Appeared in Banking Technology, November 18, 2009
Wednesday, November 18, 2009
The Payment Services Directive came into effect this month - at least in parts of Europe. Some countries have yet to transpose the directive into national law, which will pose problems for the payments industry, while new payment institutions will be able to cherry-pick their opportunities.
The concept of a standard set of methodologies for payments across Europe is, on paper, a worthy cause. Standardisation will deliver economic benefits for Europe's citizens and for its corporates - payments across borders will be cheaper and more efficient. Moreover, the euro will gain a payments infrastructure that better suits the functioning of a single European currency.
But the best laid schemes of mice and men oft go astray. At the start of November, the Payment Services Directive, which provides the legal underpinning of the Single Euro Payments Area and more besides, came into effect - but not across all 27 members of the European Union.
At the time of going to press, nine countries had already approved PSD-related laws and a further 16 would have transposed the PSD into national law by the deadline of 1 November. Norway, Estonia and Latvia would be ready, but with transition periods for certain aspects, and Sweden and Finland had set target dates for early 2010.
Developing and implementing Europe-wide legislation is a complex process, fraught with difficulties. National interests come to the fore and political agenda dominate. Little wonder that the PSD has followed such a tortured path to date.
The PSD provides the legal foundation for the creation of an EU-wide single market for payments. It aims to establish a modern and comprehensive set of rules applicable to all payment services in the European Union, not just payments in euros. The target is to make cross-border payments as easy, efficient and secure as domestic payments within a member state. The PSD also seeks to improve competition by opening up payment markets to new entrants, thus fostering greater efficiency and cost-reduction.
Simon Bailey, director of payments at Logica, is not surprised that there have been differences in the transposition of the PSD: "In any macroeconomic political agenda such as this you will have tensions between national interests and commercial interests. The implementation of the PSD has taken longer than the industry would have liked, but as long as people still feel it is of value, the differences will be ironed out and the situation will be improved."
However, the delays in transposition may prove to be a problem. Ruth Wandhofer, vice-president, cash management EMEA at Citi Global Transaction Services, says the first challenge the payments industry will face from November is the impact of the countries that will be late in transposing the PSD into national law. "Individual banks within the countries that will be transposing late can follow the best practice principles that have been issued in industry guidelines, which include, for example, no float and no deductions. However some banks may be hiding behind the fact that the laws will not be in force to continue business as usual - this will be an issue for cross-border payments because it will create inconsistency."
Wandhofer points out that while there will be limits in some countries as to the implementation of best practices until the PSD is transposed into law, there are clear recommendations that have been published for banks as to what can be done despite the law not being in force in some countries.
It is not only the delay in transposition that has muddied the PSD waters - there is inconsistency in the way the PSD is being interpreted in each member state. Luigi Brescia, special adviser at Italy-based payment processor SIA-SSB, says there are different levels of harmonisation in different countries. "In reality, what we have today is not really harmonisation between different countries. And this has resulted in there being no clear vision or understanding on the part of corporates about the implementation process. For small and medium corporates, they will not implement SDDs until there is a clear scenario to do so," he said.
The delays in transposition, along with inconsistency in the way the PSD is being interpreted in some countries, has led to confusion and a liberal dose of scepticism about the directive as well as about the entire SEPA project. Says Richard Sanders, solutions consultant at payments software developer ACI Worldwide: "Some banks have viewed the PSD as solely a compliance issue, despite the fact that the European Commission has been pushing the idea that there are opportunities within the PSD. But there are too many unknowns for some banks and they have struggled to build a business case for SEPA."
At this year's Sibos conference in Hong Kong, Andrew Long, head of global transaction banking and group general manager at HSBC, said there were "not enough" clients demanding SEPA. "Clients just aren't coming to us wanting it," he said. "SEPA is driven by politicians."
Sanders' colleague, Bob Mackman, who is head of business services (wholesale) at ACI, agrees there is a political agenda behind SEPA. "In many ways SDDs are inferior to existing local schemes. There are advantages, if you are a large corporate, of being able to rationalise collections across Europe, but those advantages are quite marginal at the moment." The business case is "fragile at best", he adds.
Proponents of SEPA now argue that an ‘end date' is required to provide the catalyst for migration from domestic payment schemes to SEPA schemes. This end date would be when domestic schemes are no longer operating - at present, banks are faced with the costly business of running domestic and SEPA schemes in parallel. An end date, mandated by the European Commission, would force banks and payments industry participants to use the SEPA schemes. While financial institutions are generally big fans of self-regulation, in the case of SEPA it seems that regulatory intervention is a requirement.
SIA-SSB's Brescia questions whether an end date will really help: "An end date for different services within SEPA would help, but because we have had so many problems with the implementation phase of the PSD, without greater harmonisation I don't think it makes sense to have an end date."
In the absence of an end date, the majority of Europe's financial institutions seem to have done the very minimum in terms of complying with the PSD and building SEPA capabilities. Mackman says banks have modified systems so they can receive SDDs but not many have built the capacity to send SDDs: "If no one is capable of sending SDDs, there's no point. I believe one or two big banks will develop full SDD capabilities and try to get the large international companies on board."
Bailey agrees that many banks have decided to opt for minimum compliance, adding: "Everyone is waiting for clarity from everyone else. Corporates can see the advantages in rationalising collections that SDD will deliver, but the advantage isn't there yet. And banks are asking whether they should lead or follow demand."
The financial crisis and economic downturn haven't helped. Nick Ford, head of payments UK at consultancy Capgemini, said banks have been more concerned about their survival than the PSD. "Before the financial crisis, it was felt that most banks would use the PSD and SDD as catalysts for reinvigorating their payments systems and capabilities going forward. Those plans have been re-examined and some have put them on hold." Instead, banks are doing the minimum to be compliant.
But not all banks are taking such a narrow approach. The larger global banks view the PSD and SEPA as an opportunity, says Edith Rigler, senior director business development at UK payments processor VocaLink. "Smaller banks have been stretched in terms of resources by the implementation of SEPA and becoming PSD compliant," she says. "But the larger banks see PSD as a changing environment that will provide opportunities to adjust their services offerings. At the same time, with the introduction of payment institutions, the PSD will provide a more competitive environment - one in which banks fear they could be disintermediated."
The European payments landscape is changing irrevocably and banks need to consider their strategies, says Andy Ponsford, head of cash product capabilities, EMEA for JP Morgan. "The aim of the PSD and SEPA is to help the growth of the European economy and to allow businesses and consumers to benefit from lower cost, predictable and high quality payment systems. For banks, this has introduced a significant overhead because we have to operate national schemes along with SEPA schemes."
JP Morgan's approach has been to develop solutions that are flexible enough to cope with any differences in transposition of the PSD between member states. "If there are differences, it means we don't have to re-engineer our systems. Some of the national banks will struggle to accommodate the changes that may be required, particularly with regard to charging codes," says Ponsford. "Banks will need routing logic that can differentiate between PSD and non-PSD payments."
Flexibility is a virtue also cited by Colin Kerr, payments industry strategist at Microsoft. "Banks need to put together flexible frameworks to provide the integration capabilities and streamlined processing necessary for success in the new payments environment," he says.
Just as banks are divided over the benefits of SEPA and the PSD, so too are corporates. "The PSD will deliver a lot of positive results to the payments industry, such as enhanced transparency and ability to lower overall transaction costs as well as legal certainty for the full amount of an EEA currency payment to arrive at the beneficiary bank/payment service provider," says Wandhofer. "There will be more freedom for corporates to negotiate pricing and conditions of payments. Transparency should lead to greater competition going forward."
These benefits need to be communicated to the potential SEPA user community. Gerard Hartsink, chairman of the European Payments Council, says communication will be very important in accelerating the adoption of SEPA. "It is not only the role of banks to communicate the benefits of SEPA, but also the role of public administrations. The 16 ministers of finance in the euro zone countries, along with the central bank governors in those countries must communicate clearly to the buy-side organisations," he says. He also takes issue with Long's Sibos comments: "No one asked for HDTV or the EMV card standards for example. SEPA is a technical change to a more advantageous standard."
Jonathan Williams, director of communications and product strategy at payments software developer Experian, says communication to consumers must not be overlooked. "Banks are probably now doing a reasonable job of educating their corporate customers about SEPA, but I have not seen anything on the PSD or SEPA aimed at consumers." Williams argues that consumers are being "left in the dark" and that if the industry is relying on consumers to sign up for SDDs to make cross-border payments, there is unlikely to be rapid take-up any time soon. "Until we get consumers happy to make SDDs to corporates in other countries, this will be an impediment to SEPA's progress.
However, Dieter Prang, managing director at Fundtech in Germany, says as long as the banking industry is not ready for SEPA, there cannot be any great enthusiasm for SEPA in the corporate space. "While Andrew Long questioned the demand for SEPA, I can see it out there: corporates are very interested in mandate management, rejections management and liquidity management. The focus for banks now should be on education, because the major corporates have SEPA on their agenda - they would love to consolidate the payments silos they have around Europe."
Banks educating corporate customers about SEPA will have some value, says Microsoft's Kerr, but he believes there will be some scepticism about this on the part of corporate. "Bank customers are likely to say that cost effective, efficient payments are what they expect of their banks. The banks will have to speak directly to treasurers specifically about the new products they can develop and how they will be of benefit." The real driver of SEPA adoption will be the end benefit and results, he says.
Banks continue to play a waiting game when it comes to SEPA, but for how long? The PSD introduces a new category - payment institution - into the mix. How successful such entities are may well determine the approach by banks.
"Over the long term, the main impact of the PSD may be from the payment institutions coming in and taking business away. They will cherry-pick, targeting the most lucrative parts of the payments business to address," says Williams.