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September 22, 2008

SEPA faces uphill struggle

As the SEPA implementation process begins to take shape, the World Payments Report 2008 has identified potential challenges and urged all the players involved to adopt a common approach. Although credit transfers are already taking place, ambiguity still surrounds plans for direct debits and card payments.

By Verdict Staff

As the SEPA implementation process begins to take shape, the World Payments Report 2008 has identified potential challenges and urged all the players involved to adopt a common approach. Although credit transfers are already taking place, ambiguity still surrounds plans for direct debits and card payments. Truong Mellor reports.

While the SEPA initiative is certainly moving forward given the launch of the credit transfer facility in early 2008, and the proposed launch of the SEPA direct debit and business-to-business (B2B) transfer schemes by November 2009, the project still faces an uphill struggle. Notably, SEPA credit transfer volumes have remained relatively low, and the fact that corporates have been ambivalent at best regarding a wholesale migration of their payment instruments to new SEPA-compliant systems remains a thorn in the side of the initiative.

The recently published World Payments Report 2008 from Capgemini, in conjunction with EFMA and Royal Bank of Scotland (RBS), attempts to investigate recent developments in the global payments market, with a particular focus on Europe and the SEPA scheme. According to Simon Newstead, head of the financial institutions advisory group for global transaction services at RBS, the journey towards full implementation has begun, but there remain significant steps to take, namely the switch of all existing legacy credit transfers and direct debits onto a SEPA-compliant scheme as well as the comprehensive realisation of the SEPA Cards Framework (SCF).

“Looking at the credit transfer and the SEPA direct debit schemes, there are a number of practical issues that are still being explored to help the migration process,” Newstead explains, citing the initiative to help corporates move existing direct debit mandates across to the SEPA direct debit scheme without having to ask customers to approve fresh ones.

What is perhaps necessary for the full-scale implementation of the SEPA scheme to shift up a gear is a clearly defined end date to act as a catalyst for movement. Newstead concedes that it remains unclear who should be setting such a date or the potential timeframe involved, but agrees that it is something that is currently being discussed quite widely throughout the industry.

Naturally, a project that traverses the eurozone such as SEPA will see tensions arise between regional and national forces.

The EC-led Payment Services Directive (PSD) has been billed as a ‘maximum harmonisation’ initiative in order to enforce consistency between the member states, which must be written into national law by November 2009. However, there are around 20 separate points where individual countries have some leeway of interpretation when it comes to domestic execution, and the report stresses that these ‘transpositions’ may present a challenge for SEPA if they are not consistent with each other.

“We know there will be some differences because of the national derogations that were included in the text,” adds Newstead. “What is more of an ongoing discussion is that there are certain parts of the PSD where a degree of interpretation will be necessary. This is what the report highlights – the importance of a common approach being adopted across the EC and the various countries when drafting their legislation wherever there is something ambiguous in the original text.”

Interchange an uncertain issue

“Regarding interchange, the waters have not really cleared, despite the recent ruling by the European Competition Commission on MasterCard,” says Ian Rutland, head of business development at RBS Cards.

“Obviously MasterCard has appealed the decision, so the future remains uncertain. Globally, the pressure on interchange remains downwards, and retailers are certainly becoming more vocal about interchange levels.”

The report offers a case study of the Australian market following interchange regulation of 2003. Despite the likelihood of downward pressure being applied, the case of Australia demonstrates that both issuers and card schemes have sought to recoup the revenue lost through an increase in cardholder fees and interest rates – the same conclusion CI’s Australian survey reached (see CI 392).

A third scheme for Europe?

These issues are firmly intertwined with the viability of a third network scheme in Europe to rival MasterCard and Visa, as a large part of the business model would be funded through interchange revenue.

There are a number of schemes, such as the Euro Alliance of Payment Schemes (EAPS) and Monnet currently vying to position themselves as a third alternative, but the main challenge will initially be getting all the players on board, which would also involve writing off all the investment that has been channelled into domestic schemes thus far.

“We have compared the success of the different scheme business models – three-party and four-party,” says Christophe Vergne, vice-president of the Payments Centre of Excellence at Capgemini.

“If the wish of the regulator is to increase the universality as well as the volume of transactions, then this is mainly achieved through four-party models. However, there are many issues that still need to be overcome to make SEPA for cards a reality.”

Among other findings, the World Payments Report 2008 found that the non-cash payments market in Europe has continued to grow, with around 70 billion transactions taking place in 2006 across the 25 EU member states.

The report predicts double-digit annual growth in the overall volume of non-cash payments, as well as a continuing shift in the mix of instruments used.


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