European Payments Infrastructure overhaul


The introduction of a Single Euro Payments Area (SEPA) is set to overhaul the eurozone’s payments infrastructure by creating a cross-border network to make using banking services as easy as it is at national level – however, uncertainties over the introduction of the new system remain.

The current payment infrastructure in the EU has been individually developed in each member state in order to meet national requirements and is based on national currency systems. To date, each member state has had its own banking system operating on its own rules and with its own technology. Therefore, the current payments infrastructure remains highly fragmented along national lines. However, with the introduction of the common currency and trade becoming increasingly integrated within the EU, the challenge of setting up a new EU-wide infrastructure has arisen. 

The Commission seeks to eliminate national differences in the information technology and commercial arrangements used by payment systems by creating an EU-wide technological standard and a respective scheme for technical and commercial interoperability, thus allowing for European payments to be processed in no more than one day.

While all 27 EU member states are required to implement the legal framework, the new rules only apply for payments in euros, leaving it up to non-euro member states to decide whether to adopt the new system for domestic payments.

SEPA requires the removal of legal, commercial and technical barriers across markets in the euro area, aimed at making cross-border payments cheap and easy. The legal barriers are addressed in the Payment Services Directive  (PSD). In order to develop a common infrastructure and standards within the eurozone, the European Payments Council (EPC) was set up by European banks and credit associations in June 2002.

  • New rulebooks: The European Payments Council (EPC) has developed so-called 'Scheme Rulebooks', a set of rules and standards for the new SEPA Credit Transfer, SEPA Direct Debit and SEPA Cards Framework.

    • SEPA Credit Transfer (SCT): This scheme aims to allow providers to offer payment services of a core and basic credit transfer throughout the Euro Payments Area. SCT provides for a maximum execution time of three days from any point in SEPA, even though most payments are expected to arrive even more quickly than they commonly do so today.
    • SEPA Direct Debit (SDD): The SDD similarly allows for core and basic payment services across SEPA, whereby one-off and repetitive payments are collected on behalf of creditors from debtors.
    • SEPA Cards Framework (SCF):  The SCF is to provide a policy framework for banks, card schemes and other actors to move towards the creation of SEPA for cards. SEPA card standards will be defined by the end of 2008 at the latest. Experts expect an overhaul of national debit card schemes using Visa or MasterCard for cross-border interoperability.

For both SCT and SDD, there is a "replacement strategy", meaning that the old schemes will eventually be phased out. However, for the card business, due to its highly complex nature there will instead be an "adaptation" programme for existing schemes and operators to adopt a new set of business and technical standards and processes.

As a result of the late transposition of the Payment Services Directive, SEPA direct debits will only be available after 1 November 2009. However, SEPA credit transfers and card framework payments will be available from January 2008.

  • Investment costs

The Commission anticipates that the establishment of the euro payments system will lead to potential savings of €50-100 billion. However, banks are faced with the need to make major investments in order to comply with the SEPA requirements. Payment processing organisations will also have to gear up their systems to meet the new cross-border payment standards.

Moreover, banks and processors will not be able to raise extra charges for cross-border transactions as prices are brought in line with national transaction costs. This means that these organisations will see a substantial drop in their revenues in addition to the new investments.

  • Competition and consolidation

For credit transfer, direct debits and card payments, a clear separation of the scheme (the rules agreed between providers of payment services) and the infrastructure (delivery systems and processing platforms) is foreseen in order to enable increased competition among industry processors.

With regard to competition issues in the payment network industry, the Commission has underlined its view that the industry needs to comply with common standards and make the infrastructure readily available, and that pricing needs to be transparent as well as cost-based. However, the opening up of the market to competition is expected to bring about the consolidation of infrastructures, which can profit from economies of scale.

  • Migration to the new system

The European banking industry intends to offer SEPA and national payment instruments alongside one another from 2008. Full migration to the new system is to be achieved by 2010. It is expected that by then, a "critical mass" of all European payments will be made using the new SEPA methods. However, the banking industry argues that the 2010 target will be difficult to meet unless the public sector, which makes up a large part of overall use of payment services, does not take on the new SEPA methods.

According to the European Central Bank's (ECB) 5th SEPA progress report, the conversion of national payment transactions into SEPA formats may be "problematical".

  • Cost of cash

The new SEPA system largely leaves out the role and implications of cash use. Cash continues to play a key role. According to Professor Paul De Grauwe of Leuven University, the cost of cash is a multiple of the cost of cards. It is, however, not transparent and consumers are unaware of the high cost of cash.

Internal Market Commissioner Charlie McCreevy urged banks on 18 September to do more on SEPA. He said that banks had already "achieved much", but added that "more remains to be accomplished if SEPA is to become the world-class payment system that Europe's citizens and businesses deserve". Public services, which represent close to 50% of EU GDP "can and should play a major role in kick-starting migration" to the new payments system, he said.

The 2007 World Payments Report claims that it is unlikely that a critical mass of SEPA payment instruments will be achieved by the end of 2011, unless regulators provide incentives to mobilise European public administrations and corporations to adopt the new SEPA instruments.

Gerard Hartsink, chairman of the European Payments Council (EPC) said that in 2007, banks "must prepare their roll-out of SEPA payment services from January 2008 and also communicate with their clients about the new SEPA payment services". He added: "Banks must participate in the national implementation organisations together with national central banks, ministries of finance and national representatives of the users."

Gertrude Tumpel-Gugerell, member of the European Central Bank’s (ECB) executive board said on 3 September that "in the short term, efforts need to be stepped up to overcome problems that could hamper the timely launch of SEPA in January 2008." She also criticised the EPC for its "difficulty in progressing beyond the lowest common denominator".

Following the adoption of the Payment Services Directive in April 2007, Chris de Noose, Chairman of the European Savings Banks Group (ESBG) cautioned: "The directive alone will not create SEPA. Much rests on the transposition and we look for evidence that other stakeholders - such as public authorities - commit to use the SEPA payments instruments."

Norbert Bielefeld from the European Savings Banks Group (ESBG) argues that public administrations, which are significant users of payment services, have not expressed a common vision concerning future EU payment services. He expressed concern that this could hinder the migration to the new payments system.

European consumer organisation BEUC said that the introduction of SEPA was "good news for consumers", as it aims to achieve "reasonably cheap, secure and convenient national and cross-border payments" and make cross-border payments by credit card, debit card or money transfer as "efficient" as national payments.

A study by VicaLink showed that SEPA reach is still a problem for banks. The survey among banks revealed that more than half of respondents throught that meeting the January 2008 deadline was unachievable and 81% believe their customers would not migrate payments to SEPA schemes until 2010 or beyond. Martin Wilson, chief marketing officer at VocaLink said: "With SEPA compliance just around the corner, the thought that many European banks do not have a solution for reach is a cause for concern."

  • End of 2007: Commission is to publish an independent SEPA impact study.
  • By 2008: Banks and related institutions need to put cross-border schemes, frameworks and standards into place.
  • By Dec. 2010: Final SEPA deadline, when all non SEPA-compliant products need to be taken off the market.

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