The SEPA implementation scheme
to unify the European payments sector is now well under way
following the inception earlier this year of the EC’s Payment
Services Directive (PSD), which is intended to help establish a
legal structure for the European payments market, and the
publication of updated rulebooks relating to SEPA direct debits and
credit transfers. However, the 2007 World Payments Report, issued
by global business consultancy Capgemini, the European Financial
Management & Marketing Association and Netherlands bank ABN
AMRO, suggests that several key issues remain

Crucially, none of the eurozone countries expects to reach a
critical mass of SEPA payments by 2010, and several countries
pushing for a mini-SEPA whereby customers are offered one service
in their home market and another in the rest of the eurozone.
According to the report, overall success for achieving full SEPA
compliance and avoiding a mini-SEPA will depend on regulatory
incentives to attract essential first movers such as corporates and
the public sector to SEPA instruments.

Cards as payment method

The significance of cards in the attempt to boost growth in
non-cash payments is consistently rising. The volume of card
transactions as a percentage of non-cash payments is expected to
grow to 44 percent in 2012 from 34 percent in 2005, according to
the report. In order to facilitate more competition and further the
reach of cards as a method of payment across Europe, the European
Payment Council (EPC) has published the SEPA Cards Framework, which
supports EMV chip and PIN technology as the operational standard
across the EU. The report notes that, as of spring 2007, EMV
compliance for cards across Europe was at 42 percent, POS terminals
were at 47 percent and ATMs were at 61 percent.

One interesting recent development is that, while SEPA has been
trying to curb national schemes in order to foster greater card
acceptance across the eurozone, this has made conditions more
favourable for the existing market duopoly of Visa and MasterCard
with their pan-European presence. With their international reach,
they are currently the most able to comply with the SEPA Cards


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There are currently several initiatives aimed at presenting an
alternative to Visa and MasterCard, most notably the Euro Alliance
of Payment Schemes, an attempt to co-ordinate existing European
card schemes. The EC and the European Central Bank are pushing for
greater transparency as well as value for consumers in the debit
card sector, and have been supportive of attempts to create a third

 “Banks will need to review the option of a new European card
scheme as an alternative option to replace the existing national
schemes,” the report stated. “A paradoxical situation has appeared.
SEPA strives to make the payments system competitive and to change
the cards system to ensure that any card will be handled by any
terminal anywhere in Europe. But because SEPA calls for a
suppression of national schemes in order to spread card acceptance
throughout Europe, this creates conditions favourable to the
existing international card schemes with strong market position
through acquiring and issuing banks.

“For the moment, the international card schemes have a privileged
situation because, as they are the only ones with full
international reach, they can comply most easily with the SEPA
Cards Framework.”

Another crucial factor in the process of implementing SEPA is the
levels of cash use within the eurozone. In terms of replacing cash,
the main focus of the report was on the work of the EPC regarding
the progress of electronic and mobile payment methods. Several
cashless payment projects have recently grown beyond their initial
pilot schemes, such as the Barclaycard Oyster scheme in the UK.
However, these projects are all relatively confined by either
geography or applicable consumer sector, while the levels of cash
use across Europe are actually rising.

The report notes that as long as these methods of payments lack the
capacity to handle high volumes of transactions through a sizable
network with adequate security and merchant acceptance, cash will
continue to be the preferred method of payment within the EU.

As the predicted growth in non-cash transactions per inhabitant
rises due to a better environment for cards and direct debits, any
efforts from the banks to augment non-cash payments could
potentially reap great benefits, according to the report. Payment
institutions will not present a serious competitive threat to
Europe’s 20 largest banks, which are responsible for 45 percent of
Europe’s payment volume, for at least four years. But by 2012,
these banks will face serious challenges from corporates as well as
automated clearing houses, as their direct payment revenues begin
to drop. According to the report, this decrease will range from
anywhere between 38 and 62 percent.

However, this gives banks ample time to ramp up their efforts and
secure their current position. At present, they have been
repositioning their business models, moving towards a specialised
technology-driven processing system.

Battlefront for implementation

Where the battle for effective implementation will be tightly
fought is with corporations and the public sector, according to the
report. The public sector alone could potentially comprise 29
percent of the necessary volume for critical mass of credit
transfers and direct debits. If public administration volume were
combined with corporate payment volumes, the critical mass of SEPA
transactions could be met by 2010. The situation at present, in
where several states are looking to create a mini-SEPA, will be
costly for the banks, the report notes.

The report calls on regulators within the eurozone to take action
on decommissioning legacy payments. While migration plans propose
SEPA instruments as new means of payment, they do not propose to
replace legacy payments with SEPA instruments. Moreover, more than
half the national plans explicitly state that legacy instruments
will continue as long as the demand for them exists. Migration
plans show little commitment to decommissioning legacy payments,
and some countries even express doubts about the need for SEPA
direct debits.

The report also focuses on regulatory efforts made over the last
year. According to the report, the PSD is essentially a harmonised
legal framework designed to fortify the implementation of SEPA. Its
goal is to enhance competition by opening up markets and to ensure
a level playing field by harmonising divergent regulations across
the EU, such as providing clear pricing and other information to
customers. A strong emphasis has been placed on consumer protection
as well as market transparency for both users and providers. The
PSD is expected to be transposed into law by all 13 euro countries
by November 2009 at the latest.

However, the report notes that the majority of banks within the
eurozone have so far regarded the PSD with mixed feelings. This is
perhaps not surprising, as it can be viewed as both a help and a
hindrance for the banking industry. While it may help engender a
level playing field through a harmonised legal structure, it adds a
significant operating cost for some institutions and has therefore
been perceived as difficult. But despite the additional regulatory
complications it brings, the PSD is still an essential factor in
the implementation process.

The role of banks

One issue that also remains unclear is the changing role of banks
within Europe over the last few years, and how they will
effectively respond to the implementation process. The report
mentions the importance of strategic sourcing partnerships as the
industry heightens its focus on regulation and improved performance
in response to global pressures, but according to Mike Hampson,
head of financial institutions for transaction banking at ABN AMRO,
this does not mean that it will be necessary for institutions to
merge into ‘mega banks’ in an attempt to remain profitable

“There are a number of strategies banks can employ in order to
maximise their profitability,” he told CI. “Clearly, if they’re
large and they’ve got scale, they’ll be looking to grow that scale,
and they could use a strategy of insourcing, in addition to their
own business, in order to grow. Smaller banks could look at
partnerships and at various modes of outsourcing. By getting into
one of those partnerships, they could get access to that scale, and
that gives them a lower operating cost.”