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.
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.