Luxembourg: a test bed for change


5 December 2011


Luxembourg may be small but, with an active banking sector that depends heavily on cross-border transactions, it is embracing market changes such as SEPA. Marc Hemmerling of the Luxembourg Bankers’ Association tells Jim Banks how the country could also be a proving ground for new technologies such as cloud computing, e-money and mobile banking.


Whether driven by regulation or technological advances, Europe's banking sector faces continuous change, and how it will look in the future depends greatly on the industry's ability to adapt to new challenges.

Banks are still grappling with the implications of the PSD and SEPA, which will make cross-border payments cheaper and more efficient, and are also working hard to embrace new technologies such as mobile banking and cloud computing.

The Luxembourg Bankers' Association (ABBL), which, unique to Europe, allows non-banks to be members, believes it can take a more progressive view of market changes, and therefore play an important role in highlighting the problems and unlocking the advantages of new technologies and regulatory change.

Marc Hemmerling, head of organisation, technology and payment systems at the ABBL and a member of the technology committee of the European Banking Forum (EBF), coordinates work on payments systems and technology trends of interest to banks, and sees many challenges ahead.

Cloud cover

One of his main tasks is to assess how cloud computing, in which computing is delivered as a service over the internet rather than as a product, will affect the banking community.

"Cloud computing is a specific kind of outsourcing that is all about cost reduction, but the question now is how to place that technology in our framework," says Hemmerling. "This means looking at privacy directives and banking secrecy laws. These make cloud computing very different as a way of sourcing processing power and storage capacity.

"Luxembourg may be a relatively small market in Europe, but its size makes it useful as a microcosm of the larger environment."

"We have to examine whether our legal framework allows cloud computing, and how cloud computing services can be developed and become profitable," he adds. "This is clearly linked to electronic archiving. Banks have used that kind of system for years, but the authorities are now running the legal framework and they must decide the question of what is an electronic archive with legal value.

"So, they are looking to redefine the law and the conditions that need to be fulfilled for electronic archiving to be considered of legal value. At the same time, there is the issue of operational crisis management; what happens if a large system is disrupted and how do you ensure that the basic infrastructure remains?"

Cloud computing is a vast domain that affects almost every industry, but this in turn means that much discussion is needed in order to pin down how it will work for the banking sector. A legal framework is hard to implement with outsourcing, and these difficulties are magnified with cloud computing, raising important issues about data security. "If you can't store data outside the EU, for example, then where do you put the data centres? And who checks the data if it leaves the EU and comes back during the course of a day?" Hemmerling asks.

"You must check compliance, but at the same time you must avoid over-regulating. Banking people and IT people need to work together. That is relatively easy to achieve in Luxembourg because of our culture and the small size of the country."

He continues: "Banks, other industries and the authorities are uniting to see what the difficulties are, but they need to understand that, even if all of the legal concerns are resolved, there are still difficult decisions to make about cloud computing."

Pushing ahead with payments

On the regulatory front, Hemmerling. explains, transparency issues and performance criteria laid out in the PSD, and the harmonisation of cross-border SEPA payments have taken time to filter through the industry. New SEPA deadlines will be imposed, which will see payments between euro nations become faster and cheaper.

"Banking people and IT people need to work together. That is relatively easy to achieve in Luxembourg because of our culture and the small size of the country."

In Luxembourg, the ABBL is the National Adherence Support Organisation (NASO), which supports banks in their migration towards SEPA-compliant payment systems. The ABBL has also developed the Luxembourg Interbank SEPA Agreement (LUISA), under which signatories embrace a commitment to actively support and implement SEPA services.

"There are relatively few retail banks in Luxembourg, but they are very active. The big decision for them was SEPA and that is now fulfilled. We've replaced our national clearing system, which was not SEPA-compliant, and now we are talking about moving our debit cards into the SEPA environment," says Hemmerling. "SEPA is politically very visible, and as we have a high proportion of international transactions - more than 50% of transactions are done by foreigners - it is very important that we adopt international standards, including SEPA.

"We are happy about the regulation on end-dates, which will force everyone to use SEPA-compliant systems. Any such change takes time and money, of course."

However, private banks, of which there are many in Luxembourg, have a view of SEPA that is very different to that of the retail banks, which handle an altogether different kind of business ."Some banks in Luxembourg are more about private banking than payments. Even though they do make some, their clients are less worried about the transaction costs, so the banks ask why they should move to SEPA, when cheaper transactions are not that important to their customers," says Hemmerling.

Another key challenge that occupies much of Hemmerling's time is mobile banking. Luxembourg may be a relatively small market in Europe, but its size makes it useful as a microcosm of the larger environment in which new technologies can be assessed.

"We are looking at e-payment initiatives, too, although we are a small country with an incumbent network operator. Our banks are too small to define a mobile solution, but our country could be a test bed for mobile technology," he says.

The ABBL's role is to bring the industry together around the issue of mobile payments through its Payments, ICT and Standardisation Committee, and through workshops with banking experts, payment service providers and mobile network operators in Luxembourg.

As a proving ground for technologies, Luxembourg is ready to embrace the challenge of mobile payments, cloud computing and e-money. Amazon has recently been given a licence to issue e-money, and PayPal has a banking licence there so it can be
a payments institution and also an issuer of e-money. As a result, Hemmerling expects to see a lot of activity in this space in the relatively near future.

"The European Committee may push banks to be more innovative on payments, and that is a good thing that will come from this. But they must remember that banks do things step by step," he says.

Whatever the issue - mobile technology, data security or cloud computing - Luxembourg has a lot to offer Europe as a place to explore the challenges, and solutions, in a rapidly changing market.

"Luxembourg can set an example for Europe. The public authorities have done a lot to help set up infrastructure for modern business, including big data centres and networks of fibre-optics. And we have the banking secrecy framework in place, so to comply you have to have high competency on security when managing data," concludes Hemmerling.

As a proving ground for technologies, Luxembourg is ready to embrace the challenge of mobile payments, cloud computing and e-money.
Marc Hemmerling is head of organisation, technology and payment systems at the Luxembourg Banking Association.