Appeared in The Banker on September 9, 2008
Tuesday, September 09, 2008
Political intrigue and a lack of leadership might yet kill the European Commission’s vision of a Single Euro Payments Area.
The overarching goals of the Single Euro Payments Area (Sepa), the European Commission’s vision of a single European domain in which all payments are as efficient, timely and inexpensive as a traditional domestic transaction, have never been in doubt.
There is, however, a growing feeling among such parties that Sepa is becoming little more than a political initiative, driven by the needs of the EC as a power centre, not by the fiscal needs of the European single market. Consequently, political lobbying, protectionism, distrust and, increasingly, inertia have come to characterise much of the debate on Sepa at a European level, which in turn has served to undermine its scope, reduce its potential benefits and delay its progress. As such, it is fast becoming a salient example of how not to frame and execute European fiscal projects.
In particular, the EC’s move to devolve decision-making power to the banking community – represented by the European Payments Council (EPC) – appears a strategic error, not least because the banks’ best interests were never served by the scheme. Having excluded the corporate community from its initial discussions on Sepa, the EPC has, in turn, failed to persuade the scheme’s most critical stakeholders of its benefits.
Furthermore, much-needed leadership from both European and national government bodies, by whom the scheme was originally mandated, is notable by its absence.
Less than halfway through its implementation and many are now beginning to ask the uncomfortable question: has the execution of Sepa been flawed from the outset?
So far, so-so
None of which is to say, however, that Sepa has achieved nothing. The first Sepa milestone, the standardisation for Sepa credit transfers (SCT) – a payment ‘instrument’ used between banks – has been live for nine months. For many involved in its creation, its mere implementation is reason enough to celebrate. But there is not yet much evidence to suggest that the success of the SCT is anything more than notional, not least because the number of SCT-compliant organisations has been over-estimated, says Gareth Lodge, payments expert at analyst firm TowerGroup. Although leaders of the Sepa scheme believe that about 8000 organisations are compliant, the Sepa compliance register suggests just over half this number is nearer the real figure. “And that’s supposed to be the easy part,” says Mr Lodge.
It is the volumes of SCT payments that tell the real story, however. The European Central Bank (ECB), a major actor in the initiative, notes that in May a mere 1% of credit transfers made in Europe used the SCT instrument, which Gertrude Tumpel-Gugerell, member of the ECB’s executive board, recognises is “too low”.
One source has told The Banker, however, that the figure may be considerably lower still. Because almost 99% of payments in Europe are local domestic transactions, and Sepa does not yet encompass domestic payment instruments, the banking community now finds itself “caught between two stools,” says Ruth Wandhöfer, Sepa market manager at Citi. The compliant banking community now has the capability to make SCT payments, but there is not yet demand for its use. “Sepa risks, to a certain extent, losing momentum. Once we’ve implemented and no one uses it, it sits on the shelf,” says Ms Wandhöfer.
Of more concern, however, is the weak appetite within the corporate community – regarded as a key beneficiary of the Sepa regime – for the next stage of its development. This is the introduction of the Sepa direct debit (SDD), by which corporate organisations are permitted to collect payment from customers’ bank accounts. Because a range of ‘added-value’ services may be built into the SDD instrument by the bank provider, the SDD is widely regarded as the ‘show-stopping’ instrument through which the corporate community will enjoy the true benefits of the Sepa regime. For this reason, it is also regarded as a decisive milestone that will allow Sepa to make irreversible strides.
But as many bankers point out, the corporate community is not willing to foot the bill for this part of the scheme. This was plainly underlined in a recent survey conducted by analyst firm Celent, which found that only 10% of corporate organisations would be willing to pay either in full, or in part, for Sepa-related services. Celent’s finding may reflect the feeling among corporate treasurers that the benefits of Sepa have been over-stated, says Tom Conlon, a consultant and founding member of the EPC. “I have heard corporate finance directors say that there is virtually no benefit to them.”
Having made considerable investment in the SCT scheme, the banks are equally reluctant to pick up the tab for the SDD. This mutual disinclination to fund the SDD puts Sepa’s progression in doubt. “We have been concerned about the direct debit,” says Paivi Heikkinen, an economist at the Bank of Finland who works closely with the ECB on Sepa. “It has tumbled into difficult obstacles in different markets and the ECB has been worried about it.” Renewed inertia brings Sepa to a crucial halfway point: the first Sepa milestone has been passed but the case for pushing on to the next milestone has yet to be made.
A peculiar inversion
Had the corporate community been involved in the Sepa design process from the outset, this situation might have been avoided. Instead, it was excluded during what Gianfranco Tabasso, chairman of the European Association of Corporate Treasurers Payment Commission, describes as a “critical time” in the Sepa discussions. “Ignorant” of the EPC’s discussions for two years, the corporate community was confronted with the Sepa rulebooks after the descriptions of the new instruments were “totally finished”, says Mr Tabasso.
Although the corporate community was brought on board with the arrival of commissioner Charlie McCreevy in 2004, the resulting participation was largely perfunctory, says Mr Tabasso, and many corporate requests were rejected. The corporates were not alone in this predicament. Technology vendors report that the information provided by the EPC was poor at best and that, frequently, the Sepa rulebooks were extremely difficult to obtain.
Both complaints call into question whether, in allowing the banking community to pursue a self-regulatory agenda, the EC in fact made a serious error: in placing Sepa in the banking community’s hands, the EC wrongly transformed what should have been a market project into a project led entirely by the banking industry, whose interests were not in line with those of the EC. Indeed, it is no secret that Sepa was and remains hugely unpopular among the banking community due in no small part to its abject lack of commercial appeal. Nor has the ECB or the EC ever pretended that it would or should be otherwise. But this does not explain why the EC felt it judicious to allow those with most to lose from Sepa to take charge of its design.
Borne of this curious compromise, the EPC has not been an effective decision-making body in the eyes of many. “The EPC is very unwieldy, and it takes a very long time to negotiate anything,” says Mr Conlon. “When you are trying to negotiate on something unpopular among your own members that makes it even more difficult.” The devolution of power to the EPC, however, is only one example of how peculiarly inverted the Sepa decision-making power structure has become. Sepa, after all, was originally intended to benefit the European consumer first and the corporate community second. The political purposes of the EC and ECB, as brokers of competition and fiscal efficiency, were third on the list of beneficiaries of the Sepa vision, followed by the banks in last place.
This hierarchy has not been reflected in the Sepa design process – quite the opposite: the corporates have been involved only latterly, while the consumer is nowhere to be seen and is now rarely mentioned. “If you had had a system designed by corporates for consumers, you might have got a different Sepa that might have been more in the interests of the consumers,” says Jonathan Williams, director of product strategy, Experian Payments. No-one would argue against the banking community playing a pivotal role. But it is clear that greater and more disciplined collaboration would have been appropriate given the EC’s stated goals.
Efforts in vain
Under the arrangement that emerged, however, “the banks worked out the minimum that would be accepted by the EC”, says Mr Conlon. Attempts to steer the EPC towards a more ambitious framework were ignored, even though Europe offered several strong examples that might be emulated, in particular, the Finnish system. The ECB organised several presentations on the Finnish model for the EPC, says Mr Conlon, but its efforts were in vain.
In this regard, Sepa – as envisaged by the EC and ECB – was fated to be diminished under the EPC’s governance. It was also an inevitable consequence of a self-regulatory approach that European harmonisation could never hope to take a best of breed approach. The ECB, with justification, praises the work of the EPC in having “laid the ground for the single market for payments in Europe”. But Ms Tumpel-Gugerell also goes on to note that the EPC “has been given a limited mandate by the community it represents”.
As The Banker went to press, the EPC had not responded to repeated enquiries on this and other issues.
It has reason to be reticent, however, following the sudden resignation of secretary-general Stewart MacKinnon in July. According to an EPC spokesperson, Mr MacKinnon “considered that the job was not in line with his expectations”, although one source has told The Banker that the EPC was too unwieldy to be administered to in the way Mr MacKinnon had been led to believe it could be.
The organisation, which will be hard pressed to replace Mr MacKinnon before next year, now finds itself in a difficult position, says Mark Hale, director at PricewaterhouseCoopers and a former office holder within the EPC. “The EPC is in an absolutely pivotal movement. Stewart’s departure should be a real concern to the industry,” he says.
No project manager
Critical though the EPC has been, many participants feel that the EC should have been more visible and more vocal throughout the process. “The EC should have been a bit more accountable for what it wanted to achieve,” says Mr Hale, who played an instrumental role in the creation of the SCT.
“It was pulling levers but it should have been a bit more directive and it should have worked as a programme with the EPC and ECB to drive change through,” he adds.
He is not alone in his views. Many now question whether the EC has provided adequate leadership throughout the Sepa initiative. Paul Styles, business solutions manager at payment specialist ACI Worldwide, puts it bluntly: “There is a big payments project going on in Europe but no project manager.” The EC does not recognise such complaints. Because Sepa is an industry-driven and self-regulated project, the question of the adequacy of leadership is best addressed by the industry itself, says Mr McCreevy.
The EC’s response to this criticism is typical of the attitude that many bankers believe has served to frustrate Sepa’s progress: that once the banking community attempted to take control of the initiative, the EC effectively absolved itself of responsibility for Sepa entirely. Yet when the banks acted, recalls one banker, the EC complained that the measures were “too slow, not done in the right way, or that the consumer was going to be disadvantaged”. To this extent, the source adds, the EC sometimes displayed a counter-productive mistrust towards the banking community.
It is not just at the European level where governmental leadership has been lacking. At a national level, public administrations have also made a poor showing. “What is painful for the banks is that we do not have the support of public administrations. They don’t speak of Sepa at all,” says Martine Goubert, senior adviser, cash management, BNP Paribas. The most obvious and powerful demonstration of support for the scheme would be the use of Sepa payment instruments by European public institutions and government bodies within their own payments departments. But this has yet to happen in anything other than a handful of Belgium institutions.
The EC now finds itself in an intractable position: the self-regulatory approach has been stretched to its limits and the ECB and the banking community at large are hoping for a show of force. In particular, they badly need an answer to the lingering question of Sepa’s eventual ‘end date’, yet to be determined.
But in order to provide this, the EC will have to intervene and in turn risk a torrent of criticism it is not minded to endure. For this reason, it is divided on the issue. “This is such a big decision that nobody wants to take it in isolation,” says Mr Tabasso. Indeed, so thorny is the subject, that the EC has not even been able to obtain a consensus on whether to discuss it at all, he adds.
This political torpor threatens to undermine the future of Sepa, and with it the hard work achieved so far. Now is the time for the EC to act and to act with conviction.