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V1 25/04/06
Driving the SEPA TrainHow to Implement the SEPA Cards Framework
EBUG Seminar, LisbonWednesday 26th April 2006
EBUG Lisbon April 20062V1 25/04/06
SEPA - Opening up Europe’s Payments Markets The Story So Far…
Long delays – banks did not deliver on promises
National interest – not EU
Protectionism – not open market
Threats of regulation
Overdoses of politics
Monopolies and duopolies
Major infrastructural projects
Lack of progress, not good enough!Lack of progress, not good enough!
EBUG Lisbon April 20063V1 25/04/06
“Politics is the art of looking for trouble,
finding it whether it exists or not,
diagnosing it incorrectly and applying
the wrong remedy”
Sir Ernest Bevin, 1930
EBUG Lisbon April 20064V1 25/04/06
Agenda
SEPA Background and Content
Overview of SEPA Cards Framework (SCF)
Analysis of Implementation Options
Summary and Conclusions
EBUG Lisbon April 20065V1 25/04/06
The ‘F’ Word - A Story of Failure…
Failure to achieve EC’s vision
Failure to think EU / euro-zone
Failure to standardise
Failure to inter-operate
Failure to consolidate
Over 15 Years of Delay and Vacillation in Delivering an Open and Common Payments Infrastructure… But now we have SEPA
Over 15 Years of Delay and Vacillation in Delivering an Open and Common Payments Infrastructure… But now we have SEPA
EBUG Lisbon April 20066V1 25/04/06
At last the SEPA train has left the station
2006
You can be upfront with the driver, or sitting comfortably in First Class, or being thrown around hanging off the back… or left in the Station!
You can be upfront with the driver, or sitting comfortably in First Class, or being thrown around hanging off the back… or left in the Station!
sepa
EBUG Lisbon April 20067V1 25/04/06
SEPAland - The SEPA Vision
“SEPA is achieved when people can make payments through the whole euro area from one bank
account or by using one card as easily and safely as national payment is conducted today … the
choice of bank or location should make no difference … all euro area payments should
become domestic”
Gertrude Tumpel-Gugerell, ECB, September 2004
ECB rationale for SEPA:
Current account access by card anywhere
Common processes for all payments (not just cards)
Improved banking competition
SEPA will do for electronic payments and cards and what the euro has done for cash
SEPA will do for electronic payments and cards and what the euro has done for cash
EBUG Lisbon April 20068V1 25/04/06
Key Owners of the SEPA Concept
1. European Central Bank – owns broad requirements and timing – responsible as for euro
2. European Commission – owns harmonisation plan – 15 years pressure – legal framework
3. European Payments Council – design/specification – self regulation
Key stakeholders are merchants, corporates, consumers, government and representative associations
Key stakeholders are merchants, corporates, consumers, government and representative associations
EBUG Lisbon April 20069V1 25/04/06
Today Tomorrow
Euro-Area EU-25 EEA
SEPA Scope & the vision for tomorrow
Reduced complexity, improved efficiency
Cross-border complexity and risk
Harmonisation and consolidation Fragmented industry
Improved inter-operability No inter-operability of national schemes
Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws
Different schemes, experiences, standards, consumer protection laws
Common “local” solutions National / local solutions
Tomorrow –Harmonised SEPA
Today –Fragmented National Markets
Reduced complexity, improved efficiency
Cross-border complexity and risk
Harmonisation and consolidation Fragmented industry
Improved inter-operability No inter-operability of national schemes
Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws
Different schemes, experiences, standards, consumer protection laws
Common “local” solutions National / local solutions
Tomorrow –Harmonised SEPA
Today –Fragmented National Markets
euro-zone 12 Nations
EU New Member States
EU Nations outside euro
EEA
Switzerland
Key: = voluntary alignment; = Requirement
= For new Member States domestic payments when they join the euro
PSD Directive
Domestic Payments
All Euro Payments
Region
euro-zone 12 Nations
EU New Member States
EU Nations outside euro
EEA
Switzerland
Key: = voluntary alignment; = Requirement
= For new Member States domestic payments when they join the euro
PSD Directive
Domestic Payments
All Euro Payments
Region
EBUG Lisbon April 200610V1 25/04/06
SEPA Infrastructure Impacts
SEPA is the most significant change in EU’s payments in the past 20 yearsSEPA is the most significant change in EU’s payments in the past 20 years
SEPA is a major harmonisation project which will replace the fragmented national payment infrastructures
All payments will be carried out using common frameworks, rule books and the new Legal Structure (PSD)
Every citizen, bank, merchant and corporate enterprise will be impacted by the SEPA implementation
SEPA is not about cross border payments, it is about standardising each national market
12 euro 29 EU
Population 310m 470m
Corporates 17m 25m
Banks 7k-8k 9k
ACH Schemes 10 20+
Card Schemes 14+ 18+
POS 4.5m 6.2m
ATMs 238k 326k
Electronic txns 50bn 73bn
EBUG Lisbon April 200611V1 25/04/06
SEPA - EPC Timeframe
Design & preparation
Implementation & deployment
Co-existence & gradual migration
Programme activities
2
1
DesignSpecification
Implementation
Pilots
National migration
Early adopters
Programme management, planning, communication, monitoring
Launch
Milestones
1. EPC instruments available to citizens
2. Critical mass migrated so SEPA is irreversible
Source: EPC Chair, SIBOS Sep 2005
201020092008200720062005
Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q4Q3Q2Q1
201020092008200720062005
Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q4Q3Q2Q1
Feasible for ACH schemes – but realistic for cards?Feasible for ACH schemes – but realistic for cards?
EBUG Lisbon April 200612V1 25/04/06
SEPA – the Size of the Change
Year 2000………
The euro………..
SEPA………………………
….. and customers will be looking for solutions to help digest it….. and customers will be looking for solutions to help digest it
How do you eat an elephant?……… one piece at a timeHow do you eat an elephant?……… one piece at a time
€8-13bn*
* Tower Group estimate
EBUG Lisbon April 200613V1 25/04/06
New CSM/
PEACH
New CSM/
PEACH
Old ETS Schemes and Infrastructure
Old ETS Schemes and Infrastructure
Today - 2006 Tomorrow – 2010
Old ACH Schemes and
Processing Infrastructure
Old ETS Schemes and Infrastructure
Old ETS Schemes and Infrastructure
Old Card Schemes and
Processing Infrastructure
New CSM/
PEACHInfrastructures
12
3
Replace
Adapt
Separate
Separate New CSM/
PEACH
New CSM/
PEACH
Card Processing
Infrastructure
12
3
New CSM/
PEACH
New CSM/
PEACH
Modified Existing Schemes
1 23
ACH – Replace with ETS Schemes and Separate Processing
Cards - Adapt to SEPA Cards Framework and Separate Processing
New ETS Common
SCT/ SDDSchemes
Comparison SEPA Schemes Design Features
EBUG Lisbon April 200614V1 25/04/06
SCF General Observations
Framework is a multi-national compromise – so is a great achievement
Applies to all general purpose euro payment cards - focus is on debit
Self regulatory framework – not a scheme, lower cost – schemes must “adapt” – banks follow
SCF does not substitute for card scheme rules/regulations
Principle is to foster competition at debit scheme level – but potential for ICS duopoly
Scheme brand/infrastructure unbundling has the greatest potential for change – particularly ICS
EBUG Lisbon April 200615V1 25/04/06
SCF Impact on Card Schemes
SCF Statement
Scheme Organisation/Activities – must ensure legal/commercial barriers removed
Separation of Scheme Governance from Processing and other functions – no longer mandate use of processing services – no longer self certify
Participation – transparent and non discrimatory criteria
Principles of Interchange Fees – MIF and bilateral acceptable – local MIFs allowable with SEPA wide default
Licensing – single licence enables offer of all scheme products/services – on us applies to the SEPA
EMV Supporting Technology – commitment to EMV for all cards (credit/debit) by 1st January 201
Scheme Pricing – transparent pricing, no bundling
Liability Shift – all schemes to introduce liability shift rule plus incentives
Open Business Model – no discrimination, ensure merchants/ATM owners can accept SEPA compliant cards from other schemes
Fraud – commitment to fraud statistics/reporting
Operational Quality – must provide benchmarks and how policed
EBUG Lisbon April 200616V1 25/04/06
SCF Impact on Card Schemes – cont’d
SCF Statement
Issuer Authorisation – all transactions to be online or offline by chip
Cardholder Experience – must be consistent at POS/ATM – schemes cannot mandate specific payment application, common flow, English mandated
Merchant Experience – one single terminal to access multiple acquirers – merchants free to switch acquirers and can accept any scheme (SEPA acceptance parity)
Inter-operability – all four domains must have inter-operability – cardholder to terminal; card to terminal (EMV); terminal to acquirer; acquirer to issuer
Certification Principles – open market – certification no longer only a scheme function
Terminal Certification – schemes to release terminal security requirements – post certification approval/allowable
Scheme Rules – schemes to commit to convergence over non competitive elements
EBUG Lisbon April 200617V1 25/04/06
SCF Impact on Acquirers
Business Technical / Operational
Potential new scheme membership rules governance
Merchant communication campaign on SCF/SEPA impacts/benefits
Common consistent experience for cardholders
Changes to merchant contract terms – removal of barriers to acceptance
New terminal strategy – elimination of multiple terminals
New SCF/SEPA card acceptance policy by 2008 for one or more SEPA compliant card schemes in terminals
New rules for provision of DCC (PSD)
EMV/SCF compliance/acceptance for all cards schemes /terminals
Implementation of SEPA compliant card scheme
Potential new core terminal applications and upgrades
New multi acquirer terminal application in some countries
Acceptance of multi function cards
New terminal to host interfaces
New acquirer to issuer interfaces
Possibly new clearing and settlement arrangements (eg. Berlin Group)
Build new processes for fraud management/reporting
Implementation of EMV by 2010 and liability shift
EBUG Lisbon April 200618V1 25/04/06
SEPA Impact on Debit Card Issuers
Business Technical / Operational
Potential new scheme membership rules, governance
Offer at least one SCF compliant card provided from 1st January 2008 onwards
All general purpose cards issued become SCF compliant
Re-issuance of cards to new scheme
Communications plan – potential brand change
Communication campaign SCF/SEPA benefits to cardholders
Complete migration to EMV by end 2010
New rules for consumer redress (PSD)
Implementation of new debit scheme infrastructure
Implementation EMV for all cards issued
Implement new standards for:
cardholder to terminal interface
card to terminal (EMV)
issuer to acquirer interface
Potentially new debit/credit default features for multi application cards
Implementation of new/modified card management processes
Implementation of new/modified authorisation and credit management systems
Possibly implement new clearing and settlement arrangements
EBUG Lisbon April 200619V1 25/04/06
SCF Key Issues
SCF was the easy bit – how to implement and enforce?
Is scale and scope beyond banks/schemes/EPC?
Created by team of experts within ECB broad requirements
Pressing need for standards and guidelines – terminals POS/host, issuer, acquirer
Need to remove many national blockages and barriers
New operational model chargebacks, merchant accounting, PINS/HSMs
Can current structure manage specification and delivery of Europe’s largest ever project – card share €7bn to €8bn
Can current structure manage specification and delivery of Europe’s largest ever project – card share €7bn to €8bn
EBUG Lisbon April 200620V1 25/04/06
European Infrastructure ChangeWhat Does History Tell Us?
Past Cards Infrastructure Projects SCF
Phased smaller projects more successful – large much less (EMV)
Large scope 12 domestic plus all euro systems – no phases yet
Strong consumer/merchant proposition Weak consumer but strong merchant
Good business case Short term poor – long term good
Strong commitment – large national banks – will to fund
Strong large bank commitment, but no funding
Interbank company implements and provides delivery service
EPC represents all banks and monitors, but no more
Strong scheme mandates incentivise change (EMV example)
Lack of basis for mandates – no operational revenues
What structures to use for implementation?What structures to use for implementation?
EBUG Lisbon April 200621V1 25/04/06
Four Strategic SCF Implementation Scenarios
Scenario 1 – Open Market Devolved Strategy (Current)
Scenario 2 – Separate Implementation Only Company (SEPACo)
Scenario 3 – New Infrastructure and Implementation Company
Scenario 4 – Regulated Implementation
EBUG Lisbon April 200622V1 25/04/06
Scenario 1 – Open Market Devolved Strategy(Current)
Strengths Weaknesses
EPC monitoring
Leverages banks ownership of schemes (pressure)
Open market competitive principles for schemes
Open market competitive principles for network construction (Berlin Group)
Strong commitment by largest banks
Standards/guidelines to be produced
Poor history of open market driven developments
No central control or network
Voluntary body – EPC’s limited resources
No experience of implementation
No mandates incentives/penalties
Aggressive delivery dates
Schemes sign up to concept and compete, banks make choices. Scheme/infrastructure separation stimulates processor sector. Implementation devolved to national associations, no central co-ordination body. Standards developed by consensus, networks evolve through market demand by processing sector. Current timelines retained.
Conclusion – chances of success modestConclusion – chances of success modest
EBUG Lisbon April 200623V1 25/04/06
Scenario 2 – Separate Implementation Only Company(SEPACo)
Strengths Weaknesses
EPC continues to provide leadership
Professional project managers (lower risk)
Realistic road map construction
Standards rapidly developed
Separation of policy/execution
Incentives and penalties
Cost of SEPACo set up/operation
Does not deliver an infrastructure
No guarantee of success
EPC member resistance to penalties
Separate governance needed, professionally managed, fully funded SEPACo. Powerful mandate to co-ordinate, lead, plan, monitor, manage. 30-40 staff €20m-€30m per annum. Sets standards, best practice, network architecture, certification/compliance. Operates PMO, owns macro SEPA plan. Negotiates revised time scales - two years slippage. EPC allowed to fine non/slow participants.
Conclusion – would work but who pays?Conclusion – would work but who pays?
EBUG Lisbon April 200624V1 25/04/06
Scenario 3 – New Infrastructure and Implementation Company
Strengths Weaknesses
Professionally implements/delivers
Avoids fragmentation
Equal to and competes with ICS networks
Delivers solution for direct debits/credits
High cost and risk
Uncertain volumes/efficiency improvement
Unfair cost sharing
Already exists within ICS
Follows traditional interbank model. NewCo created (includes SEPACo functions), permanent infrastructure to implement SEPA and operate network to link all national debit. Builds network equal to that of Visa/MasterCard, draws in Berlin Group. NewCo sets standards for all aspects.
Conclusion – workable but cost/riskConclusion – workable but cost/risk
EBUG Lisbon April 200625V1 25/04/06
Scenario 4 – Regulated Implementation
Strengths Weaknesses
Ensures all schemes and banks sign up to SEPA/SCF
Penalties strong motivator
Level playing field for competition
Regulations more directive than SCF
Support from some bank players
Pioneering regulation of standards specifications
Banks work to rule – work arounds
Unintended consequences and collateral damage
High risk project – EC micro manage
Failure damages EC credibility
Commission decides will only happen through legislation. SCF turned into a regulation. Highly prescriptive, mandates deliverables and timelines. Includes regulation of interchange and MSCs. Penalties if not achieved. PSD tightened up to strengthen legal framework.
Conclusion – an interesting option!Conclusion – an interesting option!
EBUG Lisbon April 200626V1 25/04/06
Summary Assessment of Scenarios
Scenario Feasibility Risk Complexity Cost Certainty of Delivery
Scenario 1Current Open Market Strategy
H L
Scenario 2SEPACo
M M
Scenario 3New InfrastructureCo
M M/H
Scenario 4Regulated Implementation
H H
EBUG Lisbon April 200627V1 25/04/06
Conclusions - SCF
SEPA Europe’s largest infrastructure project – will impact all
Timeframes highly ambitious, unlikely to be achieved for cards
Europe poor history of major EU wide change (euro excluded)
Current implementation plan suitable for ACH
SEPACo and NewCo unlikely to be funded
Some form of regulation highly likely
That’s the way politics goes!That’s the way politics goes!
EBUG Lisbon April 200628V1 25/04/06
“Politics is not the art of the possible.
It consists of choosing between the
disastrous and the unpalatable”
J K Galbraith, 1969