2010 is slowly but surely coming to an end and, as in every year, the media will soon be producing reviews of the year’s events. In sports, the World Cup football championship will no doubt predominate. Despite the early elimination of one or two of the favourite nations, as was the painful experience of France, Europe still dominates world football. It seems that Europe has made some good decisions in the past as regards football. When it comes to payments, Europe has made a lot of the right decisions in this field too, and is therefore likely to become a very successful region in the context of payments if SEPA finally becomes a reality.
Cards are a very sensitive topic, be it in football or in payments. During the World Cup some referees were criticised for using their cards too frequently. But SEPA for cards would, on the contrary, greatly benefit from a more active approach by all stakeholders.
The future European cards market rests on two legs. One leg is the requirements any competitive cards market should fulfil, such as the certification of cards and terminals, separation of card schemes and processing activities, the establishment of a card payments processing framework and European involvement in global card standardisation initiatives. The other leg is the establishment of an additional European card scheme, a field in which progress has been considerably slower than hoped.
Clear business rules for a fair game
A game needs adequate rules: professional football would be unthinkable without a set of clear and unambigous rules leaving little room for interpretation. In the same way, clear business rules are essential for the proper functioning of the cards market. Earlier this year the Canadian government issued a code of conduct for the credit and debit card industry in Canada, which promotes fair business practices and ensures that merchants and consumers understand the costs and benefits associated with credit and debit cards. This follows similar regulatory initiatives in the United States and significant efforts in Australia, New Zealand and South Africa. In Europe, extensive public intervention is not envisaged for the time being. It is up to the European Payments Council (EPC) and individual card schemes to create the business rules that are needed for SEPA for cards to function smoothly. The lack of clear rules is precisely what has been criticised when it comes to the SEPA Cards Framework (SCF). The SCF would certainly benefit from further development, increased clarity and more detailed rules – cosmetic changes are not enough.
But it is not only the SCF that needs further work, the
Team play to get technical standards up and running
However, business rules are only half the battle for SEPA for cards, as technical standards are needed too. In December 2009 the EPC published an updated version of the SEPA Cards Standardisation Volume. This « Book of Requirements », as it is now called, builds on the SCF. The objective of the document is to lay the foundations for the harmonisation of standards in SEPA. It provides the basis for the SEPA standards that are needed so that « any SEPA card could technically work at any SEPA terminal ». The EPC Cards Stakeholders Group (CSG), which started work in October 2009, has taken over the maintenance and development of the Book of Requirements. The CSG consists of representatives from five sectors: banks and payment institutions; card schemes; processors; manufacturers of cards and terminals; and retailers. The EPC is in charge of the strategic vision and business rules for cards while the CSG focuses on functional, security and procedural requirements. This distribution of responsibilities is welcomed by the Eurosystem. The evolution of the Book of Requirements will also facilitate and guide the adoption of the detailed standards that various market initiatives have developed or are developing. This is an important step towards interoperability, security and market access. Without it, there is a risk that fragmentation would remain or even increase in Europe.
The development of implementation standards and specifications is the responsibility of standardisation initiatives in four domains (the card-to-terminal interface, the terminal-to-acquirer interface, the acquirer-to-issuer interface, and certification and type approval). Various standardisation initiatives are currently working on implementation standards for these domains, e.g. the CIR Technical Working Group, EPAS and the Berlin Group. However, although progress has been made on the development of implementation standards, further efforts towards their implementation are necessary. As regards the SEPA certification framework, the implementation specifications for security certification have been developed by the Common Approval Scheme (CAS). The Eurosystem welcomes this work. The governance aspects of the SEPA certification framework are still under discussion. The Eurosystem expects a permanent governance structure to evolve for SEPA security certification for cards and terminals, and is expecting EPC and CAS members to agree on concrete proposals. Governance is one of the key components of the SEPA for cards project: setting requirements and promoting standards is important. From a European perspective, it is strategically necessary to take a more coordinated approach to global standard-setting bodies, such as the ISO or EMVCo, and Europe should start to speak with one voice, ideally via the EPC.
Major efforts by individual card schemes are also needed. Although work has started in some areas, it is far from finished. One of the challenging tasks is the separation of card schemes and processing entities. The principle of the separation of scheme management functions from processing activities, which is one of the key requirements of the SCF, is an important element in the creation of the SEPA for cards. However, after the start of the SEPA for cards project in January 2008 doubts were raised as to whether all card schemes have effectively separated processing activities from their scheme management functions.
In order to foster a competitive cards market and to avoid misperceptions, the principle of the separation of management and processing should ideally apply at the corporate level. Operational, informational, financial/accounting, commercial and legal aspects should all be separated. However, a requirement to implement legal separation could only be stipulated by the receptive regulator.
A European Champion in card payments
For a number of years the Eurosystem, together with other European authorities, has been promoting the idea that at least one additional card scheme with its roots and legal basis in Europe should emerge from the SEPA process. A new European card scheme could bring both economic and political benefits. Given that the European cards market is big enough to combine competition with consolidation and economies of scale, the Eurosystem believes that an additional card scheme could function well in addition to – and in competition with – the two schemes that already have a well-established position at the European level, namely VISA Europe and MasterCard. Therefore, the Eurosystem considers an additional European card scheme to be necessary in order to create a competitive cards market within SEPA. There is a risk that the vast majority of the national card schemes could leave the field clear for the two schemes already active at pan-European level. This would mean less choice and less competition – to the detriment of European consumers and merchants – and less involvement in the governance of card payments – for European banks.
The three existing initiatives to set up a new European card scheme (Monnet, PayFair and EAPS) are still at a very early stage: they need to keep training hard to get match fit. While other major economic areas have already succeeded in establishing additional card schemes (e.g. China with China Union Pay) or are in the process of doing so (e.g. Russia and India), the success of one – let alone several – new European card schemes is not yet guaranteed. Of course, the political, economic and competitive environment of the above-mentioned regions differs from that of the EU. But the main reasons for the establishment of these initiatives are the same, i.e. to promote electronic payments and actively address the specific requirements of their payments markets.
It is clear that there are still many issues to be resolved – developing a proper financing model being probably the most important one from the point of view of banks. The multilateral interchange fee (MIF) has been the focus of attention from policy-makers, regulators, competition authorities and the payments industry for quite some time. Although in football referees and their decisions are not always well-received, once they have been made, their decisions are to be considered final. In the payments world too, the decisions of competition authorities are often heavily disputed. In fact, competition authorities have already provided some guidance in the context of card payments, although it may not satisfy many banks. However, it is fair to state that greater clarity on the MIF from the European Commission would be beneficial.
Naturally, the most obvious component of a financing model is revenues, but it may also be worth analysing possible effects on other areas of business. A reduction in cash handling costs could, for example, form an integral part of the business case when banks evaluate their involvement in one of the initiatives to establish a European card scheme. According to the Bundesverband deutscher Banken (Association of German Banks), cash is by far the most costly payment instrument for German banks, entailing annual costs of approximately €130,000 per branch for the provision and handling of cash and resulting in total annual costs of
The upcoming hopeful: eSEPA
However, we should not only focus on the teams that are currently top of the league, i.e. cards and cash. In order to create a competitive and efficient payments market, some scouting for young talent is needed too. The Eurosystem summarises this under the term « eSEPA » which means a Single Euro Payments Area in which service providers make use of advanced information and communications technology when offering payment services. eSEPA is a synonym for a smooth functioning competitive market where value added services are offered in addition to SEPA’s core services, with online e-payments and mobile payments being the most promising upcoming hopefuls. The ECB has launched a training ground for these innovative services, the eSEPA website (www.esepa.eu), and carried out a stock-taking exercise in the course of the summer. A report on the results of this exercise will be issued in due course.
In football, all-rounders who can use both legs equally well are very rare. In card payments, both legs – i.e. the provisions to ensure a competitive cards market and the creation of an additional European scheme – are equally important. SEPA for cards should therefore aim to use both legs.
(Article written before 14/10/2010)
