The Financial Services Club's Blog

After the PSD and SEPA, has anything changed?

Last year, we performed a major survey in anticipation of the implementation of the PSD and SEPA Direct Debits, to see how the world viewed these areas.

The research received over 350 responses from financial professionals worldwide, and found a general cynicism about the effectiveness of the PSD in particular, due to inconsistencies in interpretation due to legal options and opt-outs.

The survey for 2010 is now live and looks at the world after PSD and SEPA:

• Are they a success or failure?
• What innovations have these changes introduced?
• Who are the new competitors in payments processing?
• Has anything changed?

We would love to have your participation in this year’s survey.

Click here to take survey

By taking the survey – it’s just over 20 multiple choice questions and should take no more than 10 minutes to complete – you get the chance to WIN a free one year membership of the Financial Services Club.

You also will get a copy of the full results of the survey, which are due for release in early October, so please join in.

Click here to take survey

What happens to SEPA, Chi-x etc if the euro fails?

There’s the classic old joke about the European dream being a place where the police are English, the chefs are Italian, the car mechanics are German, the lovers are French and the bankers are all Swiss. The nightmare is that it is a place where the police are German, the chefs are English, the car mechanics are French, the lovers are Swiss and the bankers are Italians.

It seems that the nightmare is coming true, although the basket case is Greece and the bankers are German.

Last week’s surprising comments from German Chancellor Angela Merkel that “the euro is in danger” and “if the euro fails, Europe fails” sent shudders across the world’s markets, and probably made Brussels shake with rage.

But the Germans are shaking with rage. After Nicolas Sarkozy was rumoured to threaten Merkel with France’s withdrawal from the euro if she didn’t step up to the plate and support a Greek bailout, Germany’s citizens have been demonstrating their rage by printing deutsche marks whilst the national newspaper, Bild, is stirring anger towards the EU and the Greeks in particular with headlines such as:

• "How much more do we have to pump into this country?" April 26th
• "Why are we paying the luxury pensions of the Greeks?" April 27th
• "Greeks ready to cut back? They would rather strike!" April 28th

As I talk to German colleagues, they refer to Greece as the Golden Fleece and that they aren’t paying bills in Greek restaurants because they’ve prepaid to 2020.

All of this puts a huge strain on the European Union, in its fragile 53rd year of unity, particularly as Spain, Italy and Portugal are considered to be on a par with Greece by many, forming a Southern European Union called the PIGS [Portugal, Italy, Greece and Spain].

It raises a key question in my mind, and I’m sure all of the bankers I deal with: if the euro fails, what happens to the monetary union of banks, the Financial Services Action Plan and all those bank and insurance directives like Solvency II, MiFID and the PSD?

What happens to Chi-X, SEPA, the EBA and the rest?

In order to answer this question, you have to look at two key areas. First, is the economic and monetary union (EMU) broken? Second, if it is, do we throw away the eighteen years of change introduced by the agreement to launch the euro when the Maastricht Treaty was signed in February 1992?

Let’s take the first question: is the EMU broken?

We asked this question in 2005, when the French and Dutch threw out the EU Treaty. Answer: it is political union that they were rejecting, not economic union. Note: even with their rejection, and the Irish no vote, the Treaty became the Lisbon Treaty in 2010 regardless of such resistance. In other words, in the interests of the long-term vision of Europe, Europe wins.

Equally, America has taken years to gain its United status, starting with a nation of disparate states that had far less history than those of Europe.  Their Union was easier in comparison, and that still took years, so Europe’s union will take time and will face many more tests.

But this is the greatest test so far.

The size of this test should not be underestimated as it is the first time that we are seeing an economic union, resulting in a cascading effect upon money and politics. Historically, the tests for Europe have been mainly about how much power is ceded to Brussels. This test is showing the inter-relationship between economies and Germany’s anguish is that if they are to keep the vision of Europe in harmony, then they have to pay for it.

Therefore, returning to the rejection of the European constitution, that was a political rejection and when a country has an economic crisis, the monetary union means that other nations pay and, as a result, that political will is tested when one nation's tax dollars are taken to pay for another nation's debts.

That is why this challenge is so much greater than any before, because it is testing the political will of citizens, not just their ability to trade and compete.

The core issue though, is that it is not just the Greek economy and Greece that would leave the Union if they were allowed to fail.  It is the Union.

Should the Greek economy fail to honour their government bonds due to being economically bankrupt, the ratings agencies and banks would downgrade Spain, Portugal and Italy, and there would be a spiral effect. This means the European Union breaks apart.

That is why the Greek failure option is unpalatable ... but is the alternative palatable?

Why do we need a European Union?

Answer: Europe needs to be a Union to maintain its drive to be a regional superpower, and competitive commercially and economically with China and America. There’s the rub. If Europe fails, then the UK, Germany and France fail, as parity to compete internationally and intraregion becomes far more difficult.

This is why Greece needs the bailout and why Germans are paying.

It does not help Angela Merkel maintain her status or power hold in Germany – her popularity is sinking faster than the Titanic – but if Greece fails, it is felt that Europe may fail too. And that is not an option seen to be agreeable today.

Also, nations have been bailed out already.

Two years ago, Spanish banks received over €50 billion worth of ‘aid’, in the form of mortgage-backed securities with the European Central Bank (ECB), when they faced a property meltdown.

Did the Germans wail out about that bail out?

No.

Why?

Because it wasn’t on the front page of the Bild.

That bail out was smaller and less obvious, so no-one really noticed.

The Greek bailout is a bit bigger – €110 billion – admittedly, but it is supported by the IMF and is necessary for Europe’s future. ‘nuff said, although if you want to know more, Robert J Samuelson in the Washington Post provides a particularly good overview of why Europe needs to support Greece.

My summation is that Europe will survive this crisis, the euro will stay and the currently ridiculous pricing of US$1.24 to the euro will reverse within the next month or so, as forecasted by most economists.

But let’s look at the worst case scenario: what do we do if the euro does fail? Does it mean we unravel all we’ve done to date?

This is the second and, in some ways, more important question: is there a backup plan?

OK, if the Eurozone breaks apart, then it matters ... but it will not throw away all that has been built to date.

The banks will still want to use cross-border instruments that work. They will just bring back a margin to represent those cross-border movements whilst maintaining the efficiency of the infrastructure that has been built.

As Werner Steinmuller, Head of Global Transaction Services of Deutsche Bank, stated when we researched the Payment Services Directive (PSD) and the Single Euro Payments Area (SEPA) last year:

Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.

In other words, the SEPA process has forced the banks to build new infrastructure, new systems and new efficiencies in transaction processing. That will stay.  It does not go away if the euro goes away, as the new infrastructure is designed to handle efficient transactions, not euro payments.

So if we look at SEPA Credit Transfers and Direct Debits, the Euro Banking Association (EBA) and STEP2 ... it will all stay. The EBA will be a private consortium to operate efficient systems, rather than a government initiative to create efficiency, and it will stay. There will be a charge for this, and a charge that could provide a substantial return to the banks that created this infrastructure, but it will not go away.

The same will be true for Chi-X, and the capabilities electronic trading platforms have introduced into the European equities markets. Sure, some countries may want to block and reverse policies in these areas – Spain? – but the process of regional investing is unstoppable now. Goldmans, Merrill, BarCap and co, won’t want to see this go away, so it will remain.

Bottom-line: the efficiency of European payments and investing is in the interest of banks, corporates and institutions today, not just governments and policymakers.

So, if the euro fails, my answer is that the all the investment made by the financial markets in efficient systems will stay.

It will just be at a profit rather than a regulation.

Want to know the latest on SEPA?

If you're wondering what's happening with SEPA (the Single Euro Payments Area) then this interview with Gilbert Lichter, Secretary General of the Euro Banking Association (EBA) and CEO of EBA Clearing, provides a good overview of the latest and greatest:

Gilbert Lichter from Chris Skinner on Vimeo.

The interview took place after our recent FSClub meeting with Gilbert.

Voice Commerce fail in bid for RBS WorldPay (UPDATE)

Just had a fascinating chat with Nick Ogden, founder and CEO of Voice Commerce and previously RBS WorldPay which is now part of RBS Global Merchant Services (GMS). As mentioned last week, Voice Commerce is one of the organisations bidding for RBS GMS, now that it is up for sale again, and this week was told that their bid has been rejected.

Here’s the detail.

It was a fully funded cash bid, comprising a group of investors and a major UK listed entity. The bid was “north of £1 billion and south of the £2 billion mark”.

The bid would have made RBS GMS a UK-listed company, with Voice Commerce merged into it.

In addition to the cash, RBS would have retained an equity stake shareholding in the new business, which would have moved RBS into new markets with new technology. This was a particular focal point for the bid, as Voice Commerce would have integrated voice biometric authentication into the RBS GMS merchant processing epayments business.

It was also a stand-alone bid, rather than being some group of partners or partnerships. Apparently, the seventeen expressions of interest included many consortia of Private Equity (PE) and Venture Capital (VC) firms.

The Voice Commerce bid received “full marks for management and technology, but was too low and our aspirations are higher” according to a letter Nick received from UBS, the bank advising on the M&A process to RBS.

So what happens next?

UBS is narrowing bidders to around three or four for a second round of evaluation. These bidders will then enter a due diligence process, with the view to completing the final round of bidding within the next eight weeks or so.

Of particular note is Nick’s valuation of the business, bearing in mind that he founded WorldPay and sold it to RBS in 2002.  Nick therefore has a “good understanding of that business worldwide and it will be interesting to see the final valuations and whether they have that same level of understanding.”

Meanwhile, Voice Commerce is looking elsewhere for acquisitive growth with a focal point around distribution. That’s what they wanted from RBS GMS – the 500,000 merchants and their customers – and could lead Nick to look at companies such as Heartland.

Nick would only say they are looking around America, Asia and the Middle East as, having received their PSD approvals in the EU, he wants to take their PSD and Visa authorisation overseas as a critical differentiation point. Equally, he believes that “the emergence of IP-based POS means significant changes will occur with merchant acquiring” over the next few years, and Voice Commerce is ideally positioned to capitalise upon this.

Watch that space, and also the RBS GMS deal. This could get interesting.

UPDATE

From the Financial Times:

Moneris enters the fray for RBS unit
By Martin Arnold and Patrick Jenkins
Published: April 15 2010 23:19 | Last updated: April 15 2010 23:19

Moneris Solutions, the Canadian card payments company, is a surprise bidder for Royal Bank of Scotland’s Global Merchant Services division, as the auction of the business moves into its final stages.

The £2.5bn ($3.9bn) operation, centred on the WorldPay payments business and incorporating the Streamline cards operation that dominates the UK market, is one of the assets that RBS must sell under the terms of a European Commission state aid ruling. The government has a shareholding of 70 per cent in RBS after bailing it out last year.

Toronto-based Moneris, a joint venture between Royal Bank of Canada and Bank of Montreal, provides credit card payment processing to more than 350,000 North American merchants.

RBS plans to invite a small group to join Moneris in the second round of bidding for Global Merchant Services, out of the more than a dozen bids it received earlier this month.

The other bidders that are moving into the second round include CVC Capital Partners, the UK-based private equity group, and a consortium of US private equity groups Advent International and Bain Capital.

Talks were still being held on Thursday night by RBS on whether to include others in the final round, such as a consortium of Silver Lake, the technology focused US private equity group, and Tsys, a rival US payment services group. Other private equity bidders thought to still be in the fray include TPG, Carlyle and Permira. Groups no longer in the running include JPMorgan Chase Paymentech, Atos Origin of France and Apax Partners, the UK private equity group.

Advent believes it may have an edge as it bought 51 per cent of the credit card processing unit of Fifth Third Bank a year ago in a $2bn (£1.3bn) deal. The US arm of Global Merchant Services could be combined with Fifth Third’s business.

Moneris has held talks about joining forces with one of the private equity group bidders, but without reaching an agreement.

Global Merchant Services generated operating profits of £249m last year. RBS has agreed to provide vendor financing on the deal alongside Goldman Sachs, people close to the deal said.

RBS and the bidders all either declined to comment or could not be reached.

A new PSD-approved Payments Institution starts business

Nick Ogden, CEO and founder of Voice Commerce (he previously created WorldPay, the RBS payments unit, back in 1993 and sold it to them in 2002*), recently spoke at the FSClub about using voice biometrics as part of authentication in mobile financial transactions.

Who are Voice Commerce Group?  Best to read what they say about themselves:

“The Voice Commerce Group was founded upon a simple principle ‘whenever we speak we establish a position of trust’. Consumers use their voices to communicate decisions; perhaps to instruct, to agree or to buy something. This natural process already happens automatically billions of times every day and the Voice Commerce Group has taken this natural capability and automated the process through its innovation in voice signatures.

“Voice signatures allow consumers to use their own unique voice to sign and authorise transactions, and their patented technology now lies behind worldwide standards for mobile trust. Using voice signatures guarantees transactional security when making a payment and protects users against personal data compromise. Voice signatures are complex devices that combine the use of voice biometrics with transactional history, trends and patterns to create a highly secure, unique authorisation environment. The system can deliver two factor identity authentications virtually anywhere. Authorisation failures, suspected imposters or potential fraudsters can be controlled and managed and transactions re-qualified using automated outbound IVR. This not only improves customer service but reduces the risk of fraud and identity theft.”

Why am I giving them a plug here?

Because, during the evening at the FSClub, Nick mentioned that Voice Commerce were one of the first Payments Institutions (PI) to register with the FSA, after the PSD was transposed last November and were about to announce that they are also one of the first PIs to be accepted as a Principal Member of Visa Europe.

The announcement was released this morning, so now is the time to talk about it.

What does being a Principal Member of Visa Europe mean?

The membership means Voice Commerce can start providing its own payment services to businesses including acquiring payment transactions.

Following the launch of the PSD in November 2009, Visa Europe confirmed that Payment Service Providers such as Voice Commerce, as defined in the PSD, would be eligible to apply to become members of Visa Europe. Subject to stringent risk management requirements and being capable of complying with Visa Europe’s operating regulations, the Voice Commerce application was approved by Visa Europe at the Board of Directors Meeting in February 2010.

Nick comments that: “as a Payment Institution, Voice Commerce is regulated in exactly the same way as banks in relation to capital adequacy and regulatory responsibilities for payment services. Being granted Visa membership means we can further compete on an equal footing across Europe with our banking peers. Our next move will be to grow the business and bring fresh creativity to the industry using innovative payment services, including voice biometrics to authorise payments.”

Voice Commerce also describe themselves as being “authorised by (the) UK Financial services Authority under the European Commission Payment Service Directive, and regulated in the provision of e-money services”. This means that they have to “maintain appropriate financial capital adequacy”.

Interesting.

Very interesting.

Particularly interesting as the firm that Nick created, WorldPay, is now up for sale with a price tag of £3 billion ($4.5 billion).

Bidders include private equity firms Advent International Corp; TPG Inc.; Warburg Pincus LLC; Kohlberg, Kravis Roberts & Co; Permira; CVC Capital Partners, Blackstone Group LLP and The Carlyle Group LLP.   Tsys, Atos, ChasePaymentTech and First Data are rumoured to be in there .. and IT firm Voice Commerce Group, whose chairman and chief executive officer is Nick Ogden, the founder of Worldpay, is making a bid to get them back too!

From Lafferty Card News:

“A skilled management team has already been assembled as part of the acquisition offer that will include the existing team at Voice Commerce. The team has appointed Montrose Partners, specialist financial advisors, to assist in their bid ... the value of Ogden’s bid for RBS WorldPay has still to decided, but he said Voice Commerce has substantial support from a number of private equity firms. When asked when a deal might be completed, he said: The expectation from UBS, who are handling the deal, is hopefully by August 2010. The process of due diligence is now taking place while they attain the position and value of the company. Following this period, UBS are expected to produce a sales memorandum in January 2010. Voice Commerce then predicts an 18-month separation process of the business, at which point the full extent of the deal will become clear.”

Towards Currency Union

I've been studying developments in the Middle East lately, and particularly the countries of the Gulf Cooperation Council (GCC). The GCC has been running since 1981 and comprises six core states of the Persia Gulf Region: the UAE, Saudi Arabia, Kuwait, Bahrain, Oman and Qatar.

The GCC is a bit like the EU, which formally established in 1957, in that its aims are to:

• create similar regulations in areas such as the economy, finance, trade, customs, tourism, legislation, and administration;
• foster scientific and technical progress in key areas of industry, mining, agriculture, water and animal resources;
• establish scientific research centres;
• set up joint ventures;
• unify the military presence for the Peninsula Shield
• encourage cooperation of the private sector;
• strengthen ties between the peoples of the GCC; and
• create a common currency by 2010.

Ah, there’s the key one at the end there. A common currency.

I’ve been visiting the region regularly for about ten years now, and this currency has always been on the agenda. Now, after a decade, it’s still on the agenda, and that’s about it.

That’s surprising as the GCC is very closely harmonised already; unlike the EU where there has been a massively fragmented region of economies, cultures, languages and monetary policies.

So you would think it would be easy.

In particular, the GCC countries are all closely pegged to the US dollar and, apart from the UAE’s wild child Dubai, pretty stable economies.

So what’s holding it back?

Politics.

It is a political issue about harmonising currencies that is the gating factor to a GCC currency or an Arabic currency. On this later point, assuming the GCC succeed, there is a plan for a single currency for the 18 member countries of the Council of Arab Economic Unity. These include the six GCC states, plus Yemen, Egypt, Iraq, Lebanon, Libya, Sudan, Syria and a number of other countries.

What are the political issues?

Firstly, what to call the currency.

If you call it the riyal then it means that Saudi, Oman and Qatar wins, as the dirham is the currency of the UAE whilst the dinar is used in Kuwait and Bahrain.

This is why the region voted to call it the ‘khaleeji’, which means ‘of the Gulf’, although no-one refers to the khaleeji, they just talk about the ‘currency union’.

So there is no official currency name as yet.

I did discover some currency designs:

 

 

But these are fake as none of the bankers I met had seen these designs, and the fact its called dinar gets thrown out of court straight away ... as does the fact that half is in English rather than Arabic.

In fact, the only thing folks liked about these notes is the six flag logo, so that might stay.

Even if the region gets a currency name that all nations can agree upon, where will they headquarter the Gulf Central Bank?

As soon as it was chosen to be in Riyadh, the UAE walked out. Meanwhile, Oman had said it wouldn’t join the currency and Kuwait has issues due to being linked to a basket of currencies, rather than just the dollar.

Nevertheless, five nations have agreed to create a Gulf Monetary Council and move towards union by 2015 rather than 2010. GCC Secretary-General Abdulrahman Al-Attiyah has stated that the first meeting of the joint monetary council will take place at the end of this month, and that is considered to be an important milestone towards the monetary union.

Some say 2010 was just the start date towards union anyway.

All in all, like the EU efforts, the GCC has a long road ahead. At least they have the oil resources to motor along it.

This house believes that SEPA does matter ... or does it?

We had a great debate at the FSClub the other day, with the provocative title: “this house believes that SEPA (the Single Euro Payments Area) does matter”.

The evening was chaired by the more than capable Bob Lyddon, who coordinates the IBOS Association secretariat, and four panel members who ‘played’ parts in being proposes and opposer of the motion.

Proposing the motion were two leading European Proponents: Gilbert Lichter, CEO of the Euro Banking Association (EBA) Clearing Company that runs STEP2, a Pan-European ACH; and Fred Bär, Managing Director for Euro Services at Vocalink.

Opposing the motion were two devilish Brits, set up in the form of Paul Smee, Chief Executive of the UK Payments Council; and Simon Bailey, who is currently starring in 'The Phantom Of The Opera', at Her Majesty's Theatre where he plays the role of Raoul.

Pardon?

Whoops, sorry, it’s not that Simon Bailey. It’s Simon Bailey of Logica ... an easy mistake to make.

On the night, Bob kicked off the motion by making clear that there are four immutable facts about SEPA which were not up for debate. These are that there is no end-date set as of today (although I think one is coming); the Core and B2B SEPA Direct Debits schemes are in production; the fact that there is no requirement for central bank reporting for transactions under €50,000 is good for efficiency; and cross-border direct debit and credit transfer euro transactions must now cost the same as domestic transactions.

With those four foundation points, Bob then asked Gilbert to take the floor.

Gilbert gave a resoundingly balanced view, stating that the old days of cross-border margins and operations were a luxury. The way correspondent banks worked and the form filling required for cross-border payments were a big issue in inhibiting trade across Europe, and those days are now gone as European Commission Regulation 924/2009 makes it clear that every bank in Europe must now be reachable for SEPA Direct Debits.

As these changes will alter the behaviours of payments processors and payments users, innovations will follow, as innovation follows buying behaviours. By way of example, Gilbert cited Spain where SEPA payments have increased from 3.5% of transactions to 13.6% in the last quarter.

All of this means that SEPA does matter, because it is fundamentally changing European commerce and pushes banks to the management table.

Paul Smee responded with a worrying opening line that SEPA reminded him of the old Samuel Johnson saying that ‘a woman's preaching is like a dog's walking on his hind legs. It is not done well; but you are surprised to find it done at all’.

There was a sharp intake of breath as, in today’s politically correct world, Paul should really have substituted the word ‘dog’ for ‘bitch’ [editor: stop there!].

Paul’s comment was far more relevant to SEPA than the incorrectness of the statement however, in that if SEPA were that needed, then how come there haven’t been any SEPA street parties yet to celebrate. Again, I would claim that there have been a few ... but then SIBOS, EBA Days and IPS aren’t exactly street parties are they, as we all celebrate inside bars of the world but, there you go.

Paul continued by saying that the reason for the lack of celebrations is down to the fact that:

• SEPA is not critical and nor are payments. No-one wakes up thinking about how important any of this is, unless you abolish cheques;

• SEPA doesn’t matter because it has been a top-down process driven by politicians with no user involvement. The European Payments Council (EPC) must engage with the user communities, such as those represented by the UK Payments Council, for this to succeed; and

• SEPA is not working because, based upon the UK’s experience with the Faster Payments Service, if you have a regulatory mandate involving technology change, IT will support this but the business community will not. In other words, SEPA needs a business requirement to succeed, not just a technology change.

A few heckles raised meant that it was time for the seconder of the motion, Fred Bär, to respond to Paul’s comments.

Fred began with comments that banks do innovate, with the direct debit being a good example, but it can take a long time to be pervasive especially when there are so many constituencies, groups and actors involved (was he referring to Simon?). That is why it will take twenty years for a baby of this size to be born. Nevertheless, the fact that it is so difficult – with IBAN and BIC usage being a good case in point – does not make it worthless and SEPA is worthwhile and does matter.

However, it could have mattered more if the launch of the infrastructure was supported by a regulation that mattered. Unfortunately, this regulation – the Payments Services Directive – lost all credibility just as things were moving forward, and when we were at a point when the regulation needed to be more credible than ever before.

Then the Phantom that is Simon stood up and delivered the most damning attack on the program of all of the evening’s speakers who, remember, are all playing ‘a part’ in the program and do not necessarily believe the views they are presenting.

Anyways, Simon began by asking what exactly is SEPA, and to whom exactly is it supposed to matter for? His point is that there is no common definition of SEPA, as demonstrated by some referring to it as the Single Euro Payments Area and others the Single European Payments Area.

There is no clarity of ownership, which is why there is no ownership; there is no legal representation and the legislation meant to provide clarification is unclear; there is no business case for SEPA with users, the ACHs, the corporations or the banks and, where there is a business case such as with einvoicing, it has nothing to do with SEPA.

All in all, it is just a political need that is driving SEPA and nothing else. So what is SEPA? No-one knows, so how can it matter?

Bob then opened the evening to an open discussion with the audience, who asked intriguing questions, such as: “where are the imperatives for SEPA? What will make this happen?” and put the provocative point, such as: “SEPA doesn’t matter because there are far more important things taking over the agenda today, like Obama’s banking reforms, balance sheet capitalisation and liquidity”.

I think my favourite comment had to be from one panel member though, which was that SEPA seems to be moving in ever decreasing circles “having started with a vision and ended with a committee”.

Anyways, we concluded the evening with a vote and, surprisingly, the motion was carried by a single vote.

So yes, this house does believe that SEPA matters ... just.

Meantime, returning to the theme of the Phantom, the sequel to the Phantom of the Opera comes out soon. It’s called: Love Never Dies, and I wonder if that’s what we’ll see with SEPA.

SEPA Never Dies; it just goes on and on and on and on and on and on and on and on and on and on and on and on and on and on and on and on ... bring on the end-date ...

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SCTs second birthday

Today is the second birthday of SEPA Credit Transfers (SCTs), which launched on January 28th 2008 and has now achieved a 5.3% volume of total European credit transfer ... I had completely forgotten about this major milestone until Jonathan Williams, of Experian Payments, sent me this note:

in the last year, we have reached several payments milestones, including the launch of SEPA Direct Debit (SDD), and the transposition of the Payment Services Directive (PSD) into national law in most of the EU. So the time is right to reflect on SEPA migration to date and the challenges the banking industry still has to overcome.

While both SEPA Credit Transfers and SEPA Direct Debits are now available, implementation and adoption has not necessarily followed. In fact, most banks, for example, still do not comply with SEPA Direct Debit regulations and the latest figures from the European Commission show that only around 2,600 of Europe's 8,000 banks were ready for the launch of SEPA's Direct Debit scheme on 2nd November 2009. However, there are six key steps that corporates can take in order to harness the benefits of SEPA whilst maintaining current levels of efficiency and avoiding costly bank charges.

First of all, corporates now need to ensure that they have a good understanding of SEPA to fully assess existing operations against the new regulatory requirements

Secondly, corporates in particular need to investigate in which countries they plan to operate and consequently consider which countries they will want to make payments into and within to create the scope of their planning since the use of IBAN (International Bank Account Number) and BIC (Bank Identifier Code) is mandatory for all SEPA Credit Transfers and SEPA Direct Debits both domestic and cross-border

Then, organisations should contact their bank to find out about the changes that the PSD makes to the agreement between them and their payment services provider

Furthermore, corporates need to be clear about what the charges are likely to be for invalid payment details or instructions in the wrong format

In addition, to minimise the costs, organisations will need to complete migration to SEPA in a timely and efficient manner by assessing how much data needs to be converted to the IBAN and BIC format and the resources required to avoid errors in converting the data

Finally, corporates need to investigate whether their current payments systems can capture and handle the IBAN and BIC formats required for Eurozone payments to help quantify the amount of system change required to be SEPA-compliant.

Despite the associated challenges, we must not forget that the move to SEPA does create opportunities that corporates as well as the banks have been slow to take advantage of. It might be that by following these steps, organisations are able to smoothly migrate to the SEPA payment systems and avoid costly errors as a result of failed cross-border payments.

Thanks Jon ... nice to know someone's thinking about this!

Are you taking the PSD?

Interesting article on the guide to all things Europe today, Euractiv, about the Payment Services Directive.

The Directive “has been transposed in all but 11 of the 31 EU/EEA countries”.

Hmmm ... that would be Cyprus, Estonia, Italy and Latvia (Jan); Norway (Feb); Belgium, Greece, Spain, Finland, Malta and Poland (Mar); whilst Sweden is last (Apr).

December 2009:                                          January 2010:

Note: the above are the official charts of the European Commission.  Is someone pulling the wool?

“Observers agree that it favours banks and card companies over the merchants, retailers and consumers who will be using the scheme.”

Hmmm ... would the banks agree? The banks that have spent eight years pulling SEPA together? The banks that have spent billions on change and lost billions of margin? The banks that have been arguing that there is no benefit to merchants, retailers and consumers being communicated by the Commission or public authorities?

“The directive may lead to more fragmentation.”

That’s the point isn’t it?

By introducing new payments institutions, it creates more competition which leads to lower prices which leads to better markets, is the contention of the legislators. This was the same view with the other Directive, the Markets in Financial Instruments Directive, that led to market fragmentation for investing with the rise of Chi-X, BATS and many dark pool investment vehicles, where things are traded outside the line of sight of the public market.

Markets do fragment thanks to these Directives.  Over time, they then consolidate. That is why Chi-X stands out as a clear leader in the post-MiFID trading world and, over time, the same will happen in the post-PSD payments world.

So fragmentation isn’t necessarily a long-term issue, but a short-term concern.

“The PSD's weaknesses lie in its opt-outs”.

Absolutely. Checkout our research if you want to know what they mean as derogations and opt-outs have created a truly uneven playing field for payments.

“Card companies argue that the EU's new rules do not address the issue of catching fraudulent transactions.”

In the words of an old Tina Turner song: “what’s fraud got to do with it?”

The card companies are right by the way. The PSD is purely concerned about moving towards a level playing field for payments in terms of the legal structures of cross-border transactions. The focus was primarily around direct debit and credit transfer operations, as this is where SEPA had focused and needed support. Cards were not centre of the radar for the legislation, nor was fraud. Watch out for the PSD II in 2012 however, when these things do move to centre stage.

Postnote:

At the end of the article is the line: “SEPA is being treated as a low-priority project in Sweden and Finland because their respective ministries of finance have limited resources to roll out the scheme, according to Elemar Tertak from the European Commission.”

I think the person who wrote this mistook PSD for SEPA.

If they want to know more about SEPA then come along to our meeting tomorrow night at the Club:

"Is SEPA happening and does it matter?" a panel discussion with:

• Gilbert Lichter, CEO, EBA
• Fred Bär, Managing Director Euro Services, VocaLink
• Paul Smee, CEO, the Payments Administration
• Simon Bailey, Director, Logica

Chaired by Bob Lyddon, Managing Director, IBOS Association.

Started in 2002, in response to the Lisbon Agenda and Regulations on fees for cross-border cash withdrawals, the Single Euro Payment Area (SEPA) has been in the planning for a long time. In fact, it has been discussed for so long by so many that, for a lot of people, it’s become as dull as dishwater.

This view may be wrong though as, after seven years of gestation, SEPA Direct Debits (SDDs) were finally born in November 2009 and the Payment Services Directive (PSD), which legally supports SDDs, was transposed and implemented in most European countries. So all is good is it not?

Or maybe it is not as, according to the survey the Financial Services Club performed during the Autumn, most nations and most banks are not supportive or implementing SEPA and the PSD correctly. What is the truth? Is SEPA here? Even if it is, does it actually matter?

If you would like to attend, click here.

 
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Europe's new regulatory agenda

We had a fascinating and packed meeting at the Financial Services Club this week with David Doyle, EU Policy Advisor, discussing the challenges of the new Barosso European Parliament and their legislative drive in financial services.

David is a regular visitor to the Financial Services Club, and runs our European Financial Regulatory Advisory Group.

In a broad and wide ranging speech, he presented key views around MiFID, the PSD, Solvency II, UCITS IV, Basel III and more, as well as commentary on Jacques de Larosière’s committee and the appointment of Michel Barnier to succeed Charlie McCreevy.

Here’s a summary of the key points David made.

The Commission is taking a 'safety first approach' to regulating capital markets and market actors, and will fill in the gaps where European or national regulation is insufficient or incomplete.

The over-riding principles of their approach are that:

• All that is of systemic importance should be regulated and supervised;
• There is a need for a better well-capitalised finance industry, with less leverage;
• The Commission must leglislate to avoide the perverse incentives in the financial sector that encourage excessive risk taking or over reward;
• Supervision should have the right tools to grasp complex, inter-connected and globalised financial activities; and
• To restore trust, investors and consumers should benefit from clearer, more coherent and effective safeguards.

At this point, audience members asked lots of questions about whether the European approach would be the same as, or coordinated with, the US approach.

David’s feeling is that it is being co-ordinated on the big ticket items – risk, leverage, capital, bonuses and such like – but the rest is still open competition in terms of the way payments, capital markets and specific aspects of the market are operating, such as hedge funds.

There are then the key changes that should be introduced by the new Barosso team in the near term as a result of the Jacques de Larosière. Of these changes, David believes that the new supervisory bodies:

• European Securities and Markets Authority (ESMA)
• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)

Will be the key here.

These new authorities will have teeth, and will be responsible for ensuring that any EU member states who are not following the line of regulatory oversight are brought to order.

This will be in play within two years:

2009-2010 ►national FSAs powers strengthened + focus on harmonising national rules to reduce cross-border differences

2011-2012 ►implement Pan-EU-wide supervision via ESMA/EBA/EIOPA

and will mean that the large states who are proactively interpreting directives will be in a far stronger position than those states resisting such supervision.

In practice, this means the UK, Netherlands are going to be fine; France and Germany will have some wrinkles to iron out; other nations will get a note to say they need to fine tune some stuff; and Spain and Italy will get a large wet fish slapped around their chops.

After all, every Directive I deal with – MiFID and the PSD in particular – it’s Spain and Italy who always seem to be dragging their heels.

David also made an interesting point here, which is that not only will the new regulatory bodies have teeth to drag member states before Brussels to explain why they are dragging their heels, but also resources to assist when assistance is needed. Therefore, in the case of Sweden where their key person for transposition of the PSD left at a critical juncture, this future structure would allow the EBA – the European Banking Authority which is not to be confused with the EBA, the Euro Banking Association, that operates STEP2 and EURO1 – to provide people to fill the gaps. These people may be promoted in from regulatory authorities in other EU member states for example and, in so doing, it will fill the gaps.

David then rifled through all of the areas for legislation and key directives including:

• The Payment Services Directive
• MiFID and Market Abuse updated rules
• Capital requirements Directive III & IV
• Remuneration
• Pan-EU Supervisory Mechanisms
• Hedge Funds & Private Equity
• OTC Derivatives
• Solvency II – Insurance
• Responsible Lending & Borrowing
• Packaged Retail Investment Products
• UCITs IV
• Credit Rating Agencies

It was real insight and incredibly useful stuff.

Unfortunately, if you want to know what he said about the above, you’ll have to hire our experts in the European Financial Regulatory Advisory Group or join the Club.

It might be worth you doing that anyway as our next meeting is on SEPA!

Who am I?

I’m sitting in the house.

It’s snowing.

Look.

This is big news.

We don't get snow in Britain anymore.

Global warming saw to that.

So when it's snowing, it's major news headlines.

Non-stop BBC reports saying: "it's snowing".

And so it's snowing, and Britain has stopped.

Literally.

Everything has closed down.

We couldn't even get our newspaper delivered!

What is the world coming to?

So I'm stuck inside and I’m wondering: "Who am I?"

It’s the New Year.

Christmas is over.

And you tend to ask those big existential questions at this time of year like:

• What’s the meaning of life?
• Why am I here?
• Who am I?

etc.

Or I do at least.

Maybe it's because Christmas is over, or maybe it's because I'm stuck here.

In the snow.

Here’s our drive.

It’s as far as we can get today.

So I’m sitting wondering what life is all about and who am I?

A good thought for a New Year and for a blog, but what's it go to do with banking?

Well, if I don’t know who I am then how do they know who I am?

I mean they don’t, not in an ego and id sort of way anyways, but they don’t even know who I am as a customer.

That’s why we ring up and have to give so many account details.

Name, account number, PIN, card number, security code.

It’s even worse as a corporate user.

Name, VAT number, company registration, BIC, IBAN and more.

And nothing has standardised any of this yet, even though we’ve been trying for years and even decades.

Just look at IBAN.

Here are a few examples:

• ATkk BBBB BCCC CCCC CCCC (Austria)
• BEkk BBBC CCCC CCKK (Belgium)
• BGkk BBBB SSSS DDDD DDDD DD (Bulgaria)
• CHkk BBBB BCCC CCCC CCCC C (Switzerland)
• CYkk BBBS SSSS CCCC CCCC CCCC CCCC (Cyprus)
• CZkk BBBB SSSS SSCC CCCC CCCC (Czech Republic)
• DEkk BBBB BBBB CCCC CCCC CC (Germany)
• DKkk BBBB CCCC CCCC CC (Denmark)
• EEkk BBSS CCCC CCCC CCCk (Estonia)
• ESkk BBBB SSSS kkCC CCCC CCCC (Spain)
• FIkk BBBB BBCC CCCC Ck (Finland)
• FRkk BBBB BSSS SSCC CCCC CCCC Ckk (France)
• GBkk BBBB SSSS SSCC CCCC CC (UK)
• GRkk BBB BBBB CCCC CCCC CCCC CCCC (Greece)
• HRkk BBBB BBBC CCCC CCCC C (Croatia)
• HUkk BBBB BBBC CCCC CCCC CCCC CCCC (Hungary)
• IEkk BBBB BBBB BBCC CCCC CC (Ireland)
• ISkk BBBB SSCC CCCC XXXX XXXX XX (Iceland)
• ITkk kBBB BBSS SSSC CCCC CCCC CCC (Italy)
• LIkk BBBB BCCC CCCC CCCC C (Liechtenstein)
• LTkk BBBB BCCC CCCC CCCC (Lithuania)
• LUkk BBBC CCCC CCCC CCCC (Luxembourg)
• LVkk BBBB CCCC CCCC CCCC C (Latvia)
• MKkk BBBC CCCC CCCC Ckk (Macedonia)
• MTkk BBBB SSSS SCCC CCCC CCCC CCCC CCC (Malta)
• NLkk BBBB CCCC CCCC CC (Netherlands)
• NOkk BBBB CCCC CCk (Norway)
• PLkk BBBB BBBk CCCC CCCC CCCC CCCC (Poland)
• PTkk BBBB BBBB CCCC CCCC CCCK k (Portugal)
• ROkk BBBB CCCC CCCC CCCC CCCC (Romania)
• RSkk BBBC CCCC CCCC CCCC kk (Serbia)
• SEkk BBBB CCCC CCCC CCCC CCCC (Swenden)
• SIkk BBBB BCCC CCCC Ckk (Slovenia)
• SKkk BBBB SSSS SSCC CCCC CCCC (Slovakia)

B = SWIFT BIC/Bank Code; C = Account Number; D = an Alphanumeric Account Type; kk = a Checking Code; S = Branch Sort Code; X = Accountholder’s National Identification Number

Warramess!

And that’s meant to be standardised.

Sure it’s getting there, but whilst we have IBAN and BIC codes that combine with account numbers and other codes with variability from 15 to 31 digits, with huge variations in structures and formats in between, then banks will never know who I am.

So, ignoring my ego and id, who am I?

I’m Chris Skinner.
I’m C M Skinner.
I’m Christopher M Skinner.
I’m birth date DD-MM-YYYY.
I’m House Number/Post Code/Country.
I’m landline number XXX XXXX XXXX.
I’m mobile number XXX XXXX XXXX.
I’m National Insurance Number XXnnnnnnX.
I’m Driving Licence Number XXXXXnnnnnnnXXnXX.
I’m Passport Number XXXXXXXXX.
I’m Frequent Flyer Number XXXXXXXX.
I’m Bank Account GBkk BBBB SSSS SSCC CCCC CC ...

... except that I have many accounts and so I’m actually Bank Accounts:

GBkk BBBB SSSS SSCC CCCC CC (1)
GBkk BBBB SSSS SSCC CCCC CC (2)
GBkk BBBB SSSS SSCC CCCC CC (3)
GBkk BBBB SSSS SSCC CCCC CC (4) ...

... no wonder I have no idea who I am.

40 days of the PSD

It's forty days since the introduction of the Payment Services Directive (PSD), so there has been lots of chat about the PSD this week, and how it’s working or not working.

Derogations and interpretations are rife, with the hottest and most contentious issue being the fact that charges are now meant to be shared (SHA in the SWIFT message exchange), except that many banks, institutions and even government administrations are insisting on OUR charging structures, where the sending bank pays all fees.

This issue is even causing ambiguity within a country, where one bank might accept OUR message payments from corporate clients in order to save the client having to re-jig their systems to accommodate, whilst another bank might not.

Even worse is where a bank sends a payment and gets a call from the beneficiary’s bank saying that they will process it as SHA but, if the client objects to the charges, then they will process it as OUR and ask the sending bank to pay the fee plus a potential ‘lifting fee’.

Elsewhere, some banks are taking the payments as SHA but then wrapping charges into other services and fees, so that the client does not realise they are paying or how much.

All of these shenanigans are just mere ‘teething troubles’ of course, as the PSD settles into the markets.

In fact, according to Ruth Wandhöfer, EMEA Head of Payments Strategy and Market Policy for Treasury & Trade Solutions at Citi’s Global Transaction Services and member of the EU Banking Council for the PSD, there are things that are being captured and changed. For example, some German banks were asking for €170 to process an incoming cross-border direct debit payment because their systems are so inefficient. This has been slapped down, with a maximum of €40 being viewed as an acceptable charge (that’s still high if you ask me).

Equally, some Spanish banks were asking for 4% of any transaction as their fee. That’s been slapped down too.

All in all, it is still clear that we have passed the start date for the PSD but the PSD has yet to start.

For example, here’s the state of transposition of the PSD according to the latest EU analysis:

What this shows is that Estonia, Greece, Latvia, Poland, Slovakia, Finland, Cyprus, Lithuania, Italy, Spain, Sweden and Belgium (Belgium!!!), all missed the deadline of 1st November 2009.

This is poor form as that means only 15 of the EU27 made it on time. Only in September, when I last checked the Europa website for the state of play, they had confidently predicted that 26 countries would meet the deadline.

Poor show.

Even worse, those that are making the deadlines are misinterpreting, adding or changing the intent of the text. These changes take one of three forms:

• Derogations
• Gold-plating
• Divergence

In the first instance, there are 23 derogations in the PSD. These are meant to allow each member state the ability to introduce the PSD without having to completely reinvent their payments infrastructures within country.

However, they are also creating major confusion, with the one derogation cited most often being the definitions of what is a microenterprise and how is it treated.

The UK classes microenterprises – small businesses – as consumers, and gives them all the rights and protections, products and services that would be afforded to a consumer in a payments transaction context. France, Spain and Italy, amongst others, use the derogation to classify microenterprises as corporates, and give them the rights and protections and products and services of a corporate client.

By doing this, they can offer and operate a consumer product as a corporate product under the PSD’s definitions, with the most obvious standout being the Italians who claim that the Riba – a direct debit in any other country – is actually a corporate product and therefore not subject to the PSD’s definitions of direct debits.

Gold-plating is also rife, particularly illustrated by the leg-in and leg-out dialogue where some countries are making themselves more attractive for payments processing by including US dollars and other non-EU currencies in their PSD definitions.

Finally, divergence is being created across countries by using definitions in different ways.  For example, Belgium and Slovakia have used derogations to enable their markets to define the payments cycle to be same day, rather than the D+1 (or +3) as dictated by the PSD; meanwhile the UK, by clever interpretation of value dating rules, has managed to get around this completely.

No wonder this is all so confusing.

Anyways, to clarify the confusion, Ruth Wandhöfer presented some interesting insights, and here are a few of her bullet points ...

What is the PSD?

The PSD represents a legal framework for payments within the European Union Single Market, covering the EU 27 as well as Norway, Iceland, Lichtenstein (not Switzerland!).

The PSD is a European Directive, which means that all Member States were required to implement PSD rule into their national legislation, a process called transposition, by the deadline of the 1st November 2009.

The PSD applies to payment transactions in euro and all other Member State currencies within the Single Market, where those are provided by payment service providers located in this Community.

The PSD covers all electronic payment services, while cash to cash transactions and cheques are exempted from the scope.

The PSD does not intend to cover payment services associated with securities asset servicing.

The PSD’s focus is on customer protection (not just consumer protection), covering the relationship between all providers and users of payments services.

With the aim of enhancing competition the PSD creates a new lightly regulated entity called a “Payments Institution”, allowing non-banks to handle payments and join the bankers’ payment schemes and associations.

The PSD also defines conduct of business rules for all payment service providers covering the end to end payer to payee relationship.

The PSD will have a revolutionary impact on the legal framework between banks and their customers setting stringent rules for information disclosure, conduct of business rules and service provision

Harmonised refund rules have been established to support SEPA Direct Debits, while unique identifier primacy ensures for enhanced levels of straight-through-processing.

Central Bank Reporting requirements for Euro transactions across the EEA still constitute a barrier to the free flow of SEPA transactions.

Every credit institution that provides payment services in the EEA will have to comply to PSD’s conduct of business rules.

Short-term issues with the PSD

Banking industry and Commission were strongly in favour of all countries transposing the PSD for 1/11/09 given intra EU/EEA cross-border payments are in scope.

In reality, the following countries are understood to have not been ready for the 1 November 2009 deadline: Estonia, Greece, Latvia, Poland, Slovakia, Finland, Cyprus, Lithuania, Italy, Spain, Sweden and Belgium. Spain and Slovakia joined in early December 09.

Consequent impact in practical terms: clients may experience a brief period of non-uniform treatment where a ‘PSD payment’ is being sent to a country yet to complete its transposition; and hence where ‘old’ legal regime practices could be applied.

An ideal ‘best practice’ would be if banks in late countries could voluntarily adopt key PSD payment processing provision (e.g. full amount principle) between 1/11/09 and transposition completion, but this may not always be possible.

To help minimise uncertainty, the EU banking industry within the PSD Expert Group is looking to establish Best Practice Guidelines designed to establish an approach in the key countries where transposition was delayed to ensure broad principles of the PSD are nevertheless complied with (e.g. the ‘no deduction’ principle).

Full Amount Principle and Charging Options

General rule: no deductions of charges allowed from the full amount where both legs of the payment are in the EEA and the transaction is in Euro or another Member State currency.

EU Commission Services are strongly of the view that charges code SHA is the clear requirement in line with the charge sharing principle in Article A52(2) (excepting in cases where there is a currency exchange) – despite the slightly broader interpretation in a few Member States (who have not ruled out use of OUR option).

The Commission and Banking industry further support a general move to using the ‘SHA’ charge code for all EEA currency payments travelling within the EEA.

The usage of SHA will ensure that the ‘full amount’ of the payment transaction will travel up to the beneficiary bank and a separate fee agreed with the beneficiary client will be charged or deducted (in a transparent way from the full amount).

Generally, the recommended best practice to all beneficiary banks is not to reject an incoming payment just on the grounds that the charge code is possibly ‘inappropriate’ as generally the beneficiary bank will not have all the facts necessary to make such a determination with certainty.

There were lots of other discussions about this during the week, but far too much to blog about every nuance of every chat.

Suffice to say, my own bottom line is that this ain’t working.

Roll on the PSD II.

 

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Part Three - Real-time risks and opportunities

In the final part of this discussion of risks and opportunities in CEE, I was asked to give a view (see if you can spot me).

 

So here’s my brief summary:

What are the risks for the next year or two?

First, we are still in the middle of what I call the internet, or www, recession. There are still foreign exchange and trade issues between China, Europe and the USA, and doubts over sovereign debt defaults in key countries such as Dubai, Greece and Ireland. In addition, we still have a UK AAA-rating risk of downgrade, as do other countries, and all of this will make 2010’s economic recovery a challenge, although not as hard as this year has been.

Second, we are seeing a major contraction in debt amongst businesses and consumers. This means that those who can pay-off debt are doing so, leaving those who want to borrow or increase debt being those who are increasingly viewed as being higher risk because of their need. This will potentially result in a ‘debt squeeze’.

The debt squeeze is where banks are left with the people who want lending being those they can’t lend to, whilst those they can lend to are the customers who don’t want it and have paid it back.

Third, there are still risks, especially liquidity risks, that will require banks to seek further diversification of risk by either entering new markets or, more likely, pulling out of all markets where risks are less quantified. This could still lead therefore to national protectionism, where a bank actively seeks to focus on known home territories, whilst selling off or shutting down any more recent and therefore less known expansionism.

Fourth, there are issues of corporate governance as mentioned by John McFall.

Fifth, there are the nerves created by the change of leadership of the management of the internal markets of Europe, from the City-friendly Irishman Charlie McCreevy to the unknown but pro-French minister Michael Barnier.

Finally, there is a challenge with technology, in that there is fast cycle change in technologies in the front office areas of retail banking (mobile) and trading rooms (high frequency trading) versus very slow change in back office infrastructures (SEPA is now seven years old and interoperability in Clearing and Settlement is still to happen). This dual carriageway of slow lane back office and fast lane front office technologies is going to crash somewhere in the middle, unless something is done to align the two better.

On the opportunities for the next year or two.

First, things are cheap. If you are a bank with liquidity, then you can pick up a bargain these days. This is no better demonstrated than JPMorgan with Bear Stearns and Washington Mutual, or by Santander with Alliance & Leicester and Bradford & Bingley. If you have capital, then today is a low hanging fruit picking season.

There are also opportunities for those who can innovate. With so many firms focused upon operational excellence and internal management issues, firms that have clearly unblinkered and unfettered capabilities to compete can begin to decimate.

Some of this opportunity is being created by deregulations that have been years in the making. For example, non-bank payments institutions in Europe could sweep up a lot of activity now that they can be registered for processing under the Payments Services Directive. MiFID is still allowing change and competition for the MTFs, with Chi-X and BATS taking a lump or two out of those markets.

Most important of all, of course, are the ability for new banks to enter weak markets. This is why the UK has flurry of new banks, from Virgin and Tesco to Metro and the Post Office.

Therefore, strong, well-capitalised, financial institutions and non-banks can start to cherry pick much of the banking market profitability if they want, leaving the incumbents with the festering gristle.

So, all in all, here’s the message.

For most banks, 2010 will be a return to basics and a focus upon getting the most efficiency and effectiveness out of operations. Operational excellence will still be the key management competency. This was the focus for 2009, but the ‘back to basics’ approach will be even more resonating and loud.

Real-time reporting will be critical from all angles, especially from a risk reporting viewpoint. The FSA has been pushing for real-time liquidity reporting, and it would not surprise me if a move towards real-time clearing and settlement becomes a focus on the table. That’s the focus of trading exchanges, such as Eurex or the Russian exchanges, and real-time is also becoming a focus in the retail world as the march of faster payments progresses. So real-time everything will be key.

Finally, intimate customer knowledge and using the tools for strong customer analysis with data mining tools will be high on the agenda. As bankers, many are looking for more cross-sell opportunities and you only get those if you have customer intimacy. This is a key.

In fact, it is best illustrated by the Tesco example given the other day, where the fact that I know your buying habits means that I can tailor my offer and rates to you on an individualised and personalised basis. If you buy lots of alcohol and cigarettes then your car and life insurances cost more than if you buy muesli and keep-fit supplements. That’s real customer intimacy.

In summary, back-to-basics, real-time everything and customer intimate operations will be the key.

Istvan Lengyel of the CEE Banking Federation didn’t like the idea of real-time trading. In particular, he was concerned that if a bank collapse, such as Lehmans, takes four days today then what happens if it is four nanoseconds tomorrow. What can you do?

I think he missed the fact that I was talking about real-time risk management and real-time liquidity reporting too.

John McFall of the Treasury Select Committee didn’t like the idea of Tesco giving discount on car insurances based on lifestyle. He thinks that two MP’s who find one saves £100 on car insurance because he or she doesn’t smoke would be grounds for a good early day house motion.

I did try to make clear that risk-adjusted pricing is the very heart of finance, and the better you are at this then the safer the markets would be. Equally, risk is at the very heart and nature of insurance. Also, if I give Tesco permissions to mine my lifestyle by being a Clubcard member, then so be it.

 

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Fragmenting the banking structure

Most banks have evolved from days of branches and large offices, to banks with multiple channels of distribution and extensive technology backbones.

The issue banks have with this structure is that the technology backbone is broken.

This is well illustrated by a comment from one payments manager who said to me that he gets his highest rating for performance if he changes nothing. This is because the complex beast of transaction processing is best left alone. If it ain’t broken, don’t try to fix it. Leave it well alone.

This is why some banks have payments systems that are ten years, twenty years, thirty years old or even older. There is the classic story of one UK bank that still processes in pounds, shillings and pennies – a pre-decimal system – and Britain converted to decimalisation back in 1971!

But this just isn’t good enough anymore. Not only does it mean that banks are intransigent to change, but they will also be outsmarted by new players.

For example, it’s already seven years since Europe determined to introduce the Payments Services Directive and the Single Euro Payments Area, and we still have no end date in mind, nor do we have any idea how to get our customers to migrate to these instruments.

Many say it will be 2018 or after before we get to a fully-integrated Eurozone. That would make it a sixteen year change program.

Similarly, most banks will admit that there are so many councils created to provide governance over the change of these systems, that you can only move at the speed of the slowest player ... that is why change is so slow in the backbone infrastructures of this industry.

But it won’t be slow for the new entrants: the Payments Institutions.

It wasn’t slow for PayPal, who have rapidly become one of the largest payments processors by volume of transactions, and yet they are not even ten years old.

What PayPal achieved, and other Payments Institutions will do the same, is not just to build innovation on the old, out-of-date, legacy backbones ... but to completely rethink the payments process as a layer of innovation above the backbone.

This will happen more and more with other Payments Institutions.

Where this leads is that banks need to fragment themselves.

Break the bank into pieces.

Each piece should represent a piece of functionality, a process, a capability.

And for each piece of functionality, a process, a capability, the bank should ask hard questions: are we good at this? Should we be doing this? Could we provide this service to other banks? What would it mean if we did? How much do our customers value this? Would they pay for it?

Without this hard analysis, banks will stagnate in the sandpits of historical approaches, where legacy builds upon legacy, and the bank tries to serve all customers across all channels in a bank managed way.

Doing the above results in average and will never be exceptional.

Instead, banks should focus upon who they are trying to reach and serve, and in what way.

They should then look to see which areas of this service they can deliver exceptionally and, where it is average or below average, either improve it or junk it.

This means that the old way of banking, where the bank would deliver the entire infrastructure, product and service in a vertically integrated package, is no more.

Today, for banks to compete, they must focus upon where they have strengths, and outsource the rest to the best provider of the services they need to offer around their core competencies.

Equally, a bank must stop believing that they can serve all of the people all of the time. That is the reason banks have expensive legacy overheads because they are trying to keep the old products alive for the old customers, whilst trying to innovate services at the other end for the new customers.

The result of a bank believing they have to do everything internally end-to-end and serve all customer demands from legacy customer channels and instruments to new ones, is failure.

Banks must rationalise to categorically reach and serve the customers they want to reach and service the best, and internally restructure to process and manage only the parts of the customers’ processes they are strong at delivering internally whilst outsourcing the rest to the best.

Simples!

*

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More on the SEPA DD launch

Just got an email from Charlie McCreey's office that announces the launch of SEPA Direct Debits (SDD), as covered here last Monday.  Here's the official line:

"Cross-border direct debits and easier bank account switching now possible

"From the beginning of November, EU consumers will start to have the possibility to make regular payments using the new Single Euro Payments Area SEPA Direct Debit scheme, and should find it easier to switch their current account from one bank to another within their own Member State.

"The new SEPA Direct Debit scheme means that, for the first time, consumers and businesses will be able to make direct debit transactions between different countries in the euro area. Direct Debits are a convenient way for consumers to make recurring payments and an efficient method for companies to collect money such as bills for water, gas, electricity and telecom services as well for magazine and periodical subscriptions. Although direct debits are widely used in many euro area countries, at present, there is no pan-European scheme in place for making these payments possible across borders. Supporting the industry-led scheme are new EU rules on payment services and cross-border payments, in force as of 1 November, which are designed to ensure that SEPA Direct Debits will be as easy, efficient and secure as national schemes without being more expensive. Thousands of euro area banks have already signed up for the new scheme.

"The improvements in bank account switching are thanks to a set of 'Common Principles' adopted by the European Banking Industry Committee (EBIC) last year and have now been implemented in the Member States by the national banking associations. From now on, whenever consumers wish to switch their current account to another bank, the new bank will offer its assistance throughout the switching process."

Charlie McCreevy is then quoted as saying:

"Thanks to industry's efforts and a solid legal platform at EU level, direct debit payments can now be made between different countries in the euro area – good news for consumers, for businesses and for the economy as a whole.

"I am pleased that national banking associations have taken their self-regulatory agreement seriously and worked to ensure that the Common Principles on Bank Account Switching are ready to be applied by 1 November."

I would question some of the views here based upon the other official EU website, Euractiv, saying that banks and users have not bought into SEPA yet and our own research which demonstrates thaat the 'solid legal platform' is not solid at all.

But good on you for 'bigging it up' Charlie, as they say here in Chavland.

  

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What's next for the EU in light of the financial crisis?

Eurofi had their annual conference in Gothenburg, Sweden last month.

The meeting was themed: what priorities for the incoming EU authorities in the light of the financial crisis? and saw a number of common themes recur in discussions by key policymakers, officials and industry figures.

The official report has just been released (download here), and here is their summary of the meeting:

While it is clear that the worst of the crisis is behind us, “we are not out of the woods yet”.

This is in large part because one of the main underlying contributors to the crisis has not gone away: the existence of moral hazard. Indeed, it has probably got worse in the financial system because of the implicit acknowledgement that some institutions are too big or to interconnect to fail has in many cases become explicit.

This is an issue not just for the financial authorities but also for the single market. A total of €3 trillion has been injected into the EU’s financial sector, but it has been distributed unevenly, creating potential distortions of the competitive landscape.

For this reason, as well as the massive burden placed on public finances, it is important to start thinking about an exit strategy that can extricate governments from some of Europe’s largest financial groups.

However, the financial sector faces enormous issues of trust – the public has been appalled by what’s happened. Many market participants have lost faith in each other, partly because the value of so many impaired assets remains so uncertain.

The debate continues over whether banks will be forced to narrow their activities – with influential figures such as Paul Volcker, economic adviser to President Obama, speaking out in favour of restrictions while many in the industry argue that it was not business models that were to blame for the crisis but poor execution.

There is clear consensus that the crisis revealed unsuspected systemic risks and that these must be dealt with. Self-regulation has been thoroughly discredited and new regulation is on the way or has already been introduced in an attempt to harness the momentum for change that much fear is running out as the crisis recedes.

It is agreed that regulation and supervision of individual financial entities is not enough – there must be oversight of macro systemic risks as well and this oversight must be linked to microprudential regulation, not just in the EU but on a global basis.

The industry is clearly unhappy at the weight of new regulation. Jacques de Larosière warns that there are dangers of unintended consequences from the overlapping of the various initiatives. Moreover a system of ratios that would be to some extent disconnected from effective risks would do nothing to address the causes of this crisis. These measures will have a disproportionate impact on Europe where bank intermediation is far more developed than in the US.

However, policymakers have become more confident in their assertions that there are restrictions to the sector’s freedom that are justified for the good of the system as a whole.

Nonetheless, it is recognised that significant challenges remain in implementing the regulation.

An unprecedented level of communication and co-operation will be necessary to ensure that overkill and regulatory arbitrage are avoided.

There must also be a re-examination of the financial system, of its role and size, some participants said. The world faces a range of significant, long term challenges such as climate change, scarcity of natural resources and ageing population. Dealing with these requires a more long term outlook from investors that has been lacking in recent years and to tackle obstacles long term investment has to face up.

The regulatory framework of OTC derivatives and alternative investment funds (AIFs) is also being reviewed with the objective to bring additional safety to the financial system. The industry however points out that constraints that may be unnecessary from a risk mitigation perspective and potentially damaging to customer needs should be avoided and that the specificities of the products concerned should be well taken into account. The risk management processes of management companies should also be revised in light of the financial crisis and the responsibilities and liabilities of the players operating along the fund value chain should also be clarified.

Finally, the on-going actions to improve the efficiency and competitiveness of cash equity infrastructures (MiFID and the Code of Conduct) should not create new risks particularly when implementing interoperability between CCPs.

As Jean-Claude Trichet, President of the European Central Bank, said: “While a lot has been achieved, a lot remains to be done.”

  

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Today is SEPA day, wa-hey!

So, finally, November 2nd and here we are.

SEPA day!

SEPA direct debits go live today and the PSD was transposed successfully across all of Europe to become law yesterday.

Apart from a few countries who missed the deadline.

Obviously, Sweden who have always said April because the chap who was meant to transpose it left. 

But did I hear Poland, Estonia and Greece are late? 

And who said Portugal, Spain and Italy?

And what's that about Belgium in February, Finland in May?

Oh yes, and even if the authorities are late in transposing in each nation, there's also a lot of cynicism amongst the institutions of course. 

Many "banking and consumer associations say they have serious concerns that SEPA will open the way for more fraud and unfair pricing on payments", and "only 2,600 of Europe's 8,000 banks will be ready for the launch of SEPA's direct debit scheme on 2 November" according to Euractiv. 

Our own recent research found Europe to be a land of payments confusion, with 58% of the 350 survey respondents saying that the PSD is being transposed inconsistently and 63% stating that this is because of different interpretations at the country level; only 13% believe it is being implemented correctly.

No wonder Elemer Tertak, director of financial institutionsat the European Commission, said: "SEPA is a slow burner, not a chain reaction."

Too right.

Meanwhile, in a conversation with Craig Ramsey of ACI Worldwide and Jonathan Williams of Experian Payments, we got into some idea of how this may play out.

Q: What does the launch of SEPA DD mean for the future of the Eurozone?

Craig: The launch of SEPA Direct Debits is a continuation of politicians’ desire for a single euro economy. It marks the next step of the SEPA initiative. However, in the greater scheme of things this introduction of SDD is unlikely to have a major impact on the way that people do business or who they bank with. Most of the customers that had a cross-border payment issue have already positioned themselves to reduce their costs.

Q: Why has there been such a delay and below-expected industry take up SEPA?

Jonathan: The key challenge here is the lack of added-value which is preventing corporate customers from migrating. At the recent Sibos conference in Hong Kong, Andrew Long from HSBC stated that customers need SEPA to be relevant to them to create demand and then migration. He suggested that SEPA was driven only by politicians and that we as an industry should find out what the market wants and then tailor the rules to fit. If SEPA was perceived as a value-added alternative there might have been less debate and no need for an enforced end date as customers would want to migrate.

Disagreements around interchange fees have also been a further setback for the European payments framework, culminating in French Banking Federation (FBF) suspending work on SEPA payment services.

For corporates who are already finding it difficult to see the benefits of SEPA, the discussion around interchange fees is likely to mean higher transaction costs, an unappealing prospect in the current economic downturn.

The lack of awareness around the SEPA migration requirements also stretches to conversion from domestic account numbering systems to the European BIC and IBAN system.

It is still clear that national legacy systems will be a barrier to take-up which means that few banks and their corporate customers are likely to be prepared for SEPA and some of the obstacles associated with the conversion from the Basic Bank Account Number (BBAN) to IBANs. However, by cleansing and validating BBAN details before conversion into IBANs and by validating existing IBANs on the database, both banks and corporates will be able to get around some of the hurdles in migrating to SEPA and truly herald the arrival of the scheme.

So what have we learnt from this? Who should take responsibility for governance of the initiative? Who should be responsible for developing and implementing the standards and systems needed? The answers to these questions are not clear with the European Commission proposing a new governance structure for SEPA and the project not yet nearing completion.

Q: Do we need stricter deadlines for SEPA migration?

Jonathan: The confusion about the timeframes for an end-date of legacy payment systems added to the lack of interest and urgency regarding implementation of the SEPA framework on the side of banks and corporates alike. Only setting a fixed end-date can provide the impetus needed to force the financial services industry into motion. While we can at least agree on what we mean by an end-date - the time when all domestic clearing has moved across to SEPA standards - there are still disagreements over how to address the country variations, or "additional optional services", perceived to be necessary to migrate domestic clearing harmoniously.

Q: How will it change the way we pay when it is here?

Craig: If you are a customer in the Eurozone, the launch could encourage the use of Direct Debits. However the trend towards electronic payments from traditional schemes will not be advanced by SEPA, as it is already happening regardless.

Q: What are the benefits and opportunities?

Jonathan: SEPA is bringing markets closer together and increasing cross-border opportunities for corporate organisations and banks alike. SEPA Direct Debits in particular will enable direct debit originators to collect pan-European direct debits from any of the SEPA countries using a single direct debit service instead of the country-specific services that currently exist. For banks and corporates the SEPA initiative will provide opportunities to improve end-to-end Straight Through Processing, reduce processing and transaction costs and expand markets. Those planning to make use of the initiative will benefit from greater efficiency in terms of consolidating their systems and rationalising the number of bank accounts they hold as well as having a common standard for direct debit transactions in Euro countries. Those corporates which need to make payments to and receive payments from the European Economic Area will benefit from this more standardised approach to payment transactions.

Q: What does it mean for banks?

Craig: Banks have had to spend a lot of money preparing for the launch of SEPA Direct Debits without a strong business case and with no guaranteed return on investment. However, the launch date itself will not have a large effect while an end-date for migration to SEPA products from legacy products will have a much greater impact. In the short-term, they will have to support both SEPA products and legacy products simultaneously, which will be an extra strain on profit margins. At least once an end-date is set, banks will be able to plan the move away from supporting multiple products.

Q: What does it mean for payment processors?

Craig: Certain aspects of SEPA Direct Debits are commodities that banks could potentially buy in from payments processors. This could add further business viability for banks to move towards outsourcing and cloud computing business models.

  

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French tractors in Canary Wharf

I’ve become a bit of a fan of Prospect magazine if, for no other reason, than they have useless facts spotted in the media such as “the average weight of new members to WeightWatchers has risen from 12.3 stone (about 77kg) in 1989 to 13.7 stone (85kg) today” (Daily Mail, 24/08/09).

They also have some useful ones, such as “Americans are giving up their landlines at a rate of 700,000 per month. If this continues, the last cord will be cut in 2020” (the Economist, 13/08/09); and “General Electric is the only company remaining from the Dow Jones index of 1896. It had fewer leaders since then (eight) than the Vatican has had Popes” (Fortune, 05/04/04).

All good stuff and useful for presentations.

They also have interesting features such as the interview with Lord Turner, Chairman of the FSA last month, where he caused a furore by saying that some banking activity is “socially useless”. Tsk, tsk.

This month’s magazine continues that debate.

However, hidden on page 27, is this key column by Manneken Pis on EU matters:

“It seems inevitable that the Barroso II (European) Commission will be less committed to the free market than Barroso I. The focus of opposition to Barroso’s renomination as president was the accusation, chiefly emanating from France, that he is an ‘ultra-liberal’.

“One appointment he made five years ago has not served him well in particular. Charlie McCreevy’s term as internal market commissioner has been little short of disastrous for the cause of a deregulated Europe. (ed: how can Manneken say that when we have the PSD and MiFID here now?)

“The former Irish finance minister, a convinced free-marketeer, showed little interest in being in Brussels and even less in regulating financial services where, apparently, the market knew best. (ed: is the author taking the Pis?)

“Then came the crash ... France wants the internal market but there is a complex interplay between who Paris will send and what job Barroso is willing to make available. The main contender is Michel Barnier, a former European commissioner and then foreign and agriculture minister in France.”

Oh Jeez, we’re gonna have flipping French tractor drivers blocking Canary Wharf next.

And it gets worse.

“There’s also talk of its current finance minister, Christine Lagarde.”

Bummer, there goes all of our bonuses too.

But wait, what’s this?

“One possibility is that France is offered internal market but without responsibility for financial regulation, which would be separated off into a specific portfolio. That, said one Eurocrat, would ‘allow the French to say they have got what they wanted, without actually giving it to them.’”

Thank goodness for political machinations and machinery, ay?

Regulate for what's needed, not politics

Just went to another great plenary session discussing whether transaction banking will be the engine for the next phase of sustainable growth and moderated by Karen Cone of TowerGroup. The panel consisted of the heads of global transaction banking from some of the largest banks:

• Werner Steinmuller of Deutsche Bank
• Andrew Long from HSBC
• Catherine Bessant with Bank of America
• Francesco Vanni d’Archirafi at Citi

Here’s my loose highlights of what was said and please note that these are not directly quotes but an interpretation which began with each panellist providing a view on the current regulatory environment ...

Andrew Long:

I went to the European Union to find a continent covered by regulations and thought that was bad. The recently retired chairman of our bank, Sir John Bond, said on his retirement that he joined an industry with zero regulators and there are now over 300 when he retired, and that was bad. The result is that the costs and confusion created by regulations outweigh the aims and the benefits.

Werner Steinmuller:

Regulators are always following what is happening and should be more forward looking, instead of always trying to mop up after an accident. I want to see the regulator, at least on the EU side, more coordinated. For example, we have European initiatives but no European regulator, and this would help if we had more harmonisation rather than country-to-country approaches. For example the PSD has country to country views and the cover payments initiative has no global coordination. The result is a lot of money involved in implementation.

Francesco Vanni d’Archirafi:

Just to switch the lights on we have to constantly upgrade our platform to serve our clients. Therefore business as usual, particularly with earnings pressure, will push the industry to continue to collaborate. I use scale providers when we don’t have the scale in our business and that is what others will need to do.

Andrew Long:

Regulators tend to introduce these rules and think we make so much money that it doesn’t matter, but they forget there are a lot of smaller banks that also have to comply. The costs for them are too great. This means there should be industry created platforms to support compliance with shared costs for all, rather than all the costs being applied to each institution.

Catherine Bessant:

When I think about the risks that are in the system, it is not that they are unknown to us but that they are different to those of the past: the average size of risk, the speed at which things move and how decisions are made, the costs and volumes involved. There are a lot of challenges there. The nature of counterparty identification and counterparty risk is a critical factor. Also, the places we take risk are not necessarily the places where we get paid. Daylight overdrafts for example, and the exponential risks involved there. We are not necessarily adept at educating our clients on the risks that we are taking and sometimes we are not adept at doing that internally. We have to work different ways as a result, in order to get value out of the system. This is why the notion around cooperation and leveraging scale and partnership within the industry makes sense.

Andrew Long:

We are all paid to take risks and if we didn’t, we wouldn’t be in business. In the securities space are massive risks hidden away. We are now talking about how we manage risk on an individual and systemic basis. There are significant intraday risks in there and we need consider these and price them accordingly.

Francesco Vanni d’Archirafi:

Everything we do is focused upon releasing working capital for our clients. The more you can squeeze cash from working capital, the more efficient our clients can be. This means we need to give visibility and transparency for our clients and allow them to manage risk on their balance sheet and transaction flows based upon that visibility and transparency to give them more control.

Catherine Bessant:

We, as bankers, have a duty to our clients to provide a window into the marketplace because we understand the functioning of the marketplace. We have a track on global trade flows and trade movements and, as capable as we are, we must step up our accountability to this so that our clients know as much as we do about those flows.

Andrew Long:

We will have to do more in responding to regulators and making sure our internal controls are in place. That means more costs as this is not just the risks we are aware of historically, but now legal risks and fiduciary risks and more. We’ll need to spend a lot of time on the legal documentation in the securities business for example.

Werner Steinmuller:

Compared to other areas in banking, we work much more together in transaction services, where our biggest competitors may also be our biggest clients. Without working together, payments would not work. For example, without SWIFT, we couldn’t do what we do. This is why, during the crisis, you didn’t hear about issues in the infrastructure and how the systems work or any failure in payments or settlement. BAFT is also following our interests and we are talking about how we can standardise the processes more and work together more. Sharing information on fraud protection for example, and also in the area of having a common voice to the regulator.

Francesco Vanni d’Archirafi:

We work together more because forcing people to stay with you because it’s difficult to unplug is the model of the past. This is why most banks will consider using shared services outsourcing from a competitor’s transaction services structure in the future for this reason.

Catherine Bessant

We’ve spent a lot of time working out where is the moment of separation where we need to compete and where is the moment to leverage where the scale and operation of working together can achieve more than competing. We have a joint venture with Wells Fargo in this space called Pariter** for example. The reaction to this announcement has been evidence of what an unnatural act this collaborative competition is. There were very negative reactions from some, including the Federal Reserve, about how that impacts the traditional ways we have done business. We have a lot of structures trying to craft cooperation now though, and the crisis has brought us to a moment where we have realised how we can work better together.

Francesco Vanni d’Archirafi:

The market forces us to do this, not just the regulators.

Andrew Long:

We are also seeing global changes in trade trends – the north-south trade flow is declining but the south-south emerging markets dealings are growing. There are huge opportunities here in Asia and once we work out how to leverage those opportunities through the right products in the right systems, we will be far more competitive as I’m sure my competitors are thinking today. If you introduce new products priced appropriately and have a good balance sheet, then you can grow your business by leveraging your strengths ... but you must know what those strengths are.

Catherine Bessant:

The value we get paid for the business that we do has not just reduced in the last two years, but in the last ten. There’s a painful truth about the economics of our business.

Andrew Long:

The regulators now recognise how systemically important our service is in trade flow and commerce globally, and are now asking: if we are so systemically important are we too big to fail? The answer to that is to ensure capital is covered and therefore this is why capital flow and analysis has been a key.

Werner Steinmuller:

Also, if a provider should fail, there should be no issue in moving their service to another. That’s the basis of open connectivity today. On another note thought, in Europe, I have two messages for the regulator on SEPA.

First, come up with an end-date

Second, harmonisation. If you have one SEPA Direct Debit, but each country with a different implementation then you don’t have a single direct debit for Europe, and this is crucial for SEPA. If we are not strict on harmonisation then the total SEPA introduction is at risk.

Note: this is what Weiner said in the research note on PSD and SEPA we released last week

Francesco Vanni d’Archirafi:

I agree and we also need to ensure the end-date is not too far out. A date please and the sooner the better in our view.

Werner Steinmuller:

2012 would be ideal, but 2013 is realistic.

Andrew Long:

I disagree. We don’t have an end-date it’s because there’s no client demand. So my message would be make SEPA and the PSD more relevant and get the markets – corporates and citizens and countries – to see it as necessary. They see it as driven by politicians however, and not as relevant.

Francesco Vanni d’Archirafi:

If we look at the European securities space, MiFID and T2S are creating major headaches for many of us around the table, and these programs have irrevocably squeezed profit pools from the trading environment. I think that’s good for Europe though as we have new business models and efficiencies delivered as a result. This is what SEPA should achieve in the future – more efficiencies through new business models.

Andrew Long:

I don’t disagree that we need efficient infrastructure but I take the view that rather than making the rules and then forcing the market to follow we should understand what the market needs and then make the rules.

** Wells Fargo and Bank of America have announced the formation of a joint venture to operate a single, combined automated clearinghouse (ACH) platform for both companies and their clients. The new entity, called Pariter Solutions LLC, will be the country's largest processor of ACH payments.

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The European Commission Strikes Back

Just as we post over 500 pages of research that conclude the European Commission's Payment Services Directive's (PSD) implementation could destabilise the Single Euro Payments Area (SEPA), the Commission strikes back.

Yesterday, they published a whole range of documents and details about how they would make SEPA work.

"The European Commission has adopted a Communication on Completing SEPA: a Roadmap for 2009-2012 in response to the Communication on 'Driving European recovery' ( IP/09/351 ).

The Single Euro Payment Area, or SEPA, is an initiative of the European banking and aims at creating an integrated market for electronic payment services in euros, with harmonised sets of business rules and technical standards. With these new European payments, consumers, companies, merchants and public administrations will be able to make payments under the same conditions throughout Europe as easily as within their own country. The Communication provides a framework for action within six priority areas where greater involvement of all relevant actors is required in order to achieve the full implementation of the Single Euro Payments Area (SEPA).

Internal Market Commissioner Charlie McCreevy said: "To make SEPA a success, a strong commitment by all actors concerned is needed to ensure that the project is delivered on time and in a fully accountable way. At the same time, there is an increasing need for regulators and market players to work together to give Europe an efficient, secure and high performance system for non-cash payments in euro. By providing a Roadmap where actions, actors and deadlines are clearly identified, this Communication will play a decisive contribution in helping SEPA successfully achieving its last miles."

The Communication , which is also in line with the view of the European Central Bank (ECB), presents a series of actions to be undertaken by EU and national authorities, industry and users over the next three years. The Commission has identified six priority themes:

(1) Foster migration : Rapid migration is crucial in order to minimise the costly period of running legacy and SEPA systems in parallel. Public authorities should play a key role here. An efficient monitoring of the migration process will help anticipate and remedy possible migration problems. Setting an end-date to the SEPA changeover could significantly boost the SEPA migration process.

(2) Increase SEPA awareness and promote SEPA products : All parties involved in the SEPA changeover need to be fully informed about its numerous benefits. This could be achieved through tailor-made information and communication initiatives.

(3) Design a sound legal environment and strengthen SEPA compliance : The removal of legal barriers and the design of proper business models which are fully in line with competition rules are cornerstones for a smooth SEPA take-up and increased competition in the payments market. In a self-regulatory context, efficient compliance monitoring deserves special attention.

(4) Promote innovation : SEPA should be a driver for the modernisation of retail payment markets, facilitating the use of internet and mobile phones for making payments and promoting the development of environment-friendly e-invoicing solutions.

(5) Ensure necessary standardisation, interoperability and security : Interoperable, open and secure standards are essential in a network industry such as payments in order to reap the full benefits of SEPA.

(6) Clarify and improve SEPA governance : A n over-arching and efficient governance mechanism that meets the needs of the users is needed at EU level. The main objectives of the new governance structure should be to define a clear strategic vision for SEPA, monitor and support SEPA migration and ensure transparency and accountability."

Good.

Various documents were issued to support this announcement including an intriguing chart on SEPA Credit Transfers (SCT) which supports the figures I heard where they went from 1.9% of volume to 5% in just a couple of months thanks to major banks converting their back office payments systems to use SCT formats:

Still no end-date or outline of how to get rid of the PSD's inconsistencies and issues ... but at least this shows some support for an industry trying to get to grips with a change program that they don't want and politicians are finding hard to enforce.

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