Six months on...

Over the past few years, major obstacles to the success of European political and financial integration have emerged. As Greece, Ireland and Portugal face mounting debt crises, and with contagion a genuine possibility, the long-term future of the EU could depend on its ability to weather the storm.

The magnitude of these events has also had the effect of pushing other important European governance issues to the sidelines. For the European Central Bank (ECB) and its attempts to roll out the SEPA payments platform, this shift of emphasis is one of many setbacks to hit the project since its inception.

Encouraging progress

The scale of the programme means that developing a timeframe convenient for everyone was always going to be difficult. In addition, becoming SEPA-enabled involves systemic change for many banks, which in turn requires hefty expenditure. Burdensome at the best of times, it is particularly difficult now. Banks already have to set aside considerable amounts of capital to ensure Basel compliance and SEPA will have a direct effect on their ability to derive revenue from payments. Despite this, Gertrude Tumpel-Gugerell, former vice-governor of the Austrian National Bank and now an executive board member of the ECB, is positive about the progress that has been made so far.

"Of course, sometimes a certain kind of inertia has to be overcome," she says. "But several thousand banks across 30 countries have now agreed on one single scheme for credit transfers and direct debits, making use of international standards. We should not forget that a large-scale project such as SEPA is unique and our achievements should not be underestimated."

Tumpel-Gugerell has done much to encourage this progress. In November 2010, at the Next Generation Cards and Payments Conference in Brussels, she presented a list of five New Year's resolutions for the European payments industry. The first was that an official SEPA migration date should be defined, something most interested parties had been calling for throughout 2010.

"A few years ago, many market players and public authorities had the opinion that the market will move by itself," says Tumpel-Gugerell. "Based on real experience, we now have a much better understanding of the limits of self-regulation and there is common agreement on the need for action by the European legislator."

In December, the European Commission officially confirmed the replacement of national schemes with an EU-wide standard. Since then, approximate end dates have also been defined by the ECB, with the publication of an official legal opinion stipulating January 2013 for credit transfers and January 2014 for direct debits. Tumpel-Gugerell is hopeful that the eventual dates, which must be agreed by European lawmakers, will be within this timeframe.

"Payments are a network economy," Tumpel-Gugerell explains. "First-movers are at a disadvantage, so it is important that a critical mass makes the transition at the same time. The European Commission's proposal for a regulation to facilitate the migration to SEPA credit transfers and direct debits is definitely a step in the right direction. The Council Working Party is discussing possible dates of 1 February 2013 and 1 February 2014, respectively, while the European Parliament is thinking of one date for both: February 2014."

The second resolution outlined on Tumpel-Gugerell's list was for the establishment of a more competitive European card market. For this to happen, entities that manage card schemes would most likely have to be separated from those that process payments. This would give banks a greater range of card payment processing options.

Standardisation: on the cards

The ECB has also identified the need for further standardisation across the transaction chain, from card to terminal, and acquirer to issuer. This principle is at the heart of SEPA credit and direct debit transactions and, in Tumpel-Gugerell's view, should be applicable to cards as well.

"In the field of cards, there is still a lot of work to be done in the domain of standardising terminals and transactions," she explains. "It is clear that choices will have to be made by the market: too many standards means no standardisation. Ideally, harmonisation would be based on the ISO 20022 messaging format, which is also used for SEPA transfers. harmonised security certification procedures for terminals will also help in this respect."

Standardisation in this market applies not just to transactions and terminals, but also to the payment card itself. To ensure Europe-wide interoperability, the European Payments Council and the Cards Stakeholders Group have worked together to define a strategic vision and set functional, security and procedural requirements for the complete adoption of chip and pin (EMV). These efforts have been particularly successful, with complete migration from magnetic stripe to EMV technology expected by next year.

"We have presented a strong message that this is vital to ensuring the security of payments in Europe," says Tumpel-Gugerell. "Of course, there will be obstacles to overcome. What do you do when you go outside of Europe and need to use a magnetic stripe? Different issuers are thinking of different solutions, such as issuing special cards with a stripe when required. One thing is especially important: that there is clear alignment across the European payments industry to ensure our interests are represented at a global level among the different standard-setting bodies, such as the ISO."

Bank-led SEPA compliance

Change in the card market has not come about without difficulty, which inspired the formulation of Tumpel-Gugerell's third resolution. A number of banking communities, instead of making their payment schemes SEPA-compliant, opted for Visa Europe or MasterCard solutions. Although not a worry at the moment, the ECB is keen to avoid the creation of a duopoly and sees plenty of room for a third, bank-led option. A handful of initiatives are in the formative stages, but it is too early to say which will prove most successful.

"We have to put things in perspective," she says. "Due to the number of national schemes, there is, strictly speaking, no duopoly. VISA Europe and MasterCard undoubtedly play a crucial role in the cards market, but there is space for at least one additional offering with European governance. Governance and control of the card industry are things that need to be taken seriously into account, now and for the future. Such considerations are not only to be made here; Australia, Russia and India seem to be paying close attention, too."

Customer-centric innovation

More generally, Tumpel-Gugerell's fourth resolution calls for the acceleration of innovation in the banking industry, an area where many European banks have fallen short in the past.

"I think it is fair to say that, all in all, banks do not have the best track record in retail payment innovation," she explains. "There have been some very successful initiatives such as payments via online banking in the Netherlands. But these are exceptions that prove the rule and are mainly restricted to the domestic market."

This innovation must stretch beyond pure payments and move into alternative channels including mobile and online. These, in Tumpel-Gugerell's opinion, could even come to usurp some of the more conventional customer channels.

"Banks need to become even more tech-savvy and should not ignore the impact of social media either," she says. "Losing direct contact with the customer could have adverse effects on other areas of the bank, limiting cross-selling opportunities."

It is for this reason that the ECB has shown strong support for the creation of a SEPA-wide online e-payment solution, like those already in place in Germany, Austria and the Netherlands. The Eurosystem has strongly encouraged the profusion of payment institutions, both traditional and non-traditional.

"Vested interests are hampering some communities from moving ahead with online banking e-payment solutions as they risk affecting card revenue streams," says Tumpel-Gugerell. "My reply to that is that if banks do not move, others will step in and take the market for online payments. The high share of unsuitable and relatively inefficient instruments for online payment - along with the calls of various stakeholders for the development of European solutions - shows that there is not only room, but a genuine need, for secure alternative payment options based around online banking."

A strong, secure strategy

The key to making this a success, and the fifth resolution on the list, is providing a secure platform. As things currently stand, there is a lack of standardised, clear guidance on how banks should handle payment risk, both online and through more conventional methods.

To combat this, the Eurosystem has produced the Harmonised oversight approach and oversight standards for a payments policy framework, which provides clarification. It has also launched the Forum for Security Issues, which monitors market developments and facilitates the alignment of security priorities between the banking chiefs and regulators.

"The risk-based approach taken by individual banks may be suboptimal in achieving a level of security required at the aggregate industry level," Tumpel-Gugerell says. "This is because the level of commercial risk tolerance may differ from that of social risk. In general, to increase the level of trust in payment systems and services across Europe, there is a need for more clarity regarding the specific actors involved in defining security requirements and the requirements set by those actors."

This theme of strong central governance runs through Tumpel-Gugerell's resolutions. She strongly advocates the formation of a clear strategy at the top and a unified, step-by-step migration process based on this. The European Payments Council recently launched its annual public consultation on payments, the results of which will help form the definitive migration deadlines that are expected to be published later this year.

"This is a huge transformation, even more complex than the introduction of coins and banknotes, and it was also a self-regulatory effort, which made things more difficult," she explains. "It took time to get the governance right and then some banks had to reconsider their revenue models, which further slowed the process. We expect to have new regulations in place by autumn, which will really help banking entities make the final move to these new standards."

Although these resolutions seem ambitious, clear progress has been made. It seems, however, that there will only be impetus to change when rules and deadlines are centrally imposed.