SEPA, in Search of a European Payment Accomplishment
SEPA, Single Euro Payment Area covers three areas: SEPA Credit Transfer (SCT), SEPA Direct Debit (SDD), and SEPA Card Framework (SCF). So far, more efforts have been spent on the first two subjects than on the card industry. For the time being, the industry is facing a set of principles, an incomplete technical content, and an aggressive schedule.
The principle behind the SEPA Card Framework is that the complete SEPA area (the EU plus Switzerland, Liechtenstein, Iceland and Norway) should behave as a domestic payment area. This means an increased competition between the different actors in the SEPA area, that the EU expects to be ultimately beneficial to the European citizens. A consequence of this principle is that a payment should occur the same way, independently from the issuer location and the merchant location in Europe. According to SEPA principles, consumers should be able to choose freely between different payment means without a relation to a set of acceptance points, the card market is to be competitive, reliable and cost efficient, and national schemes should be eliminated.
There is still a lot of ground to cover to reach this ideal situation. As of now, different payment schemes exist in different places. Depending on the countries, the split between various payment means is radically different, for instance 70% of payments made in the Netherlands are using cards whereas 61% of payments made in Germany use cash. In every country, there is at least one national payment scheme, sometimes more than one. And international cards are generally co-branded with Visa or MasterCard. The national scheme is used domestically; the international scheme is used for international payments, in Europe or elsewhere.
Different evolution paths are proposed by SEPA: replacement of a national scheme by an SCF-compliant international scheme, alliances between different national schemes, co-brand with an international payment scheme.
A conference about SEPA took place this week in Paris, organized by EESTEL, where some of the major actors voiced the issues they are identifying on the way to SEPA full implementation:
- There is still a lot to do in terms of card standardization. Of course, the standard will be based on EMV, but no detailed specification has been drafted yet.
- The evolution to SEPA will mean for merchants an upgrade or a replacement of their terminals. Many of them have recently been going through replacements or upgrades to go through Year 2000 anticipated bug, switch from national currencies to Euro and switch to EMV. No doubt they will be reluctant to foot the bill again for another global terminals replacement.
- SEPA implies the commission level should be consistent between merchants in various locations. For some of them, especially the French, this will mean a sharp increase in the commission level.
- The regulatory authorities, the certification processes and authorities, and the standardization body are not yet identified.
- SEPA is to be implemented by 2008 for some actions, and by 2010 for a total completion. Given the weight of the existing systems, and the remaining uncertainties by now, this sounds more than aggressive. For instance, the decision was made in France to migrate to EMV in 1996, the migration will be almost completed by end of 2006, 10 years later.
- SEPA allows some "payment institutions" to operate payments. These "payment institutions" are not banks, thus don't have to fit in the banks regulatory framework. Payment and security guarantees for payments made though these "payment institutions" are still to be evaluated. This could create a competition distortion between banks and "payment institutions".
- According to a study recently published by Accenture, the cost of SEPA migration for the 90 major European banks could reach EUR 3 billion. Experts consider this amount to be highly underestimated, and wish the global cost for the European economy could be taken into account.
SEPA provides for an increased competition on the European level. Either current national schemes may decide to work with each other, or even in the long term to merge together, or remain independent and find a third party to operate at the European level. The candidates to become this "third party" are already identified. In their current respective reorganizations, MasterCard and Visa have decided to give an independent positioning to their European entities. Even if MasterCard is now a public company, MasterCard Europe remains the center of expertise for cards. Visa is on its way to become public, with the exception of Visa Europe that will remain a bank association. But in both cases, MasterCard Europe and Visa Europe may feel they have a role to play in building directly a European scheme without having to take into account the legacy of a national scheme. We already see the beginning of this strategy with the position of Maestro and the announcement of V-Pay, positioned as a European scheme without legacy concerns. The same could happen on the payment processors area: we already witness First Data (from the US) going for a series of acquisitions in Europe (the last one being GZS a major German payment processor) in order to be present all over the continent, and take advantage of the SEPA migration.
An increased weight of Visa and MasterCard, as well as international payment processors, could mean an important loss of sovereignty for the European payment industry. Then, what could be the future of European banks, European capital, etc…