The years of procrastination (by some) are over, and payment services providers — as well as consumers — will have to get ready to be compliant with SEPA in the not so distant future.
Ruth Wandhöfer, Head of Regulatory & Market Strategy, Citi Transaction Services provides an overview of the challenges that providers and users (PSUs) of payment services in Europe are now facing, and of the work that is being done to help resolve some of the many open questions that the SEPA Regulation has triggered.
Introduction
Having reached the not-inconsiderable age of 10 the SEPA initiative is getting ready for its next growth stage. With effect from 31st of March 2012 migration to SEPA became a regulatory requirement for the entire European payments market when EU Regulation 260/2012 came into force. In response to the slow migration pace until now, a strict migration deadline to move to using SEPA credit transfers and direct debits has been set for 1st of February 2014. So the years of procrastination (by some) are over and payment service providers (PSPs) as well as users will have to get ready to be compliant in the not too distant future – despite the fact that some Member States never really wanted SEPA in the first place.
Why is SEPA being regulated?
Following the launch of SEPA credit transfers in January 2008 there was an assumption that PSPs and PSUs would migrate to these new payment instruments as a result of market forces alone. Sadly, the reality has left little doubt that these forces were insufficient to meet this challenge. The combination of the vast majority of retail payments in Europe being executed at national level, limited PSU demand for change and little incentive on the PSP side to fix something that was not actually broken (legacy national payment schemes worked ok in the main) naturally resulted in very little natural migration activity. It is also true that bank communication has not necessarily been as intense and clear as it could have been in all Eurozone countries in order to fully explain the large scale transformation ambitions that the SEPA project embodies. And of course there was the additional hurdle that the intrinsic nature of humankind is to be adverse to change. And so, in sum, the initiative only moved at a snail’s pace. This finally left the industry in a position where a regulatory push was seen as the only powerful solution to implement this key component and achieve further integration of the Single Market.
Hence a Regulation was proposed and agreed – and in fact has now already been in force for a number of months. But when looking at the detail it becomes immediately apparent that the stated objectives of regulating SEPA – integration, harmonisation, more competition etc. – are rather unlikely to be achieved just by following this final legal text. When looking closely at the details of the text, one cannot help but notice a significant risk for national payments markets in Europe to remain fragmented going forward, at least for a period of time. At the same time even the theoretically harmonised component – those credit transfers and direct debits moving onto the SEPA schemes – may include a variety of seasoning to suit individual national tastes thereby potentially enabling barriers to cross-border competition to remain in place.
What exactly has been regulated?
The key deliverable of this Regulation is to actually provide a start date – rather than an end date – for migration from domestic credit transfers and direct debit processes/formats to the pan-European SEPA standards. This date is the 1st of February 2014.
The second big date in the Regulation refers to the point in time by when any national ‘niche schemes’ (representing less than 10% of national CT or DD payment volumes) which have been exempted from the initial 1/2/14 deadline thanks to one of the Regulation’s transition provisions must fall into line. This date is the 1st of February 2016. A slight complication arises here, given that these ‘niche schemes’ have yet to be identified by the respective national authorities, with the exception of the ELV scheme in Germany, which has been singled out in the Regulation as qualifying for this special treatment. The deadline for Member States to come forward with their list of ‘niche schemes’ that would fall under the later deadlines is only the 1st of February 2013, which of course creates some uncertainty in a market that is preparing for migration right now.
Other key requirements in this Regulation are:
• The practice of paying a multilateral interchange fee (MIF) by the payee’s bank to the payer’s bank in relation to the execution of a DD collection (an existing practice in some EU countries) must cease – by 1/11/12 for cross-border DDs and by 1/2/17 for national DDs.
• PSPs have the obligation to ensure that non-consumer payers submit XML ISO 20022 compliant payment files to the payment processing engine of the PSP. In this context any conversion either offered by the PSP or a third party provider to the sending customer will need to take place as a separate process before the payment file is transmitted to the PSP’s payments processing engine.
• The current requirement on users to provide the BIC (Bank Identifier Code) as well as the IBAN as part of their payment instructions is being phased out (by 1/2/16 at the latest) in a somewhat contentious late change in the final stages of negotiation of the Regulation. This rule’s goal is to achieve greater consumer protection. Any non-consumer PSP that would like to provide payment instructions to their PSP with only the IBAN of the beneficiary will have to contractually agree this with their PSP, in particular in the context of to the liability of the PSP for executing a payment correctly (as defined under the Payment Services Directive).
• In a couple of linked changes which the SEPA Regulation makes to another existing piece of payments law (Regulation 924/2009), those countries still maintaining settlement based balance of payments reporting requirements on their PSPs for payments over €50,000 will have to phase these out by 1/2/16; and cross-border payments in euro over this amount are being brought under the existing Regulation 924 requirement under which they must be charged the same as the corresponding national transfer.
What is being done to clarify the requirements of the SEPA Regulation?
The European Banking Federation’s Payments Regulatory Expert Group, which also includes representation from the European Payments Council, Master Card, Visa and the European Association of Co-operative banks, is already preparing an industry implementation guidance document for the SEPA Regulation, which – similar to guidance prepared previously in relation to the Payment Services Directive – is intended to provide clarity on a range of practical questions for both banks/PSPs and corporates alike. Publication is planned for early September 2012 and questions from all types of users and providers are welcome in order to extend the FAQ section and make this a living document that supports all market participants in Europe and outside.
Conclusion
Despite the broader turmoil in the European markets in relation to the European sovereign crisis, it is clear that the SEPA project has been firmly put on a course of execution by the EU authorities. 10 years after the start of a vision the market is finally moving into execution. Now implementation has to deliver. The reform brings obvious opportunities for lawyers, consultants and IT vendors. In addition, banks/PSPs and their clients can also leverage this transformational change to improve efficiency, streamline processes and ensure that client needs are addressed.
Next steps and follow-ups should include:
These are exciting times of historical dimension!
About Ruth Wandhofer:
Ruth Wandhöfer is highly regarded across the banking industry for her in-depth knowledge of the regulatory, market and competitive landscape and in particular is acknowledged as one of the foremost authorities on SEPA (the Single Euro Payments Area). She holds a number of influential positions, including the Chairmanship of the European banking industry’s Payments Regulatory Expert Group, membership of the Plenary of the European Payments Council (EPC), Chairmanship of the EPC’s Information Security Support Group, membership of the EPC’s SEPA Scheme Working Group, membership of the EPC’s Executive Committee (Co-ordination Committee), membership of the EU Commission’s Payment Systems Market Expert Group as well as COGEPS, the high level Euro Payments Strategy forum of the ECB to discuss payment policy issues with the market.
Ruth is currently responsible for Citi’s Regulatory & Market Strategy within the Citi Transaction Services (CTS) business. As such, she has external responsibility for engaging with and influencing the evolving regulatory and market/standards environment on a wide range of established and emerging topics in the transaction banking space, as well as driving and coordinating the business response within Citi CTS.
Prior to joining Citi, Ruth worked for the European Banking Federation where she was responsible for securities clearing and settlement as well as payments. Furthermore, she was closely involved with the EPC in the writing of the SEPA Credit Transfer scheme rulebook, as well as being a high profile and influential lobbyist in the negotiation of the Payment Services Directive. In addition, her efforts in the context of clearing and settlement harmonisation covered topics such as Target2 Securities as well as industry work on harmonising corporate actions processes in Europe in line with the Giovannini Report recommendations.
Previously, Ruth worked in financial management in the banking sector as well as in the European Commission DG Economic & Financial Affairs. She speaks five languages (EN, DE, F, ES, IT) and has completed studies in various countries, including an MA Financial Economics in the UK, an MA International Politics in France and an LLM in International Economic Law in the UK. She recently published her first book on ““EU Payments Integration – the tale of SEPA, PSD and other Milestones along the Road” (Palgrave MacMillan) and is a fellow lecturer of the Pallas LL.M Program in European Business Law. She is also on the Editorial Board of the ‘Journal of Payment Systems & Strategy’, a Henry Stewart Publication. A ‘2010 Financial News Rising Star’ she has recently been named to Management Today’s 2011 “35 Women under 35” list of women to watch (published in the Sunday Times).
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