide customers with their own payment cards to shop in their stores. These are often actual credit instruments, which are increasingly used by the average consumer.

Money remitters, which help immigrants transfer credit back home to their relatives, are providing their customers with mobile phone payments more often. Thus transferring money to the other side of the world takes as much time and effort as sending a text message.

All these new systems have been hovering over continental Europe for years but are still far from being applied on a large scale. One of the purposes of the PSD is to remove barriers to market entry for new payment services providers such as telecoms operators, supermarkets or money remitters. The aim is to increase competition within national markets as well as cross-border activities, which are the most affected by the lack of a clear legal framework.

However, banks risk facing strong competition from a range of new actors. Consumers may prefer to use their mobile handsets for the payment functions currently managed by banks.

On the other hand opportunities for banks are also at hand, the Commission argues. Indeed, the introduction of online accounts was supposed to harm them and force the closure of high-street branches, but this has not happened yet. Also credit card firms stand to benefit from an increased shift to electronic payments. And in fact Visa announced in April an ambitious target to provide one in five euros by electronic means in Europe by 2015, up from the current one in nine. As for banks,  

Old money and eMoney

In general, the Commission predicts that higher competition in payment services will increasingly lead consumers to choose electronic instruments (plastic cards, smart cards, mobile phones) for their purchases, contributing to the progressive elimination of cash.

The old coin-and-note system is indeed inefficient compared to new electronic means. Studies embraced by the Commission estimate that payment-related costs amount to around 3% of GDP and are driven mainly by cash-related expenses. Getting rid of coins and notes would generate "enormous" savings for the EU economy, they argue.

Cash is expensive because it has higher production costs and is not as safe. Stealing physical money is easier than stealing electronic credit, for instance. Therefore, the cost of a transaction in cash is calculated to be between 30 and 55 euro cents, already charged by retailers within the price of the product. The Commission estimates that electronic payments only cost a few euro cents.

The Payment Services Directive does not cover Internet payments. Online purchases are regulated by the eMoney Directive adopted in 2000. The Commission is currently waiting for the PSD to enter into force before coming out with new proposals to amend the eMoney Directive and integrate it into the PSD.

Transposition hurdles

The adoption of the PSD does not mean that the new rules will be applicable immediately. The text is now under revision by national authorities, which have to transpose it into national law. But the complexity of the PSD, considered more complicated than the average EU directive, means uncertainties remain as to the final outcome of the legislative procedure in the specific countries.

The margins of discretion left to national lawmakers by the text are big enough to justify the establishment of a special Transposition Group chaired by the Commission and made up of representatives of national regulators.

The Group has already met twice and plans to hold a further three meetings in 2008 and still more in 2009, according to the pace of transposition of the directive. The first problems emerging from the initial phase of the transposition regard the most and the least developed EU countries in terms of electronic payments.

In some countries the implementation of the new complex set of rules might in fact hamper the development of new payment services providers, such as supermarkets. It is feared that the rules might be already outdated once finally applied in a sector that is constantly under change.

On the other hand, the most developed member states can experience problems of transition from their current electronic payment systems to the new ones laid down by the PSD and applied by SEPA. The Netherlands, Estonia and Belgium, which are currently among the EU leaders in ePayments, will see their technologies outpaced by the innovations stemming from the new legal framework.

Speaking after the EU Council's adoption of the PSD, Internal Market Commissioner Charlie McCreevy said: "This is a directive that will not only improve the system for payments in the EU, but also opens the way to provide consumers with tangible benefits from financial markets integration."

Belgian authorities welcomed in general terms the new directive, but pointed to the potentially negative effects for its national Proton system, which already allows consumers in Belgium to carry out quick and small payments with a pre-paid card. "We are mindful of the fact that the improvement of cross-border payment systems should not have negative consequences for domestic payment systems. We are thinking in particular of the increase in the price of domestic payments, the disappearance of certain methods of payment and the reduction, through possible maximum harmonisation, of the level of protection currently enjoyed by consumers within their own countries," they commented.

Italian authorities warned  that "non-cash payments, in particular credit card payments, are on the increase and are increasingly likely to concern transactions connected with state gaming". "However, the introduction of rules aimed at promoting the development of payment services in the internal market may have undesired effects on the public gaming sector and in particular on betting," they added.

British authorities focused instead on a pro-market approach: "Reinforcing competition should be a core objective of the New Legal Framework. Creating the conditions in which payment service providers can operate and grow without being hindered by unnecessary regulation and increased compliance costs is vital."

BEUC, the European consumers' organisation, commented : "Many consumers cannot benefit concretely from the Single Euro Payments Area. It is high time to deliver on efficient but also secure and convenient payments. Enforcement of existing legislation will not be enough: binding instruments backed with appropriate sanctions are needed."

EuroCommerce, which represents the retail, wholesale and international trade sectors in Europe, welcomed the PSD initiative: "Great benefits are expected from a well functioning Internal Market for Payments," they said. After the adoption of the directive, Secretary-General Xavier Durieu said: "It will open the very much closed market of payment systems to competition and force banks to be more transparent: every European citizen and business will benefit from it".

The Euro Banking Association (EBA), which brings together the biggest European banks, commented : "In order to achieve a Single Euro Payment Area, the new legal framework for payments in the internal market should focus on the definition of the characteristics and effects of commonly used payment instruments throughout the single currency zone. The most stringent need today is for a common definition and uniform scheme for direct debits". 

After the adoption of the directive, Guido Ravoet, the secretary-general of the European Banking Federation (EBF) declared: "Banks are finally given the legal basis on which they can fully develop and implement the Single Euro Payments Area."

The European Savings Banks Group (ESBG) had a less welcoming reaction to the PSD adoption. "Whilst ESBG welcomes the end of the uncertainty created by the continuing debate about the draft Directive, ESBG nevertheless notes that prior concerns remain valid". Notably, according to ESBG, "the directive risks weakening public confidence in electronic payments; It fosters “responsibility without fault”: All payment service users will bear the consequence of the carefree or fraudulent behavior of very few; and it strengthens obligations and increases costs for providers of electronic payment services, whilst omitting cash - the most expensive means of payment for society as a whole - from its scope", reads a press release .

Contesting the argument that cash is more expensive than electronic payments, the European Security Transport Association (ESTA), which represents transportation and cash handling service providers, commented: "The cost of cash (seignorage not included) has been established by several Central Bankers at approximately 0.4/0.6% of GDP, which is much less than that associated with card use. Indeed, when compared with all other payment mechanisms, cash consistently stands out as the most effective form of payment in Europe".

"Moreover, ESTA considers that when the relative costs of different means of payment are considered, the related level and cost of fraud (most common in card payments) should be taken into account. This would help restore the truth that cash is not only one of the cheapest means of payment, but also one of the most secure", concluded the statement.

Visa Europe said it "supports the general aim of the new legal framework and welcomes the overhaul of the existing legislation in order to ensure consistency and avoid overlap". Nevertheless, "at the same time, Visa EU believes that further regulation should only be used as an instrument when deemed necessary, and consequently when a specific need is identified, and no lesser means of achieving the same objective such as self-regulation are available". 

Visa Europe's President and CEO Peter Ayliffe did not hide his partial disappointment after the final adoption of the directive: "As a strong believer in the benefits that a truly internal market in payments would bring, I would have hoped for a greater level of harmonisation."

MasterCard's position is less conciliatory. "We seriously question the appropriateness of covering all retail payment instruments (credit transfers, direct debits, debit and credit card payments, electronic purse, micro payments, etc.) under the same legal framework. As each of these payment instruments has specific features, it does not seem to us appropriate to include all of them under a 'one size fits all' type of legal framework," the firm commented.

Western Union, a leading provider of money remittance services around the world, commented: "If new competitive forces are to be encouraged and not stifled in Europe, different regulation that supports the safe and efficient operations of payment service providers will be necessary. Therefore, the imposition of bank-style regulation would be inappropriate and costly."

Orange, the mobile brand of France Telecom, asked for a different approach to micro-payments, which are the most frequently made via mobile handsets and where the risk for consumers is considered lower. Moreover, Orange added: "Mobile operators offer a range of premium rate mobile services to both their pre-pay and post-pay customers. We do not accept that these services can be defined as payment services given the intrinsic relationship mobile operators have with their customers in supplying these services."

Vodafone echoed Orange’s position: "The critical test is the proportionality of regulation. Proportionality means that regulation should not be tied to a service per se, but to risks associated with that service. Mobile payment services give rise to modest risks."

PayPal Europe, the most widely known eMoney service, showed a moderate interest in the PSD: "We would be supportive of any initiative to harmonise the licensing of money transmission and remittance services within the EU. As these types of service involve a lesser degree of regulatory risk than both eMoney issuance and banking, it should be made clear that any authorised electronic money institution should be entitled to undertake money transmission within the scope of its e-money authorisation without any requirement for additional authorisation within the EU."