One of the key parts of implementing
the Single Euro Payments Area (SEPA) – unbundling – is being
implemented as the European guidelines intended, although some of
the consequences may be different from what was first envisioned,
writes Jane Cooper
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Unbundling, where the card acceptance brand or
scheme governance is separated from the processing, authorisation,
clearing and settlement of transactions, has been occurring across
Europe. The aim of unbundling is to increase transparency so that
the pricing of the different elements were separated out. Through
this separation, the vision was to increase competition and
encourage other players to be able to compete for parts of the
services that were traditionally bundled up into one package.
Although the scheme governance has been
unbundled from the processing, a card acceptance brand can still
provide the processing as an additional service, but it cannot be
mandatory and the client has to be free to choose to go to another
provider. For example, a payment on Portugal’s Multibanco network
could be accepted under the terms of its brand and scheme
governance, but the actual transaction could be processed using a
different infrastructure, such as Visa Europe’s, for example. With
SEPA should come standardisation and interoperability so that, in
theory at least, a player would be able to compete for the same
business regardless of the domestic market as the countries in
Europe are all viewed at the same level, as a single market.
In comments to Cards International,
Gerard Hartsink, chair of the European Payments Council (EPC),
notes: “The separation of schemes from processing entities has many
dimensions, comprising operational, informational, financial or
accounting, commercial and legal separation.”
He goes on to outline the guidelines laid out
by the EPC in the SEPA Cards Framework (SCF): “A SCF compliant card
scheme is a scheme that allows unbundling of functions whilst
applying the same pricing per card product to national euro and
SEPA transactions of the same type. Separation of SEPA card
schemes’ brand governance and management from the operations that
have to be performed by service providers and infrastructures under
these SEPA schemes is mandatory. A card scheme may offer additional
services – e.g. processing services – but their usage cannot be
mandated. Scheme rules may not require as a condition of
participation that any particular provider of processing services –
e.g. network management, authorisation switching, clearing,
settlement – be used.”
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By GlobalDataLuke Olbrich, group head of debit at
MasterCard Worldwide, says that in the past if a player wanted to
sign up to accept a national debit scheme in Europe they were also
forced to sign up for the transactions to be routed through that
scheme’s processing network. “That is no longer the case,” says
Olbrich, who adds that unbundling is now a reality in the European
payments landscape. In 2009 when the guidelines regarding
unbundling were revised, discussions about unbundling were really
theoretical, but now they are a reality as many national debit
schemes have adjusted their strategy so that they are compliant
with the SEPA Cards Framework.
The pace of change
There are differences of opinion about whether
the unbundling has been progressing at the same pace as was first
intended. When asked how far the unbundling has been implemented,
Hartsink stated: “The EPC received letters from individual schemes
that they are, or are planning, to become SCF compliant. We cannot
confirm if all the card schemes are already fully SCF
compliant.”
A Visa Europe spokesperson says that
unbundling has not been easy: “European schemes provide freedom of
processor choice according to their operating regulations. However,
in many markets the reality is that it is still very difficult for
banks to disengage from the incumbent national processor. Many
domestic features and requirements are often hardcoded through the
transaction chain and the cost and effort taken to disentangle from
old systems can be quite high. Nevertheless, an increasing number
of multi-country banks are looking for solutions that can serve
their business in all markets where they operate.”
Norbert Bielefeld, deputy director of payment
eSystems for the European Savings Banks Group (ESBG) comments:
“Probably the progress has been less substantial than some could
have hoped. There are several reasons,” he says, adding that
because of competition legislation the EPC is limited in its role,
as it cannot enforce the guidelines. Bielefeld also comments,
however, that in the future he foresees that there will be greater
unbundling, which will come from market forces.
The enforcement of the guidelines or the
oversight would have to be done by a body from outside the payments
industry because if the EPC intervened with the actions of some of
the payments companies in Europe, it could be accused of acting in
a way that it anti-competitive. The oversight would have to be by
another body – such as a regulator – from outside the industry. For
now the industry is relying on each of the players to comply with
what has been laid out in the SEPA Cards Framework and their own
benchmarking of whether their practices complies with the
standards. This means that many players could drag their heels over
the implementation of the guidelines, while others have seen what
is required of them and have taken early action to get ahead of the
field in the new SEPA environment.
Feeling the effects
Some of the effects of unbundling have already
taken hold. For example Eufiserv, the European ATM network,
responded to the guidelines of the SCF and separated out its
processing business and created Trionis, which is now a separate
interbank processing network that is separate from the Eufiserv ATM
acceptance network.
There were fears that the unbundling would
mean that many domestic debit schemes would die off, but there are
some schemes that have successfully unbundled – such as Multibanco
– and remain in Europe as standalone businesses that are now in a
position to seek business beyond their domestic borders.
There are, however, national schemes – such as
the Netherlands’ PIN network – that are being phased out and
replaced with the SEPA-compliant Maestro scheme.
Olbrich points out that in terms of
unbundling, MasterCard has always unbundled and separated out its
scheme governance from the processing of the transactions so that
its customers had the choice of how to route the transactions.
However, MasterCard has stipulated that there is at least the
capability of processing on the MasterCard network as a fall-back
option, just in case the other processor was unable to settle a
payment that came from a card issued in Bora Bora, for example.
Visa Europe also says that unbundling is a
reality for its customers. “Members of Visa Europe are entirely
free to choose their network and processor for domestic and
intra-European transactions. Visa processes 40% of all European
Visa transactions. The remainder is processed by various domestic
or international commercial processors. Of course it is our
ambition to grow our processing business, leveraging the €500m
($706m) investment that we have made in our own bespoke European
switching and clearing and settlement platform. However, the market
is competitive and it is up to the banks to pick their processors
of choice.”
One of the consequences of the unbundling in
the European payments market is that it has opened up more
processing opportunities to Visa Europe and MasterCard. This
perhaps was not one of the intentions of the SEPA vision, and there
have been fears that rather than creating competition with numerous
new players, the market could be dominated by the two international
payment brands.
“Across Europe we are doing the minority of
processing,” says MasterCard’s Olbrich, who adds that MasterCard’s
dominance in this space is a common misconception that has been
driven by the fears of national schemes, which were concerned they
would lose out as a result of unbundling. “We are the minority of
transactions in Europe,” says Olbrich.
There were fears that unbundling would kill
off national debit schemes, and retailers feared that they would no
longer have access to the low-cost utility of the national schemes.
Olbrich argues, however, that many retailers are happy to be free
of the agreements that locked them into both an acceptance scheme
and a processor. For large retailers that have operations across
Europe, the SEPA environment is particularly advantageous as they
can sign up to the Maestro infrastructure which is pan-European and
means they can use the same network for both domestic and
cross-border transactions. “Retailers are driving the SEPA
business,” says Olbrich, who argues that it is the retailers who
are opting for Maestro. This is not just in terms of acquiring and
processing, but also on the issuing side as SEPA has also enabled
non-banks to issue credit cards, and retailers are increasingly
choosing to issue on the MasterCard network, comments Olbrich.
When asked who the winners of the unbundling
in Europe are, Bielefeld said: “In the short term, probably the
processors.” This may not be one of the intended consequences of
the SEPA guidelines as the main beneficiaries of the SEPA vision
were perhaps meant to be retailers or consumers.
Perhaps another unintended consequence of
European intervention in the payments industry is that prices may
have actually gone up. As part of another aspect of unbundling in
Europe, Visa and MasterCard have pledged to unbundle all the
pricing elements so that acquirers have to be transparent in all
the parts that make up the merchant service charge (MSC).
Visa and MasterCard were committed to make
these changes from January 2011 so that all the costs – of card
scheme, card programme, card type – were unbundled and the
acquirers no longer blended the MSC into a single price that also
covered the acquiring service, marketing and supply of card
acceptance equipment.
One of the consequences of this, comments Luke
Purser, a senior consultant at PSE Consulting, is that now
acquirers are beginning to pass on more fees to the merchants when
they may have taken a loss on certain products. “Historically the
acquirers would have absorbed those fees,” comments Purser. “It is
possible that rates have actually gone up,” he adds.
While there may be more transparency in how
the fees are arrived at, this does not necessarily mean that
merchants have the freedom to move acquirers. Purser notes that it
is only at the top end of the market – the largest retailers – that
are in a position to negotiate with different acquirers for better
rates for each of the elements of the merchant service charge,
which have now been broken down into different parts. In the case
of the average small and medium enterprise merchant, however, “they
want cheap prices, but they want one acquiring package,” says
Purser. He notes that despite the transparency and options that
unbundling has brought about, it is not necessarily practical for
merchants to be able to make use of the choices that are now
available to them.
It is still unknown what the long-term
consequences of unbundling will be and whether the SEPA vision will
be very different from the realities on the ground. The Visa Europe
spokesperson comments: “Legal separation of scheme management and
processing does not contribute to a truly competitive processing
market. In some markets there is still a long way to go before
truly open competition will be a reality. It’s a slow process but
in the longer run, banks will opt for what makes economic and
business sense.”
How the competitive landscape will develop is
still open for debate, and whether the unbundling has created
opportunities for a proliferation of players to enter the market,
or whether more pan-European consolidation will be inevitable and
the European payments market will be dominated by a small number of
players.
