When it comes to discussing the Single Euro Payments Area (SEPA), it is rare to find agreement between card issuers and regulators: card issuers regard the initiative as a necessary evil in order to facilitate more efficient payments, and regulators regard it as the gateway for fairer consumer pricing and greater competition. However, both parties are agreed that debit cards are likely to play a much more pivotal role in the post-SEPA European payment market. But, as ever, there are opposing viewpoints from issuers and regulators.
Wiebe Ruttenberg, head of the Eurosystem market infrastructure division at the European Central Bank (ECB), gave delegates at Cards International’s Cards & Payments Europe 2007 conference an insight into the way regulators are approaching the future of debit payments in Europe, and reaffirmed that regulatory bodies want to see the emergence of an alternative debit scheme to Visa and MasterCard.
Ruttenberg outlined the long-term vision of the Eurosystem, which is made up of the 13 euro area countries. It encompasses four elements:
• more than two euro area-wide card schemes;
• any card issued anywhere in the euro area accepted at any terminal, anywhere in the euro area;
• any merchant anywhere in the euro area can have as an acquirer any bank in the euro area; and
• processors, infrastructure providers, clearing and settlement mechanisms located anywhere in the euro area can deal with any bank, any merchant and any transaction in the euro area.
“These elements are all available now in a national context but within a few years they should be available within a European context. It is all about choice – for the consumer to use the card scheme he wants to use, and for the retailer to accept the card scheme he wants to accept, and to choose the acquiring bank he wants,” Ruttenberg said.
The basis for SEPA for cards includes the SEPA Cards Framework (SCF), the November 2006 Eurosystem SEPA for Cards report, the Payment Services Directive (PSD), the decision by the European Union’s (EU) Directorate General for Competition on interchange fees and the European Payment Council’s standardisation work between 2008 and 2010. On these foundations, he said, the industry needs to build its value propositions.
“Relating to the SEPA Cards Framework, three choices were given by the banking community itself on how to become SEPA-compliant. The options included the replacement by international card schemes, the expansion of national card schemes to Europe or to co-brand with other card schemes, most likely international ones. This was the reason for the November 2006 Eurosystem report. We saw that there was a risk of massive replacement of national card schemes by international ones, or people sticking with the co-branding solution, with the effect that nothing would change within SEPA. That cannot be the case.”
He said that there is no desire among regulators for the elimination of “highly efficient and low-cost national card schemes. Is this what we wanted when we launched the SEPA initiative? The answer is no.”
Tied to this is the issue of control of Europe’s payments market. “We have the very powerful US brands Visa and MasterCard; we have China UnionPay becoming very active in the rest of the world, and JCB also. But who is setting the standards in Europe for cards? Who is setting the fees? Where will the European data be processed? And in the end, who controls the scheme and everything within it? Of course, it’s all about governance and control so another scheme needs to be legally based in Europe and operated under EU law. Data should be processed in line with EU data privacy regulations. Personal data and how it processed inside and outside Europe is a very important political issue.”
Ruttenberg said that, following the publication of the Eurosystem report: “It became clear to us at Eurosystem that a lot of banks were thinking about giving up the national card schemes without thinking about the alternative. Of course these are political questions too, which are relevant for all market players as the answers will influence what happens in Europe’s card markets. There’s a direct impact on choice for consumers, retailers, banks and infrastructures if we don’t have answers to these questions.”
However, Ruttenberg said that the ECB was not being discriminatory towards Visa and MasterCard.
“Europe needs Visa and MasterCard, because they both provide a pan-European service for card payments,” he said. “We welcome the adoption of SEPA by both companies. But they are only two, and two may be not enough if there is to be a sufficient level of competition in the market.”
To this end, the Eurosystem had urged the establishment of an alternative debit scheme, but given that the first SEPA implementation deadline is now fewer than six months away, Ruttenberg admitted, the chances of a new European card scheme being up and running by the 1 January deadline was “mission impossible”.
“There is a need for the emergence of a European card scheme, or maybe more than one. Strategic thinking is required now, because setting up a new card scheme is a long-term project. The Eurosystem is neutral and supports all credible alternatives.
”We think a European scheme should be understood to be a debit card scheme covering the 13 euro area countries, but wider coverage to the 27 EU countries is to be welcomed. Europe is a debit card continent. Another debit scheme is needed with reach outside the EU, so co-branding is not considered as necessary. But if there’s an initiative which would like to offer global reach as a scheme itself, why not?”
Ruttenberg said that there had been misunderstandings about the Eurosystem’s view of co-branding. “We have never been against co-branding but a few years ago it seemed like it was viewed as the magic solution for SEPA compliance, which would result in a mini-SEPA. Our concern was that everyone would want to co-brand – if that were to happen, nothing fundamental changes in the system,” he said.
“Co-branding helps current national card schemes considerably. It will achieve European reach, and co-branding provides a way to become SEPA-compliant from January 2008 onwards. It would also give the banking industry and other players enough time to come up with an alternative European debit scheme. In that way, we are not against co-branding, but we are against the status quo approach which prevents markets from moving forward.”
Ruttenberg said that there were other concerns. “It cannot be the case that current national debit card schemes are rolling out their systems to other countries, when their own national market is fully protected by some sort of pre-assigned authority for the national card scheme. Another issue is that by the end of 2010 cards limited to national use will have to be phased out.”
Interchange fees have been a contentious issue for all players in the card payment market, and Ruttenberg echoed calls by Visa and MasterCard for greater clarity. “It’s clear that the market needs clarity over what is allowed in interchange fees. Without that clarity, it’s very difficult to build up a business case for current or future card initiatives,” he said.
Ruttenberg said that another issue in need of clarification is whether three-party schemes such as American Express would be subject to the same SEPA compliance standards as the four-party Visa and MasterCard schemes. “The SCF and our report in November stated our belief that three-party schemes should comply with the SEPA requirements too. But there is some room for discussion. For example, why the need for separation of scheme and processing if you only have a pure three-party scheme? If the separation of scheme and processing is not mandatory for such a scheme, what about the level playing field expected for four-party schemes? It’s a matter for concern.”
This issue is also tied to standardisation across SEPA, he said. “SEPA compliance is also about standardisation, such as EMV, issuer to acquirer, and so on. In the end, one card should be able to be used everywhere in the euro area with one terminal, one acquirer and no locked-in solutions. What would it mean if a three-party scheme was not SEPA-compliant, and what would that mean for standardisation? Will there be different terminals at the POS for three-party schemes? That should not be the case. Standardisation is key for opening up the market.”
Ruttenberg warned that SEPA was not an excuse for banks to increase pricing levels or fees. “It will be very difficult to communicate to the end users – the consumers – that SEPA will be more expensive if the service has not changed. It cannot be used as an excuse to increase price levels without any significant improvement in service. At the moment the Eurosystem is looking at the possibility of monitoring prices in the cards market and interchange fees, to understand what will happen in the next couple of years.”
Ruttenberg concluded: “Banks and payment networks are in a changing market, which enforces action by all market players – the status quo is no longer an option any more.”