SEPA Interview: Discarding National Payment Schemes in Favour of Global Processing Platforms

gtnews: How do you envision the role of the card (payment network) companies in the SEPA migration process and also post SEPA implementation?

 Marc Temmerman: We need to start with the reminder, that we are a membership association, owned and governed by European member banks. That means that, not only regarding SEPA but for all activities, our agenda starts with the agenda of the bank. For us SEPA has always been approached from that angle. What are the issues and opportunities that SEPA brings for the banking community? What should they be doing? What are they doing? Where should Visa come in? To be more precise, making the migration to SEPA as easy as possible for banks, within the 2008 deadline set by the European Payments Council (EPC) – so actually by the banks themselves.

Non SCF-compliant (SEPA Card Framework) products should be phased out by the end 2010. In response, in May 2006 the Visa Europe Board announced that Visa Europe should and would be fully SCF compliant by the 1st of January 2007, one year before the EPC deadline. Unless we are compliant; our banks cannot be compliant. To realise this there have been changes to the way Visa operates. Firstly, the fact that we have one European domestic pricing structure. Europe is one domestic market and we are adapting to that. Secondly, banks will have freedom to pick the processor of their choice, whereas in the past, for cross border transactions, they had to go via our system. SEPA is also about making the processing side of the business much more competitive.

gtnews: Your role in the SEPA migration is therefore about helping banks to meet their SEPA obligations?

Temmerman: Indeed. One aspect of that is, of course, how to deal with those markets with existing domestic debit schemes. Belgium is one example, of a market, that has been a walled garden. They will need to become compliant, and we can add value by proposing solutions and the appropriate products and technology to make that transition.

gtnews: In a recent press release, VISA announced that it planned to undertake a restructuring of its operations that will eventually result in it becoming an independent publicly listed company. However, VISA Europe will remain a European bank owned and governed membership association. I presume this is SEPA related, could you explain the reasoning?

Temmerman: The decision to retain Visa Europe’s membership-owned, not-for-profit association structure will enable it to directly support the development of the European internal market in payments and the SEPA. At the same time, Visa Europe will receive an exclusive licence from Visa Inc., ensuring global interoperability.

Developing products tailored to meet Europe’s needs will remain Visa Europe’s priority. Together with our member banks, we will strive to drive the growth of the electronic payments market to replace the least efficient payment means, cash and cheques.

gtnews: In relation to SEPA there is much talk about ‘banks’ in general but there’s quite a distinction between local, regional and global banks. From your perspective, in terms of banks meeting their SEPA obligations, how does that differ between the local, the regional and the larger, global bank?

Temmerman: Correct, banks are not a homogeneous group at all. The way our business operates, you can say that we are used to working with that bank diversity. We have almost 5,000 members in Europe, ranging from the smallest savings bank in the Black Forest to the large multi-country banks such as Barclays, BNP Paribas, BBVA etc. For the smaller bank, we mainly assist in the understanding of all the facets of SEPA and the local impact. In most markets we have local offices, allowing us to meet the needs of the local banks. Making sure that solutions meet their needs, not just from a design perspective, but also from a processing prospective. In terms of the larger multi-country banks, it’s much more about working with them individually, evaluating the options and the implementation processes of those options across all their markets.

gtnews: What is the current status of corporate direct debit usage in the euro zone?

Temmerman: Today, each country has its own national direct debit system, based on national standards. These systems are not interoperable. For instance, if I would have a holiday home in France, today I would not be able to pay my gas bill via direct debit from my Belgian current account. As from 2008, a new SEPA direct debit scheme will be introduced that will provide for pan-European direct debit payments. By end 2010, all national direct debit systems must have been converted to the new scheme.

gtnews: In recent discussions with French and Italian treasurers, it seems that for some, setting up direct debit schemes is quite complex. Not from a technical perspective but from a habitual, cultural aspect. There’s no problem with setting up schemes with their vendors but when it comes to client, they feel it’s an ‘invasive’, completely different way of working. The sales departments view it as yet another step to already a complex sales process. Do you think there’s a role for banks and global processors such as yourselves to work on changing client behaviour?

Temmerman: I completely agree with that. There are big challenges related to SEPA for the corporates. I can see why most corporates, certainly those who operate on a national scale only, must be asking themselves, ‘why do I need it’? There is no easy answer to it. SEPA is happening for political reasons. Everyone is aware of that. What is the business case? The true business case is a political one with on the one hand the European Central bank and, on the other, the EPC pushing the creation of a truly internal market – a truly single market for payments. That will bring standardisation and increased competition, which is to the benefit of corporates, including those that operate on a national scale only. They will have more choice, in terms of providers, technology, and through increased harmonisation. The increased scale on the processing side of the business should also bring down transaction costs. Of course, there are a few things you’ve got to do and you don’t see an immediate return, but the same is true for the banks. Just think of the small savings banks, for example in the Black Forest in Germany, as a matter of speaking, their world ends at the edge of the forest. Different situation altogether compared to a multi-country/region operating bank such as ABN AMRO. The benefits for them are obvious. In every country they operate in they need to work with and pay for different ACHs. A standardised, more harmonised market will allow them to go to one pan-European ACH. In the short term, however, there’s lots of pain and grief I’m afraid. In the long run, multi-country banks and multi country businesses will benefit.

gtnews: Taking Belgium as an example, switching from their domestic system to a global processing platform, what is the benefit for Belgian corporates? Will they see a difference?

Temmerman: The current situation in Belgium is such that there is one domestic scheme and processor, governed by a bank-owned payment network – Banksys. The walls around the Belgian garden will have to come down. By opening up the domestic market there will be more processors in the market, bringing increased competition, giving banks the choice. Before, they were bound by Banksys engagement. For multi-country banks, such as KBC, whose roots are Belgian but are operating in various countries across Europe and CEE, each market with its own infrastructure, its own ACH, own domestic processing arrangements, it is a problem because they have to pay for all of them. The moment all those walls come down, they will have been able to rationalise the way they operate across Europe and they may want to process through one processor for all markets where they operate and that should bring major cost advantages. The same is true for corporates operating on a European scale. In the end you must assume that more competition will mean fewer larger scale operations, and lower unit costs.

gtnews: According to some European banks, Europe is ‘over banked’. Do you think that SEPA will bring forward much consolidation?

Temmerman: SEPA is a contributor but not the only driver. The momentum for further consolidation is there already. We’ve had one big wave of consolidation a few years ago and I think we are now on the eve of another. SEPA is contributing to that, but not as the sole initiating force. There is already much pressure from the market for consolidation. Take Italy for example, an extremely fragmented market. Non-Italian banks are also looking at that market, which will bring with it further consolidation. The German market will see further consolidation and especially in terms of savings banks, I think the banking sector is subject to fundamental changes over the next 10 years. SEPA is not the only reason, but strengthens the trend.

gtnews: Is there a compatibility problem if some banks commit to one processing platform such as VISA and others to Maestro, for example?

Temmerman: No. In that respect the industry as a whole decided many years ago to migrate to chip technology. Therefore, whatever platform they choose, it will all run on the same chip standard. There is no issue of it becoming more or less complex depending on which brand of scheme is chosen, it is the same core technology.

gtnews: Which other euro countries will follow Belgium’s example?

Temmerman: The countries we should be looking at are those countries with strongly established domestic schemes. Germany, Italy, Belgium, Austria. It is for those markets that we have created a new chip and PIN-only debit card for Europe (V PAY). This system is designed to be the ideal convergence platform for those markets’ domestic debit schemes.

gtnews: In terms of payments commoditising, there is the possibility that banks will potentially be outsourcing their payments processing completely. The obvious suspects are the ACHs, such as VOCA and Interpay to potentially take over that processing capability. Do you think global processors such as yourself will take on this role?

Temmerman: You will continue to see both models. Over the last decade, some banks were outsourcing and others brought it back in-house. The big change will come through the regulative pressure on the industry. Margins in the business will be under increased pressure and economies of scale will become more important. The end result will be consolidation in processing to maybe five, six or seven large processors in Europe. However, in terms of processing, I’m convinced that banks will always want to keep some part of that value chain in-house. Banks and large processors will be seen concentrating on particular parts of the value chain. As a bank, you may want to use two or three processors together, serving you along the entire chain. As Visa Europe we are also gearing up our processing capabilities. We are rolling out a new authorisation system platform. This platform is highly scaleable and will be deployed in local markets if that is what banks want. As Visa Europe, the system is fully owned and controlled by European banks.

Interestingly, there are banks positioning themselves as potential in-sourcers. The Deutsche Post Bank, for instance, has become a payment factory of some stature. I believe, they are now in-sourcing the payments for Deutsche Bank.

gtnews: Indeed, as one bank put it, they could become a ‘Payment Estate Agent’.

Temmerman: Yes. Some become a payment factory. I anticipate that we will see much more of this. Interestingly, cross border use of payment processors will also be more prominent. I can imagine that continental banks will be considering using VOCA, for example, to have their direct debits processed. And why not, as long as the economics and the service levels are right?

gtnews: In your view, what are the challenges to SEPA migration?

Temmerman: The critical issue for the industry is to be able to show the EC and ECB that progress is being made. There will be challenges in markets with old legacy systems that need to be abolished or upgraded, and the level of re-investment required for new infrastructure. That won’t happen overnight and there is the possibility that it will happen slower than we would like. The industry needs to show that it is really serious about making SEPA happen, and that we will to do so within an acceptable timeframe. The risk otherwise is, clearly, that the EC will intervene. That would be the worst possible scenario as far as I’m concerned.

gtnews: What is an acceptable timeframe?

Temmerman: The overriding majority of the work that needs to be done should indeed have happened by the end of 2010. If there’s a few pockets left here and there that’s not necessarily the end of the world as far as I’m concerned. It’s about getting to the point of no return as soon as possible. The political commitment is there. It is now about making it happen.


Related reading