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SEPAthe current trendsin the retail payment

system developments in the EU

Paweł ŁysakowskiHead of Division

Payment Systems DepartmentNational Bank of Poland

(Source: ECB&EPC)

Warsaw, 5-6 October 2006

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WHAT IS SEPA?

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Single

Euro

Payments

Area

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• The creation of the euro is a political decision. It is a milestone in the European integration

• The creation of the Single Euro Payment Area contributes to this historic event

• The SEPA is primarily an issue for the euro area but impacts in Central and Eastern Europe:

-Banking groups;-Entry in euro area

Introduction

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SEPA will be the area where citizens, companies and other economic actors

will be able to make and receive payments in euros, within Europe, whether between or within national boundaries under the same basic conditions, rights and obligations,

regardless of their location.

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Within the SEPA customers will be able to makepayments throughout the whole euro area using a single payment account and a single card (as they do within their own country)

The Eurosystem’s way of thinking

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No price difference anymore betweendomestic and cross-border payments for cards (since July 2002) and for STP credittransfers up to EUR 12,500 (since July 2003)

EC Regulation 2560/2001- „kick off”

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From Regulation to a real SEPA

Efficientpan-Europeaninfrastructure

Profit margin

Processingcosts

Profit margin

Processingcosts

Loss

Processingcosts

Profit margin

Processingcosts

Transparency &

Competition

“

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6.2m4.5mPOS

326k238kATMs

73bn*50bnElectronic transactions

18+14+Card Schemes

20+10ACH Schemes

9k7-8kBanks

25m17mCorporates

470m310mPopulation

2912 euro

Today Tomorrow

Euro-Area EU-25 EEA

• Reduced complexity, improved efficiency• Cross-border complexity and risk

• Harmonisation and consolidation• Different country implementations

• Improved interoperability• No interoperability of national schemes

• Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws

• Different schemes, experiences, standards, consumer protection laws

• Common solutions with additional optional services• National / local solutions

Tomorrow – Harmonised SEPAToday – Different Country Implementations

Euro 01/01/07

* Not all euro transactions

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•The SEPA will eliminate national barriers•The SEPA will focus on the euro area•The SEPA will be future oriented•The SEPA will be user-friendly•The SEPA will require a communication strategy•The SEPA will also benefit banks

General objectives

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• Fewer banking relationships • Single harmonised EU-wide

processes• One common platform• Same remittance data

structure

• Each country entered requires separate banking relationships

• No common processes• Each country requires

different payments platforms• Remittance data structure per

country

Few to ManyRelationships

Many to ManyRelationships

Banking Relationships

Country

Tomorrow SEPA

Today pre-SEPA (2006)

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SEPA Product Plan• New Products &

Services• Go to Market Strategy

SEPA Delivery Plan• Operations Model• IT Platforms/ Delivery Channels• Communications Plan

SEPA Strategy andPropositions Development

• SEPA Impacts Assessment• Strengths & Weaknesses• Opportunities & Threats• Target Markets, Segmentation• Customer Propositions

SEPA Business Case & Benefits

• Revenue Drivers• Cost DriversSEPA Product Plan

• New Products & Services

• Go to Market Strategy

SEPA Delivery Plan• Operations Model• IT Platforms/ Delivery Channels• Communications Plan

SEPA Strategy andPropositions Development

• SEPA Impacts Assessment• Strengths & Weaknesses• Opportunities & Threats• Target Markets, Segmentation• Customer Propositions

SEPA Business Case & Benefits

• Revenue Drivers• Cost Drivers

Strategy

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Working methodsThe move to SEPA must be run as a project

SEPA can only succeed if all stakeholders share the same goals and agree on milestones within a common project plan

The banking industry is responsible for delivering the SEPA products

Users must be involvedPublic administrations are invited to lead by

exampleNational migration towards SEPA must be well-

organised

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The

Eur

opea

n C

entra

l Ban

k

The

Eur

opea

n P

aym

ents

Cou

ncil

The

Eur

opea

n C

omm

issi

on

Payment Services Directive

Requirements &Timelines

Business rules,standards & policies

The SEPA Initiative

Consumers, Merchants, Corporates, and Public Administrations

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EPC Plenary *

WG Electronic

Credit Transfers

WG Cards

WG Cash

WG Electronic

Direct Debit Payments

OITStandards

SupportGroup

LegalSupportGroup

EPC Co-ordination Committee**

* Decision Making Body** Process Decision Making Body§ Nominating and Governance Committee

NGC§ Audit

Secretariat

ROC: Roll Out Committee

European Payments Council

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Role for the ECB/Eurosystem

• For banks, SEPA is an opportunity, but it also involves costs. The role of public authorities is therefore to ensure that a bank-led process does not lose momentum

• ECB has also engaged direct dialogue with the end users in order to clarify their expectations.

• The ECB participates in the EPC working groups and in the EPC Plenary.

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Objectives: To be defined by public authorities (Eurosystem, European Commission)

Specifications: To be defined by the banks (EPC)

Migration: To be organised at national level with EuroArea monitoring (EPC, ECB)

The SEPA as a project

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ConsumerBodies

Merchants

Public Admins

CorporateAssociations

NationalGovernments

European Payments

Council

National Central Banks

NationalBanking

Associations

NA

TION

AL IM

PLE

ME

NTA

TION

EU LEVEL

DE

SIG

N &

MO

NITO

RIN

G

EuropeanCentralBank

European Commission

Legal Framework

ImplementationPlans

Monitoring SEPA design and

implementation

Design Schemes andFrameworks

Support for national implementation

SEPA Implementation Coordinating Bodies(Design and execution, national implementation and migration planning)

Banks

Stakeholders

Consumers Merchants Corporates Public Admins

ConsumerBodies

Merchants

Public Admins

CorporateAssociations

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Current status

Only future-oriented banks will benefit from the SEPA (”Lisbon agenda”)

customer bank interbanksystem bank customer

E-banking E-reconciliation

E-invoicing

AchievedStill to improve

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SEPA credit transfer

EPC has adopted a basic SEPA credit transfer with a 3 day settlement period

• EPC should consider adjusting the execution time for basic SEPA credit transfers to one banking day (D+1)

• A non-proprietary same-day settlement credit transfer should be available from 2008 for urgent customer payments

• Customer-to-bank and bank-to-customer standards should be developed incl. structured remittance information and a code for automatic reconciliation

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Originator Beneficiary

BeneficiaryBank

OriginatorBank

Clearing & Settlement

Mechanisms

1

5Credit

transfer instruction

Need to make a payment

2Credit the

beneficiary’s account

Debit originator’s account & send credit transfer

message

Forward credit transfer

message3 4

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SEPA Direct Debit

By 1 January 2008 the basic SEPA Direct Debit scheme will be fully operational

• EPC needs to complement the basic scheme with an option for business-to-business as well as with an option for mandate handling by debtor’s bank

• EPC needs to ensure reachability of all debtor banks in the euro area

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Debtor Creditor

Creditor Bank

DebtorBank

Clearing & Settlement

Mechanisms

1

3

4 4

5 Debit account

Mandate to pay

Pre-notification2

Collection, including

mandate data

Interbank message

Interbank message

Interbank message

Interbank message

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Client 1 Client 2

Principles for SEPA compliantClearing & Settlement Mechanisms (PE-ACH Model)

Bank 2Bank 1SEPA Credit transfers Rulebook

SEPA Direct debits Rulebook

End to End Standardsand Data-Elements

PRODUCT & SERVICE LAYER

SCHEME LAYER

INFRASTRUCTURE LAYER

EPC

EPC

BANKS+ CSM

CHOICE

COMPETITIVE

Core and Value AddedServices

COOPERATIVE

Scheme Management

Business Rules& Practices

Standards

BANKSCHOICE

CLIENTCHOICE

PROCESSORS NETWORKS

PARTLY COMPETITIVEPARTLY COOPERATIVE

COOPERATIVE

COMPETITIVE

SEPA-SchemeCompliant

ACH

Bilateral/ Multilateral/

Decentralised

Intra-groupPE-ACH Pure

Bilateral

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SEPA Card Payments

• By 1 January 2008: national technical and contractual provisions and business practices replaced by euro area ones, allowing interoperability; transparent, cost-based interchange fee methodology approved by the EC; fraud combat strategy

• By end 2010, two service layers: 1) domestic=euro area and 2) international

• Priority: standardisation work• Strategic positioning of national and international

card schemes

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Consumer Merchant

BankAcquirer

BankIssuer

PRODUCT & SERVICE LAYER

SCHEME LAYER

(NATIONALAND

INTER-NATIONALSCHEMES)

INFRASTRUCTURE LAYER

COMPETITIVE

COOPERATIVE

BANKSCHOICE

CUSTOMERCHOICE

BANKSCHOICE

COOPERATIVE

COMPETITIVE

COMPETITIVEINTERBANK PROCESSORS

COMMERCIAL PROCESSORS

INTERBANK NETWORKSCOMMERCIAL NETWORKS

NEW LEGAL FRAMEWORK

CARDS FRAMEWORK

and INTER-OPERABILITY

FOUR PARTY

THREE PARTY

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Outstanding issues for SEPA cards

Three options in the SCF:• Replacement of national schemes by international ones

(Visa and Mastercard)• National systems evolve (alliances, euro area

expansion)• Co-branding

International schemes will play a major role in the SEPA and this is positive.

However, there should be more brands competing at euroarea level; Visa + Mastercard might not be enough

Co-branding in the short term?

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The risks with co-branding

International

Domestic (national)

InternationalEuro Area

Domestic (national)

International

Domestic (euro area)

Traditionalmodel

Mini-SEPA Real SEPA

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The ECB/Eurosystem vision for SEPA cards

• Principles for interchange should be defined at EU level• Interchange fees (if any) should be determined by card

schemes at euro area level.• Acquiring should be entirely free at euro area level.

Cross-border limitations to be eliminated before 1/1/2008.

• Traditional limitations to the freedom of business between merchant and acquirer to be revisited (e.g. honor all cards, no price surcharge, …

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SEPA Retail Clearing & Settlement Infrastructure

• By 1 January 2008 retail payment infrastructures will process SEPA instruments in parallel to national instruments

• By end-2010 all euro area retail infrastructures will process SEPA instruments within the euro area (full interoperability)

• Consolidation

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Instruments, infrastructures and standards

• Full end-to-end standards are indispensable for automation of the payment process (STP)

• IBAN & BIC are necessary for short-term but EPC should aim for a long-term solution that is more user friendly

• Common best security practices are important and should be reflected in the payment instrument schemes

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Cash, cheques and other non-SEPA instruments

• The Single Euro Cash Area (SECA) will be achieved when cash handling has been harmonised e.g. regarding cash transportation, and basic functions performed by NCBs will be interchangeable

• Cheques and other non-SEPA instruments will not be used cross-border within the euro area and will ultimately disappear

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SEPA user expectations

• Consumers expect that they will be able to use their payment instruments anywhere in the euro area (and ideally also in the EU) as efficiently and at the same low-cost as in their own country. But they do not want any adjustment cost.

• merchants expect lower charges for cross-border card use and lifting of barriers to cross-border acquiring.

• corporates expect an automated end-to-end processing of payment information, including - where possible – the inclusion of electronic invoicing and automatic reconciliation.

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The SEPA is not a project to fix the cross-border problem (= “mini-SEPA”)

A double ambition- a fully integrated payment system for the Euro- Extensive modernisation (Lisbon agenda)

Summary

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Design & preparation

Implementation & deployment

Co-existence & gradual migration

Programme activities

2

1Design

Specification

Implementation

Pilots

National migration

Early adopters

Programme management, planning, communication, monitoring

Launch

Milestones

1. EPC instruments available to citizens

2. Critical mass migrated so SEPA is irreversible

201020092008200720062005

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q4Q3Q2Q1

We are here!

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Obstacles

• Lack of support by Governments/administrations

• Excessive ambition of the European legislator (payment institutions)

• Banks use the SEPA to solve national problems

• Lack of awareness/preparation from banks and users

• Adverse effects on some user segments

• Uneven degree of preparation at national level

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Conclusion

The Eurosystem is confident that a market-driven move to SEPA is the best solution for European citizens

SEPA is not an option. Should banks fail to deliver, public authorities could have to step in (regulation, setting up of infrastructure)

EPC / banking communities still have a lot to do