PP006 - SEPA & The Payments Services Directive
Participants: Edith Rigler, Programme Director for SEPA, HSBC, Ruth Wandhofer, SEPA Payments Expert at the European Banking Federation, Peter Scott of Sun Microsystems and Mike O’Hara of Voices in Business.
Mike O’Hara: Hello, and welcome to The Payments Podcast, brought to you by Voices in Business and sponsored by Sun Microsystems.
This week, we’re here to discuss the Payments Services Directive and SEPA with Edith Rigler, the Programme Director for SEPA, Global Transaction Bank, HSBC, Ruth Wandhofer, SEPA Payments Expert at the European Banking Federation, seconded to the European Payments Council, and Sun’s Global Head of the Banking Sector, Peter Scott. We’ll be exploring what the PSD is and how it relates to the SEPA project, as well as discussing how best banks should be responding to the recent approval of the PSD and preparing for the changing landscape that will follow it’s implementation into national law across the community. Peter, over to you.
Peter Scott: Well thank you, Mike. Ruth, I think the first thing that we’d like to start off this discussion with is for you just to review briefly the aims and the origins and something of the intended scope of the PSD and just review its role relative to the SEPA project.
Ruth Wandhofer: Yes, thank you, Peter, that’s a very interesting question. In fact, the PSD and the SEPA project are not exactly the same thing. Banks reacted in shock in 2001 to the Commission Regulation on prices regarding credit transfers cross border, and that was the main motivation to push industry forward in a proactive manner and create a Euro payment system in co-operation with the European Central Bank, that, at the time, was industry’s ally. And that is how the SEPA project, the Single Euro Payments Area, came into being in 2001, and what banks did, they identified legal harmonisation needs that were actually necessary in order to allow for a harmonised payment system in Euro, and so they addressed those harmonisation needs to the Commission. Basically we needed a harmonised right for refunds and direct debit. We needed the IBAN Primacy rules, so that banks don’t need to check IBAN and name, and so you needed a harmonised approach across European countries in order to allow the implementation of the technical interbank standard which banks then developed, following that. So we gave those harmonisation needs to the Commission and the Commission came back to us with a Draft Payment Services Directive. In fact, they started with a communication in 2003, and eventually the directive was published in 2005. So you can already see they took a long time to consult the market, and the PSD at the time was called New Legal Framework for Payments, developed from a 20 page document into a nearly 150 page document.
PS: Right, so, rather typically then, for the Commission, that’s a rather over energetic approach to the drafting of legislation. Okay, so what was then added? I mean, it would appear that the PSD really exceeded the scope of that which was originally intended, the bare bones to make the harmonisation possible in the various different countries. So what was added, and why was it added?
RW: Right, I mean, obviously for a purely bank’s view position, we would have been happy with a few number of legal rules, in the form of regulation that would refer to Euro payments because our system is a Euro currency based system, and instead the Commission blew up the initial request of harmonisation into a whole set of terms and conditions for payment services across a single market, that would not only involve Euro currency but all currencies of European member states, that was even initially intended to go cross border with, like, our transactions, which eventually were limited. And they also added the Special Recommendation Six of the Financial Action Task Force, which requires jurisdictions to regulate or register non-bank payment service providers.
PS: So you’ve covered a series of different things there. I mean there are regulations covering information requirements, liabilities, execution times. These are some of the additional areas that have been covered. Can we just, sort of, unwrap those a little bit, so that the listeners can understand a little bit more about what’s the content of some of those provisions?
RW: As I said, it’s a full set of terms and conditions that creates a certain benchmark acrossEurope for payment service provision, and adds a new category of player into the market, the Payment Institution. And therefore you have information requirements, liabilities and technical requirements, such as execution cycles, that are actually, now, defined by law.
On the second step, there’s a clear liability shift which now is towards payment service providers in the sense that consumers can lose their payment card, for example, and even if they don’t phone up to report the loss, they would be only liable for 150 Euro, and unless you could prove gross negligence, which is, in practice, of course, always a bit complicated. Then you have the split between Corporates and SMEs, that could be treated as slightly differently from consumers regarding some liability articles, which is a case for bilateral negotiation, so in practice, every bank has to review its Corporate contracts, and renegotiate those on the basis of what the PSD would offer a Corporate.
PS: Right.
RW: Because they could even be treated as an owner consumer if you so wish, ‘cause that’s open to, sort of, question.
PS: And in that way, presumably, avoid some of the liabilities that they would be responsible for if they were SMEs or Corporates?
RW: Yes, for example, if you have an unauthorised transaction that is based on internal fraud, but you can’t prove the internal fraud in a company, it is very hard to then say, “You’re not liable.” I mean, then the bank will have to carry all the amounts of the payment that went through.
PS: This is a bit of a grey area here. I mean, also I think there’s been some question and doubt around the information requirements, in terms of the depth of the information requirements, particularly when you’re looking at point of sale payment transactions whether it’s actually valid or feasible to actually go through these various different steps, so I think as we dig into the PSD we’re going to find that there’s a lot of content in there which is theoretically possible, but may have certain practical consequences beyond that which were originally envisaged by the Commission.
RW: For example, you are required, at the point of sale, before you actually do the transaction, to inform the customer, if he requires a currency conversion, about the exchange rate. How will you do that before the transaction even happens? It’s actually in practice not possible. So you have to review it with prudence.
PS: Right. Ruth has mentioned, Edith, that the PSD includes references to new Payment Institutions. Could you just, sort of, talk us through what you think these are likely to be, and your views on how they might impact competition for payments in the EU?
Edith Rigler: The PSD, as you rightly say, establishes a new category of firms. They’re called Payment Institutions, and these can really fall into various categories themselves. They range from money remitters to mobile telecom payments to a full range of payment service providers that are then also able to provide for an exchange, safekeeping and other services such as retailing. So we’re going to see, and we have been seeing, the emergence of those new firms. These new firms will benefit from a somewhat lighter regulatory touch. They will be able to passport themselves throughoutEurope. It is a bit too early to tell yet what the direct impact on the banks will be, but definitely the emergence of these firms will increase competition in the sense that they will not have to meet all the requirements that the banks will have to meet.
PS: Okay. The interesting thing for these new institutions is that they can operate at a lower cost base, potentially, than some of the banks can at the present day.
ER: Correct. These institutions have different capital requirements, and different ongoing requirements. Again, it is up to the individual member states to determine which authority will regulate them, and then to choose the method for these requirements, so we actually could have a situation where some member states are tougher on those payment institutions than others, which is another, a bit of discrepancy that we’re going to see.
PS: Yes, it’s certainly a very open area. I mean, in the sense that I’ve heard some institutions speculating as to whether they could outsource their whole, if you like, payment environment to a, sort of, third party institution that they create, which would then operate under a different legislative environment as a new Payment Institution.
ER: That is certainly something I’ve heard as well, and it might very well be that some payment service providers look at that. At the same time you’re going to see retailers, say, supermarkets, look much more at the opportunity to set themselves up as a Payment Institution, and therefore go into direct competition with banks.
PS: Moving on, I know that you’ve got, Ruth, certain reservations, just about the way the PSD has been drafted, not only in its complexity, but also in the lack of guidance on interlocking dependencies that actually occur within the document. Could you perhaps just talk us through those issues and give us some idea of what problems they’re likely to present to Governments and banks in translating the PSD into law and actually into systems changes within Financial Services organisations?
RW: Yes, it is a very long law. It’s over 120 pages. It has 87 articles and an annex, and the problem in reading the law is that you have certain key articles which interconnect across the document, but they are not in the same place, so basically if you, as a layman, or whatever person, want to read this law and understand it, you need to read everything in parallel in order to make sense.
I give you one example. We have the liability articles that I explained beforehand. For example, a consumer gets his card stolen, and he can’t manage to phone immediately the card company. Nevertheless, he will be liable for 150 Euro. First of all, he has a question of would the Corporate be exempted? That is a question to bilateral negotiation between the bank and the Corporate. Furthermore, what happens in other instances where you have authorised payments, but the amount wasn’t specified, etc? And you have one article that captures a number of articles that are spread around in the document that could be negotiated differently on a bilateral level with users which are not consumers. Right? So not only do you have the option, if you agree with the commercial counterpart, to opt out of these articles, but also it’s a number of articles that are spread around in the title form. So you have to always read all articles together in order to understand what is actually meant here. And that is very complex, and this will result in also in an issue of translation, because some terminologies are not known in certain markets. If you look at Slovenia, they haven’t had a very sophisticated banking system just yet. They are only building it now, and for them the implementation might be easy because they don’t have legacy to change. They never had a banking system as the UK, and some terminologies they might not even understand, because a sophisticated market obviously has nuances in certain areas which a non-sophisticated market cannot have, because they don’t even know the instruments. So you have actually a practical problem in the translation area and in the implementation, which will vary very much according to different traditions and degrees of development of financial markets across the single market.
PS: Yes, I mean I think we’re all of the opinion that the implementation of EU directives is not a friction-free process in the various different countries, and now I think it’s commonplace, I think, isn’t it, Mike, that you have something like a ten page document that ends up as a…
MO: …As an 837 page document or something….
PS: …in law when it’s finally implemented. Edith, Ruth has talked about inconsistencies in the way that the PSD may be implemented at a national level. Could you perhaps introduce to us some of the reasons behind this, and what do you think the impact might be on larger institutions who are implementing the PSD across different geographies in the European Union?
ER: The directive is not a regulation, so therefore it leaves it up to individual EU member states to apply and transpose the regulation, which means that member states have a certain freedom to, for example, they may choose how they regulate the payment institutions. They may opt for shorter payment times. There are certain provisions that are up to the individual member states. The PSD enables member states to give more favourable terms to their consumers and customers than is specified in the PSD. So banks will need to make strategic decisions as to whether they offer pan-European services, or whether they implement services with national differences. So that is where banks will have to make decisions as to when and how they will implement their payment services, following the PSD.
PS: What do you think the consequences of that might be? I mean, are we looking at if we have different implementations within one institution in different geographies, do you think it’s possible that Corporate clients might decide to execute transactions in one geography rather than another within a particular institution?
ER: I think what might happen is that Corporates will push their banks to provide services, following the PSD earlier rather than later. Remember that the PSD talks about fixed execution times, fixed timeframes for processing, transparency in terms of cost, transparency in terms of information. I would imagine that Corporates will push their banks in those countries where the PSD has not been transposed yet, to provide that transparency, and that transparency of pricing and that short processing time. But, in a way, it is too early to tell.
RW: Well, you have an issue because a number of articles in this directive allow member states to apply stricter rules for the sake of consumer protection. So some of the member states could decide on longer refund periods on more rights in case of unauthorised transactions, in case of not fraudulent behaviour, but slightly negligent behaviour on the consumer side. So you could have a case where a country such as France implements the PSD slightly stricter than it’s written here because a member state would have the option to do so, whilst in the UK, we know it’s a very liberal capitalist market that is intrinsically based on competition. There you might have a much lighter regime, which is more, word by word what the PSD says, and interestingly enough, in the case of Payment Institutions, it might allow a lighter regulation for Payment Institutions, easier waiver applications, and also lower capital requirements in the boundaries given. So indeed, you could have a case where certainly Payment Institutions might not spring up in Germany to the same degree as in the UK.
PS: Right, so you’re saying the market for those institutions, and assumedly, if we’re talking about boundary less borders within the EU, that consumers could decide to settle their transactions where so ever they find that they get – they receive the service that most meets their needs?
RW: Yes, I mean the question is also, if you are forced by your National Government to apply the PSD in a stricter version, you might need to make provisions for higher risk premia, and invest slightly more into your systems because they have to be more comprehensive. If this would result in a service being slightly more expensive, which could well happen, a customer could say, “I opened my account in Finland”, where it’s cheaper and more efficient, and they didn’t invent other obligations around the PSD where they would’ve had the opportunity to do so, because now with SEPA, the advantage will be that we will operate on the same standard for Euro payments, and any customer and any SME and Corporate can have their Euro account in any European Country.
PS: It sounds like really turbulent times ahead for the European Banking Industry. With that degree of competitive mobility it could be quite extraordinary.
MO: Interesting times ahead.
PS: Well indeed, and I think it’s another point that one hears from many people within the industry, that sometimes one imagines that the Commission in the drafting of the PSD has not always thought through the consequences of the structural change that may take place at an industry level.
RW: Yes, and indeed the assumption was that banks do not deliver sufficiently. The assumption was that basically there is market failure in payment service provision, which actually is not the case. Payment services work well across the EU. Of course you have price differences, you have SLA differences, but these differences come from the fact that markets grew in different speeds and on different traditions, and it’s the same as with the Cards Industry, you can’t just, from one day to the next, put everyone on the same level. Of course, the idea is, here, you have to do it, I think it creates a good benchmark, but in some instances it appears as overregulation. It will make it harder for EU banks in comparison to non-EU banks, because they have more requirements, and again, it’s this idea of Fortress Europe. Are we putting too many legal requirements on our institutions? Are we actually creating competition or curtailing it?
PS: Well that’s an interesting point that, perhaps, we can get onto. Edith, now that the PSD’s been adopted by the European Parliament and the European Council, what do you think banks should be doing by way of preparation for the impending implementation date of November 2009? Sort of, which areas do you think are likely to be affected, and what sort of planning and actions should banks be taking at this stage?
ER: The PSD is actually a rather complex document, as you know 84 provisions, 123 pages, the provisions relate to each other, so it’s quite complex and not an easy read. I think what banks are currently doing already is that they’re discussing the PSD at a community level with other banks and with their banking associations. Then, however, they need to discuss and really study and analyse the PSD on an individual level, and ultimately they need to discuss the provisions that relate to their customers on a bank to customer level.
PS: Right.
ER: So what banks need to do is, they need to look at each one of their products, because let’s remember that the PSD covers all products, all segments, all currencies, so banks need to develop a matrix, if you will, look at all their products, their payment products, and determine which of these products, which of these customer segments, which currencies, which countries are affected, and whether there will be an impact. And then they need to determine whether development might be needed in some of these products; they need to determine the number of customers, they need to be talked to. Potential contract negotiations will have to start, and so on.
PS: Right, so there are changes there, both within the bank, in terms of the way it structures its products, but also, potentially changes in terms of the contractual framework between the bank and its customers.
ER: Absolutely. There might be changes to the products themselves, which could mean that product development will have to take place, so that might mean investment for banks. There will be communication necessary between banks and their customers, but there might also be renewed contractual negotiations with their customers. So all in all – and, of course, there will be heavy input from in-house legal. In cases where banks don’t have legal represented in the countries where they are present, there might be the need to have the legal support from outside law firms, so all in all we’re talking about a rather significant effort and potential cost.
PS: Yes, I think the other question, of course, is the degree to which there’s an awareness of this within the banks, but the degree to which there’s an awareness of this within the Corporate client base.
ER: Absolutely, I think within banks there is some awareness, because the PSD has been in the making for a while. It has taken years to get to the current text. And some banks actually started PSD projects a while ago. They then put those projects on ice to wait for the final text. So within banks there is some awareness, but I absolutely agree with you. It will be necessary to talk to various parts within the bank. To obviously your legal operations, technology, product management, etc, and then there will be awareness raising outside the bank necessary, with customers.
PS: Right. Could we just touch on for a moment the implications of the timetable for the implementation of SEPA and really just examine some of the consequences of the late approval of the PSD, which, I understand, is anything up to a year later than it should’ve been really ratified.
RW: We initially were building our schemes and standards on the assumption that the SEPA timetable and the PSD timetable would align. So we were expecting that the PSD would be approved towards the end of 2006 or mid 2006, allowing for an 18 months period that would just give us January 2008, so basically mid 2006 to January 2008.
Now that the PSD is delayed and has a current implementation deadline of end of 2009, whilst we, as an industry, have committed to deliver SEPA instruments January 2008, there is a mismatch in the timetable. Therefore, as an industry, we committed to deliver SEPA credit transfers and SEPA cards from January 2008, as initially envisaged in our EPC roadmap, but on direct debits, which is a much more complex instrument, which didn’t exist on a real pan-European level, and which is more risky than credit transfers, we do indeed need the effective application of the Payment Services Directive in that area. Therefore, we would be reluctant to roll our direct debits before the end of the implementation deadline, and we would move our timetable for direct debits towards end of 2009, beginning 2010, with the active offering of products based on the direct debit standards.
PS: Do you think that the late ratification of the PSD will, and has led to a delay of investments on the part of the banks?
RW: Some banks have been very proactive and they’ve developed their systems, but they’ve put them in the fridge to wait. Some people therefore made already initial investments that then were put on hold, because, of course, you make investment according to the need and the urgency of implementing something, now that the whole implementation, at least for direct debits, has been stretched out to a later point in time, those investments are frozen for the moment, and used for other projects, such as MiFID and still Basel and other areas which are very costly and, sort of, complex on banks, are the same, and therefore we will see a shift in investment cycle for SEPA, but now that we have certainty on a date, more or less, banks can plan with it, and start making investments that would come into effect in 2008, for example.
PS: Right. Edith, has it been a disappointment to the banks in general that, perhaps opportunities for greater harmonisation that could’ve been brought into being by the PSD have perhaps been missed? And I’m thinking specifically of the Balance of Payments Reporting issue.
ER: Certainly, in the current payments environment we have a number of provisions that make providing banking services, and for corporate customers to use those payment services, difficult in the European environment. This fragmentation, we have different tax regimes, different VAT regulations and we have Central Bank Reporting. SEPA is not getting rid of Central Bank Reporting, and the PSD is not addressing this issue either. That is certainly a disappointment to the banks, and it continues to make it difficult for Corporates to do business across Europe. We would certainly hope that in due course, Central Bank Reporting becomes abolished, and that there might be a certain extent of VAT and tax harmonisation.
PS: Yes, I think we should also draw some comfort that McCreavy has recently kicked off a new initiative which is looking at pan-European invoicing and specifically, perhaps, the tax considerations involved. So it’s something that clearly is on the map for addressing at a later date.
ER: Yes, and the banks, through the European Payments Council, voice their dissatisfaction with this current situation. There is currently a move underway to bring again to the Commission’s attention that Central Bank Reporting is an oddity, that its abolition might be beneficial.
PS: Okay, what can banks do to make their services more competitive?
ER: The PSD aims at harmonising payments and ensuring the rights and obligations of payers and payees, and protecting the consumer. But despite the provisions in the PSD, banks can offer in their national communities better services than specified in the PSD. For example, the PSD says, “D plus one from 2012,” or “D plus three until 2012, if you have specifically negotiated that with your customer.” But certainly, faster payments will continue to go ahead, and that, of course, is a payment that takes place within seconds. So, we shouldn’t look at the PSD as levelling the payment services.
PS: No, it’s raising the bar, in terms of performance, and it is standardising that, but all I’m suggesting is that countries and institutions are going to have to look to new value added provisions in order to differentiate their services more effectively, both between countries and within countries.
ER: Yes, but banks would do that anyway, I would say, because banks continue through their dialogues with their customers to provide new services, new functionality, new value add, and they are – here we’re talking about harmonising things such as refund procedures, again processing time, but many banks are already offering same day processing anyway.
PS: Indeed, I think what I’m trying to understand is how banks – what new things you think banks are going to be offering in order to add value to their propositions in a post-PSD world?
ER: Well I think, certainly, the subject of E – everything to do with E: e-payments, e-services, is in the cards, and all banks I think are looking at that currently. What the specific offerings are, I think, is in a competitive field, and again, too early to tell.
PS: The intent of SEPA and the PSD was to bring benefits to customers and intensification of the competitive landscape, and to a certain extent really also bring value to the EU as a commercial community by way of productivity and efficiency gains. Ruth, I’m just wondering, in the opinion of, you know, perhaps at a personal level, do you think all of this has been worth it?
RW: I think in this project we really have to have a long term vision. In my opinion, rather than the PSD which, of course, intends to enhance competition and consumer protection, the real competition will come because of the SEPA project, and the same interbank standard, because banks that are, today, cross border banks, will suddenly become Euro zone banks, and they will all play on the same level, so competition will certainly be enhanced by SEPA, but the adherence to SEPA is an interbank project, which is also open to Payment Institutions, but administered by the European Payment Council. It’s not a legislative activity. Whilst the Payment Services Directive, because it defines terms and conditions of a contract, and it raises the benchmark of liability of banks towards their customers, and liabilities of Payment Institutions, does certainly improve the condition for the consumer, for the SME and for the Corporate. Yet again, the SEPA project itself will enhance productivity gains in the sense that Corporates and SMEs that do operate cross border in Europe can now make their Euro payments from one account, rather than having an account in all the locations where present. So this will, of course, reduce their investment into banking and infrastructure and it will give certainty, the PSD will give you certainty on execution times, so that you can have a clear budget planning and, sort of, cash balance planning. So the PSD and the SEPA project in conjunction will result in enhanced competition and in benefits for consumers and Corporates alike. However, I would like to make the point that the Payment Services Directive did stretch slightly too far. We have never seen, on a European level, that a law defines a whole contract to this depth and degree of detail, and banks probably would think again the next time that they would look to the Commission for support.
PS: [Laughs]. I can imagine that that will probably be the case. Okay, so in conclusion, then, we’ve covered a lot of ground today. We’ve talked about the origins of the PSD. We’ve talked about the way that it relates to SEPA. We’ve looked at the additional areas of regulation that have arisen as a consequence of the over enthusiasm, we can say, of the Commission, and some of the impact, the competitive impact that those are likely to have. We’ve also looked at the framing of national law in each of the different countries and the potential impacts of those, and the impact from a bank’s perspective on the way customers will classify themselves and potentially use the SEPA compliant instruments in time.
We’ve also talked through the issues of timetable. So, just in conclusion, are there any other issues that we haven’t addressed here, that you would like to cover off before we close this Podcast?
RW: I think it’s an important take home message to have clarity on the scope of the two projects. The Payment Services Directive is a generic benchmark terms and conditions for all payment services throughout the European Union, which therefore also applies to legacy instruments that might not exist when SEPA really comes into action, and some other national specific electronic payment instruments that have not been defined as part of SEPA. The SEPA, then, on the other hand, is really this interbank standard for a Euro payment system which only looks at Euro as a currency, so not all European currencies, and which also is a self-regulatory standardisation activity to which banks can adhere on a voluntary basis. So we will have, in the European Payments Council, a list of those banks that adhere to the SEPA standards, and that therefore will try to comply with the ISO 20 or 22 Standard Subset that has been defined in Credit Transfer and Direct Debits, and this is a, sort of subset of the PSD in a way, because it is, first of all on an industry basis, secondly, it’s a standard, thirdly, it’s only for one currency, and of course it will eventually impact the whole European market when banks take up the SEPA and replace the national Euro payment systems by SEPA in the very long run, but initially you will have a parallel world where, in Sweden, for example, you have the national Swedish credit transfer for Krona, you have the Euro SEPA credit transfer and only when Sweden eventually decides to join the Euro, they will be able to replace…
PS: Migrate?
RW: …and migrate fully.
PS: Right. Okay, well, I think that’s been a very interesting and illuminating Podcast on the PSD and SEPA, and I look forward to perhaps in future Podcasts to looking at the future regulatory direction of the EU, because I’m sure they’ve got more in store for us going forward.
MO: Can I just ask the question that, where our listeners would go to find out more about the PSD? Is there a website or a…?
RW: Yes, you have the DGMarkt Commission website, where, under Financial Services you can look up the legislation as an original text of publication 2005, and also as the final one, which will soon be published after the Council has endorsed it. You can then also look on the Council website, of course, which will make it available in a few weeks, and the final, final version will be published in the Official Journal of the European Union in a few months’ time when it’s been translated in all EU languages.
MO: Great, and we’ll put links to what’s currently available within the show notes.
RW: Right, and on the SEPA project, of course, listeners should visit the European Payments Council website, which explains the reasons for SEPA, the benefits, and it gives you the Standards Implementation Guidelines if you want to go into depth with that.
MO: Great, well thank you for that. Certainly, as you say Peter, a very illuminating discussion. It’s opened my eyes to some of the challenges that the banks are going to face with PSD.
Just a quick note to our listeners, if you would like to subscribe to The Payments Podcast, and it is completely free, I use the word “subscribe,” but there is no cost involved, then go along to paymentspodcast.com and there are full details there of how you can do that, either through iTunes or direct from the website itself. Thank you for listening. Edith, Ruth, thank you.
ER: You’re welcome.
MO: And we’ll speak to you next time.
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