The EU Commission and European Central Bank (ECB) are slowly but steadily moving the payment services market in the direction that payment service users have been looking for. The Payment Services Directive (PSD) has been adopted by nearly all of the EU Member States and affects all payments made in the EU. The Commission and ECB will jointly set up a single euro payments area (SEPA) Payments Council in 2010. The council, involving high-level members from the industry, aims to ensure proper stakeholder involvement in the SEPA project. And last, but not least, the Council of Finance Ministers and the European Parliament are urging the Commission to push the market towards rapid SEPA migration based on schemes that go beyond what payment service providers (PSPs) have developed thus far.
This article examines what the European regulators are likely to demand from PSPs in terms of delivering a SEPA end-date. It also highlights the concept introduced by the Commission of regulating the delivery upon ‘essential requirements’, what the practical implications are for payment service users (PSUs), and lists a set of high-level expectations of PSUs that could be incorporated in the essential requirements. The reader is then invited to provide input to these essential requirements, influencing the process of regulating SEPA towards delivering on corporate customer demands in the near future.
An End-date for SEPA Will be Set
PSPs and their stakeholders, as well as regulators, firmly believe a SEPA end-date is needed. In a public consultation on SEPA in the fall of 2009, a large majority of respondents, among all categories of stakeholders of the project, emphasised the need to set a deadline through regulation for the migration to SEPA Credit Transfers (SCTs) and Direct Debits (SDDs).
In December last year, the Council of Finance Ministers of the 27 EU Member States formally invited the EU Commission to start the path towards setting legally binding end-dates for the SEPA schemes.
Subsequently, the Commission issued a discussion paper on 15 March 2010 about options for the industry to move towards aligned SEPA migration and about what the payment services industry should be required to deliver by the deadline.
Deliverables of SEPA Will be Demanded Beyond the Existing EPC Schemes
The EU Commission discussion paper displays the pros and cons of multiple options for a SEPA migration end-date, but clearly points the way to the following:
- Mandating an end-date by means of a EU regulation or directive instead of self-regulation or a non-binding Commission recommendation. As stated in the discussion paper: “The advantage of this option is that it addresses the need for a rapid migration, thereby maximising the benefits of SEPA.”
- No regulatory endorsement of existing schemes developed by the European PSPs under the umbrella of the European Payment Council (EPC). “Fixing an approach for an end-date based on existing schemes could hinder potential innovation and limits the incentives for scheme improvements.”
- No regulatory endorsement of technical standards alone. “Common business rules and practices need to be defined to ensure the benefits of SEPA in terms of a harmonised user experience, straight-through processing (STP), etc. Relying on technical standards alone, therefore, leaves too much leeway for inconsistent implementations of SEPA credit transfers and direct debits. The public consultation on SEPA strongly confirmed this point.”
Instead of the EPC schemes or technical standards, the EU Commission is likely to regulate that all relevant transactions would have to comply with a set of ‘essential requirements’ for payment services. These essential requirements are to be defined such that they “[…] allow for the application of currently existing EPC schemes but do not restrict flexibility and innovation.”
The EU and ECB focus their regulations on ensuring that PSPs deliver what is required. They do not regulate customers by stipulating to use what is offered. This ensures an open market and competition and is similar to regulations in other industries, such as healthcare, food, telecoms and other financial services.
What Regulation Based on ‘Essential Requirements’ Could Resemble
In the discussion paper, the EU Commission has already carefully drafted some examples of essential requirements:
- Payment systems should be fully interoperable (interoperability is the capability of payment systems and interfaces to interact with each other (across Europe) and with their customers (e.g. banks or payment institutions) using the same standards, so that there are no technical obstacles to the processing of payments by the actors on the market).
- Full reachability of payment schemes throughout the EU/ European Economic Area (EEA).
- Mandatory data elements to be used for credit transfers and/or direct debits where both legs are within Member States.
- Remittance reference information and the other mandatory data elements must be passed full and without alteration by the PSP of the payer throughout the payment chain to the payee’s PSP, which must deliver the received remittance data unchanged to the payee.
- Payment transactions must allow for a fully automated, electronic processing in all process stages throughout the payment chain (STP), enabling the entire payment process to be conducted electronically without the need for re-keying or manual intervention.
Further some examples are provided in the EU Commission’s discussion paper of additional essential requirements that are applicable to direct debits only:
- Payment completion within a maximum of 14 days, meaning that the direct debit has been executed within this timeline after a pre-notification has been sent by the payee.
- The payer must be informed that a new mandate has been received before the first direct debit collection takes place. However, PSPs shall not be obliged to provide such information on paper.
- The collection which is sent by the payee to their PSP must include information that identifies it as the first of a recurrent series under a new mandate or as a one-off transaction, including mandate related information (only mandatory fields).
Practical Implications of the ‘Essential Requirements’ Approach for SEPA Regulation
The first implication of the suggested regulatory approach for SEPA based on ‘essential requirements’ is that every PSP will at least have to fully support the EPC schemes for credit transfers and direct debits, and deliver these electronically to all their customers. So electronic banking tools and payment gateways of all banks need to simply allow bank customers to instruct payments, manage direct debit mandates and pass any relevant remittance information easily from a payer’s system through the banks to a payee’s system without adjustment or interference in the process.
The second implication of this approach is that mandatory data elements, which have already been defined within the ISO 20022 standards and incorporated in the EPC schemes, will be used universally and without differences in implementation. The importance of the ISO 20022 standards are in their definition of what data elements are needed by banks and their customers to enable STP of payments from the payee’s receivables to the payer’s payables and back to the payee’s receivables. The EU Commission’s drafted essential requirements ensure that the necessary data elements are used consistently throughout the EU for euro payments, regardless of whether they are delivered to a bank in an e-banking tool, in a XML-based interface or via spreadsheet.
The third implication of the essential requirements approach is that the regulator will not impose the Bank Identifier Code (BIC) and International Bank Account Number (IBAN) for all SEPA payment transactions. So the regulator will not demand bank customers change their systems to incorporate BIC and IBAN, but instead will put the onus on banks to come up with solutions that avoid the need for customers to re-key data or implement manual processes.
This is one step away from specifying an essential requirement that SEPA payment schemes should minimise the need for customers to change their systems. Such addition to the essential requirements would open the door to banks, for example, universally accepting payment files from their customers with national bank account identifiers and translating these to BIC and IBANs on behalf of their customers before processing them.
The fourth implication of this approach is that complementary schemes outside of the EPC designs for credit transfers and direct debits can gain prominence and will have to be implemented by the PSPs throughout the EU. Such schemes have already been developed by a number of groups. It will be a matter of making the requirements that these schemes meet more explicit, and then ensuring that these requirements are covered by the ‘essential requirements’, which can then be regulated. This will also require the formal recognition of multiple payment schemes that need to be supported by the banking industry.
Re-using the High-level Expectations Identified by the Australians
Payment services are not only being restructured in Europe. In December 2008, the Australian Payments Clearing Association (APCA) published a roadmap for changing the Australian infrastructure for low value payments. The Australians are moving to upgrade their infrastructure based on a comprehensive list of high-level expectations of payment services. These high level expectations are in line with what PSUs in Europe have requested the EPC and regulators to adhere to in the past years. It will be useful to translate these Australian high-level expectations in the essential requirements that may be regulated by the EU Commission.
The Australians also identified high-level expectations of participants in the payments system (PSPs who are also users of the inter-bank payment system). These can be useful to define more in detail what the essential requirements for an open and innovative market for payments are.
The high level expectations identified by the Australians are:
- Payment services are available when customers want to use them.
- Payment services tend to prevent or identify and correct mistakes by customers.
- Payment services have established service levels and adhere to them.
- Payment services will prevent unauthorised access to information or value.
- Payment services will prevent unauthorised modification of information.
- Payment services will manage the risk of fraud.
- The payments system supports ongoing innovation and enhancement of payment services.
- Payment services are responsive and timely, both as to confirmation of payment and delivery of value.
- Customers get the payment information they need with each payment.
- Payment services support customers’ own business processes (such as account reconciliation).
- The payment system allows value for money services to be offered to customers.
- Customers find it easy to use and access payment services.
- The payment system is ubiquitous, allowing payments from anyone to anyone.
- The payments system facilitates choice and competition in payment services offered to customers.
- The payments system does not prevent or hinder the customer’s decision to change financial service providers (switch accounts).
- The payments system will support commercial, competitive and profitable offering of payment services by participants.
- The payment system will facilitate the development of new business opportunities and processes.
- The payments system will permit access on objective terms.
- In seeking to increase efficiency of payments activity, Australia’s payment systems will seek to align with and influence development of global payment standards.
- The payments system will minimise or remove counterparty and operational risk in payments.
- Regulatory risk (in particular from competition laws) in collaborative payment innovations will be appropriately managed.
- The payments system will monitor and seek to minimise systemic risk.
Invitation for Input on the Essential Requirements
The EU Commission meets regularly with stakeholders from the payment services industry in the formal setting of the Payment Service Market Experts Group. The discussion paper about a SEPA end-date and ways to regulate the migration towards an innovative and efficient SEPA solution was presented and discussed there in March. A number of stakeholders are currently reviewing the essential requirements to incorporate customer requirements. This is with the intention to influence the upcoming regulation of SEPA migration to deliver on large and small corporate requirements as discussed extensively in the last decade.
I happen to be a member of the Payment Service Market Experts Group and am involved in these discussions about the essential requirements. In this group, I represent the interests of corporate stakeholders. So herewith I invite anyone interested in making SEPA a success for customer driven payment service regulation to review the essential requirements and Australian high-level expectations, and provide your views and input to myself as well as any of the others involved in influencing the SEPA regulation. Please do not hesitate to post your thoughts in the comment box below.
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