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This story appears in the November 2008 issue of Cards&Payments.
Under current deadlines, Europe's banks have a little more than two years to essentially do for electronic payments what euro notes and coins did for cash in 2002.
However, the Single Euro Payments Area for card and other electronic payments in Europe potentially extends far beyond the present 15 countries that have retired their national currencies for euros. And it involves changes in business practices and standards that have been decades in the making.
That is a tall order and, prodded by the regulators, banks have made some real progress in carrying out the SEPA mandates , which are designed to lower the barriers for competition in a pan-European payments market.
But besides attacking interchange–the fees banks and card schemes contend they need to develop the card networks–European regulators now are questioning some of the key standards banks are using for their implementation of a system for pan-European card payments.
The cards piece of SEPA will be the longest and, by some accounts, the most difficult to complete, and banks will miss their self-imposed deadlines, according to observers.
Banks have made the most headway so far in the first type of electronic payments falling under the SEPA mandates: credit transfers. They hit their target for launching a system of bank-to-bank cross-border transfers last January. Though more than 4,000 banks are up and running with the new system, volumes remain very small.
The two toughest categories of SEPA payments remain: cross-border direct debits and removing domestic barriers in card payments.
By November 2009, the banks and other payments players must be able to directly debit consumer bank accounts across Europe for electric or gas bills, rent and other largely recurring payments. That deadline will be difficult to meet because direct debits now run as purely domestic transactions, and a variety of national rules regulate the payments.
National governments must harmonize those regulations to comply, and, as part of that effort, legislatures in the European Union member states must pass into law the Payments Services Directive by next Nov. 1. This is the legal underpinning for SEPA and is key to opening the payments market to new players and eliminating the distinction between domestic and cross-border transactions, say European Union officials.
But for direct debits, in addition to harmonizing regulations, banks must find a new funding mechanism for the international transactions. Regulators grudgingly have agreed to let them charge each other fees, called multilateral balancing payments, but only temporarily. The payments are similar to interchange on card transactions.
Interchange, which acquiring banks pay card issuers and then pass the expense on to merchants, remains in doubt following a ruling by the European Commission last December that MasterCard Worldwide's system for cross-border card interchange was anticompetitive. Banks and card schemes complain they will be hard-pressed without it to pay for the SEPA rollouts and to fund the innovative products SEPA is designed to encourage. Regulators have indicated they will allow some form of interchange to continue.
But the uncertainty over interchange is only one of the headaches confronting banks as they struggle to meet the SEPA mandates for cards.
As with credit transfers and direct debits, EU officials have allowed banks to regulate themselves, through the European Payments Council. The commission and European Central Bank, however, closely monitor the banks' progress and could one day intervene if they do not like what they see.
Banks have set voluntary deadlines for ridding Europe of its highly fragmented card-payment scene. At present, when European consumers make card purchases, most use debit cards, and most of those operate under a hodgepodge of national rules and standards.
The European Payments Council has set a year-end 2010 deadline for all card transactions to comply with SEPA. That includes millions of point-of-sale terminals and ATMs and hundreds of millions of debit cards, along with communication between terminals, acquirers and issuers.
Deadline Woes
Yet, most experts agree, banks and merchants in some of the countries in the SEPA zone will miss that deadline by at least a couple of years.
Among the many problems is moving all cards and terminals to the international EMV standard, which the European Payments Council has adopted for SEPA. The migration of terminals likely will take longer than cards. Banks and merchants have converted about 65% of Europe's POS terminals to EMV, according to Norbert Bielefeld, Belgium-based deputy director for payments for savings banks interest groups and chairman of the council's standards committee. That represents real progress, says Bielefeld, speaking in September at the European Financial Management and Marketing Association's Cards & Payments conference in Paris.
But banks and merchants in major markets such as Germany had moved fewer than 10% of their POS terminals to EMV as of the end of March. With card fraud low there and in several other countries, the terminal owners see little incentive to replace or upgrade their acceptance devices.
The European Payments Council and Europe's banks now have other worries as they carry out their forced march toward SEPA.
A dispute may be brewing over use of the EMV standard itself to underpin SEPA compliance for cards and terminals. The global standard is managed by EMVCo, an organization that card brands then known as Visa International, MasterCard and Europay International created in 1999. Visa, MasterCard and Japan-based card brand JCB Co. Ltd., which bought into EMVCo in 2004, own the standard.
The European Payments Council chose the standard early on after it formed in 2002 to help ensure payment cards and terminals would be interoperable across Europe.
MasterCard acquired Belgium-based Europay in 2002. And MasterCard and Visa have since gone public.
European Union competition officials, already wary of Visa's and MasterCard's expected dominance of pan-European card payments after SEPA takes effect, now are making known their displeasure with the banking group's decision to choose a standard managed by non-European companies.
EU Competition Commissioner Neelie Kroes recently questioned the choice of EMV, calling it a "proprietary technology."
One of her lieutenants, Irmfried Schwimann, lectured bankers as part of a speech to the European Payments Council in Brussels in early September. Without an open standard, banks inevitably cede some control over their cards and terminals to EMVCo, she said.
"Then the owner of that technology may have such power over the market that it can lock in its customers and exclude its competitors," Schwimann said, according to written statements Kroes' office released.
Schwimann, who is acting director for financial services and health-related markets for the competition office, said she understood that the council originally chose EMV because it already was solidly established in Europe. But she noted EMVCo one day could charge fees for use of its standard.
"For the time being, the EMV standard is used free of charge," she said, emphasizing that is by "courtesy" of EMVCo.
The official added the same concerns apply to the Payment Card Industry data-security standards, which the council is using as a basis for its own standard to keep data on POS terminals safe from hackers. The major U.S. card brands and JCB control PCI.
Taken By Surprise?
The European Commission's interest in EMV may stem from a complaint merchant-advocacy group EuroCommerce filed earlier this year with regulators against the payments council. Among EuroCommerce's contentions was that if EMVCo decided to charge royalties for its technology specifications, banks could use that as justification for its interchange fees.
In any case, the barbs from Brussels against EMV, raised as late as last summer, appear to have taken the banks by surprise.
"What could be the real motives late in the day to entertain such uncertainty? I'm really asking the question," says the council's Bielefeld. The idea of adopting a new standard to replace EMV at this stage, he contends, is out of the question.
EMVCo could, indeed, decide to charge a lot of money down the road for use and maintenance of the EMV standard and could fail to develop EMV the way European banks would like to see, acknowledges Claude Brun, council vice chairman and an executive with France-based banking group Crédit-Mutuel-CIC.
But that may not be what is really bothering the European Commission, he suggests. "They consider EMVCo is in the hands of MasterCard and Visa, and they consider MasterCard and Visa to be American companies," says Brun. "But [Visa and MasterCard] are public companies. They are no longer in the hands of the bankers."
While Visa Europe has billed itself as an independent card association owned by European banks, this has failed to sway regulators, who view it as an arm of U.S.-based Visa Inc.
To ease concerns in Brussels, European banks are seeking a greater role in EMVCo's decision-making process, Cards&Payments has learned.
Tac Watanabe, JCB senior vice president for global infrastructure and technologies and holder of the rotating chair of EMVCo's board of managers, confirms the two groups are in discussions on a memo of understanding defining the council's role. EMV is a global standard, however, not just one for Europe, he adds.
"We're not forcing them to adopt it (for SEPA)," Watanabe tells Cards&Payments. "They adopted the standard because it's a de facto standard."
Varying Involvement
Just what role EMVCo will allow the council to play remains to be seen, however.
EMVCo is discussing "different levels of involvement" for the banking group, says Brian Byrne, head of the product specifications and vendor management group at Visa Inc. and a member of the EMVCo board of managers. He declined to elaborate.
EMVCo's "intent" is to ensure the EMV standard "remains publicly free for use," he says. But when pressed, Byrne says the lawyers for Visa and EMVCo would not allow it to make an ironclad promise the EMV specifications would remain royalty-free "into perpetuity."
Bankers on the council are in similar discussions with representatives of the card brands that run the PCI Security Standards Council. They are seeking a formalized role for European banks, says Gert Huizinga, a senior consultant for retail payments at Dutch bank ING and a coordinator of standards for the European Payments Council.
The latest dispute with the European Commission over control of the EMV and PCI standards only adds to the list of problems bankers face on the standards front to make SEPA a reality. They have to further define the standard to develop a single certification standard for all POS terminals in Europe, shedding different national certification standards, says Huizinga.
The European Payments Council also is working with national card schemes and vendors to come up with a standard for how POS terminals send and receive transaction data from acquiring banks. At present, terminals are not interchangeable with acquiring systems in different countries.
And the banking group also must develop a new standard for communication between acquirers and issuers for authorizing card transactions.
Given these headaches over standards, combined with the foot-dragging by banks that see no business case in SEPA, it is little wonder many observers believe the single market for card payments will be an elusive one for years to come. CP
