Payment Services Directive: The end of the cash era?


Europe has been on the cusp of a payments revolution since 2007, when it established a single rulebook setting the same payment standards and obligations across the 31-member EU/EEA. But the Payments Services Directive and a voluntary payments scheme, the Single Euro Payments Area, were welcomed only guardedly by the industry and member states and banks have been slow to implement both initiatives.

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 European 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 was foreseen for November 2009, by which date member states were supposed to have finished transposing the directive into national law.

So far eleven of the 31 countries involved - the 30 EU/EEA (including Iceland, Liechtenstein and Norway) states plus Switzerland - have missed this first deadline for implementing the PSD, and say they will convert the directive into national law before summer 2010. 

The PSD is often mentioned in the same breath as the Single Euro Payments Area (SEPA) but the two are in fact separate, because SEPA began as a voluntary initiative of the European banking industry. The industry created a consortium, the European Payments Council, to define how SEPA would work in practice. 

The most important difference between the PSD and SEPA is that the PSD applies to the 30 EU/EEA countries (including Iceland, Liechtenstein and Norway) plus Swizterland, and SEPA applies to euro payments in the 16-member euro zone. Without the PSD, however, SEPA would have no legal basis. 

The Payment Services Directive (PSD) aims to create a true European market for payments that would ideally lower the costs for both consumers and payment institutions of carrying out payments. 

From the user's point of view, payments would become more efficient. Conversely banks would be able to carry out a greater volume of payments. 

Though both industry and consumer groups for the most part support the directive, the former worry they will not see returns on investment as easily as predicted and the latter are concerned that the EU's new payment rules will open the market up to more fraud. 

The first deadline for the implementation of the PSD was the end of 2010. However 11 countries including Belgium, Cyprus, Estonia, Greece, Spain, Finland, Italy, Malta, Norway, Poland and Sweden have all asked for more time. 

Elections, parliamentary approval, rising budget deficits and in some cases, a need for secondary domestic legislation have all been cited as reasons for the delay. 

The directive is also key for the establishment of SEPA, 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 the PSD, see EURACTIV 24/07/08). 

Six countries missed the November 2009 deadline for SEPA implementation: namely Estonia, Greece, Latvia, Poland, Finland and Sweden. 

Michel Barnier, the incoming EU internal market commissioner, announced he would set an end date for banks' migration to SEPA when he takes office in February. 

A European market for payments 

The primary 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. 

Policymakers have made impressive predictions of the PSD and SEPA's cost savings. The European Commission puts the total saving at €122 billion per year, with the biggest benefit stemming from e-invoicing at €100 million. 

A more conservative estimate from the consultancy Capgemini puts the cost saving at €123 billion over a period of six years. Given the delays in implementing the directive, the consultancy's estimate may be more realistic. 

With the new rules in place and the SEPA agreements in force, European consumers and businesses would be able to use a single bank account to make payments in any of the 31 EU/EEA countries at the same speed and costs regardless of their country of operation. 

Non-bank payment institutions 

Another advantage of the directive is that payments are not reliant on an account held in a specific bank but can be administered through a whole new series of different channels, like utility companies or mobile phone operators that qualify under the directive's description. 

The scope of business for these payment institutions is more limited than banks and so they face less stringent rules on supervision, application and authorisation procedures and capital requirements, much to banks' dismay. 

Fast money 

In theory, the execution time for payments under the PSD will be capped at one working day. However, banks are reluctant to commit to this requirement given the uncertain take-up of new EU payment rules. The Commission has therefore allowed for three working days until 2012. 

If all goes to plan, a shopper will have the right to demand sums 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. Currently, banks can legally take up to five days to make a payment. 

Another significant improvement of the PSD is that it introduces the ability to use all 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. 

However, there are fears that the payment cards market will become a duopoly as the legacy of national card schemes has already begun to lose ground against dominant players such as Visa and Mastercard. 

Banks that issue cards may also prefer to issue credit cards, as they can charge higher surcharges to merchants accepting card payments from their customers. 

Old money and e-money 

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

The Commission estimates 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, it argues. 

Cash is expensive because it has higher production costs and is arguably not as safe. Stealing physical money is easier than stealing electronic credit, the argument goes.

For example, the Commission says the cost of a transaction in cash is calculated at between 30 and 55 euro cents, which is already charged by retailers within the price of the product. By contrast, it 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. 

Now that the PSD is in force, the Commission will come out with new proposals to amend the eMoney Directive and integrate it into the PSD. 

SEPA is a slow burner 

SEPA's raison d'être, like all economies of scale, is the bigger the better. The more merchants, retailers and consumers use SEPA, the more payment institutions will want to migrate as soon as possible (just like the more people want to pay with Visa, the more merchants will have Visa-compliant terminals and systems). 

But currently SEPA's sluggish take-up is being driven by large banks and card companies that are not as worried about their overheads as smaller or medium-sized institutions are. 

When outgoing European Internal Market Commissioner Charlie McCreevy said, "sadly too often I feel SEPA is only seen as an expensive, politically-hatched, cross-border payment system, rather than as a golden opportunity to modernise and integrate the whole payments market," he hit the nail on the head. 

"SEPA is a slow burner, not a chain reaction," Elemer Tertak, director for financial institutions at the European Commission, admitted at a banking event in November 2009. 

Indeed, the latest figures show that only 2,600 of Europe's 8,000 banks were ready for the launch of SEPA's direct debit scheme on 2 November last year. 

Consumer and banking groups have been lobbying the Commission to revise SEPA before it is rolled out any further. Both banking and consumer associations say they have serious concerns that SEPA will open the way for more fraud and unfair pricing on payments. 

In July 2009, an alliance of European commercial and consumer groups released a joint statement saying SEPA had failed on two counts: security and pricing (EURACTIV 29/10/09). 

BEUC argues that its concerns have been continually falling on deaf ears and for that reason it has left the European Payments Council-led stakeholder forum on SEPA's implementation. 

New payment providers 

In Japan, all you need for shopping on a Saturday is your mobile phone. When making a 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 service 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 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. Banks feared the introduction of online accounts would close their high street branches, but this never happened. 

Credit card firms recognise that they stand to benefit from an increased shift to electronic payments. And in fact Visa announced in April 2009 an ambitious target to provide one in five euros by electronic means in Europe by 2015, up from the current one in nine. 

On the downside, the Netherlands, Estonia and Belgium, which are currently among the EU leaders in e-payments, may 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' organisationcommented: "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 retailwholesale 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 e-money 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."

  • 1 Dec. 2005:  Commission proposal on a Payment Services Directive (PSD). 
  • 13 Nov. 2007: Adoption and publication of the Payment Services Directive in the EU Official Journal.
  • 1 Nov. 2009: First deadline for the introduction of the Single Euro Payment Area (SEPA) instrument for direct debits.
  • 1 Nov. 2009: First deadline for the implementation of the Payment Services Directive in EU member states.
  • 24 Nov. 2009: European Payments Council and the Mobey Forum sign an agreement to support the uptake of mobile payments.
  • 30 Nov. 2009: Retailers and consumer groups give SEPA a guarded welcome.
  • Mid 2010: Second deadline for the implementation of the Payments Services Directive in EU member states.
  • 31 Dec. 2010: Deadline for the replacement of current credit cards with SEPA-compliant cards. 
  • 2013: Predicted new deadline for SEPA-compliant cards.

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