SEPA Goes Live, Uniting Europe's Disparate Payment Systems

  A new era began for the European payments industry in January, as the Single Euro Payments Area initiative commenced to link the European Union’s many fragmented national payment systems into a zone where payments flow seamlessly across countries’ borders.
  Migration to SEPA is the single-largest payments initiative ever undertaken within Europe, and possibly the world, says the Brussels, Belgium-based European Payments Council, a self-regulating banking association that is leading banks’ compliance efforts.
  SEPA was born in 2002, following the European Commission’s adoption the previous year of new regulations designed to standardize fees for domestic and cross-border payments within Europe. Those regulations emerged from the Lisbon Accord of 2000, when banks were encouraged to develop a common payments infrastructure as an extension of the successful implementation of the euro.
  The curtain rose last month on the first stage of the SEPA-conversion process. The payments council expects the process to result in a broad transformation of banking and card systems across Europe.
  The start date of the effort was Jan. 28, when European banks began implementing cross-border funds transfers and replacing remaining magnetic stripe credit and debit cards with EMV-standard smart cards. The EMV-conversion process must be completed by the end of 2010, and banks are expected to launch a common direct-debit system no later than November 2009.
  SEPA’s requirement to replace Europe’s patchwork of disparate debit card payment systems will mark a major change from existing systems that lack interoperability, have inconsistent pricing and policies, and force consumers to jump through hoops to make debit payments outside their home countries.
  When the implementation is complete, European merchants will be able to accept payments, including debit card transactions, from all other SEPA countries, simplifying back-office processes and creating competition between banks, payment processors and automated clearinghouses, the council says. Consumers will be able to use payment cards from local financial institutions anywhere in Europe.
  To create a cross-border debit payment system, banks must turn to existing debit-network brands, such as MasterCard’s Maestro or Visa’s VPay, or create alternatives. This issue underlies a separate, but related, controversial issue of cross-border interchange rates assessed in Europe by MasterCard and, potentially, Visa Europe (see story on page 16).
  Experts expect the SEPA migration to be costly and complex for most banks and payment-industry participants. Given the scope and complexity of the effort–especially for cross-border direct-debit payments–many participants and analysts have signaled that the payment council’s original goal of full compliance by 2010 might be unrealistic.
  EMV ROLLOUT
  â€œAlready more than 4,000 banks have signed adherence agreements for credit (electronic funds) transfers, and the EMV card rollout is moving along well,” says Gerard Hartsink, chairman of the payments council. Implementing the direct-debit service will be more challenging because all banks in Europe must agree on the business rules and standards for the new service.
  Before its rollout, each European Union member country must adopt the provisions of the European Commission’s Payment Services Directive, which provides the legal foundation for SEPA. The deadline for countries to sign the directive into their national law is November 2009.
  According to Hartsink, the process of getting legal certainty on the directive from the member states is under way now, and much discussion is taking place among banks, corporations, merchants and processors about implementation of the SEPA direct-debit service, including the crucial question of what the interchange rates will be,” Hartsink says.
  The fact that there are only two viable debit card-acceptance schemes in Europe at the moment leaves banks with no choice but to participate in a duopoly while implementing cross-border debit payments, which undermines the goal of increasing competition, say analysts.
  European officials, including the European Central Bank, have encouraged banks to develop a Europe-based direct-debit scheme, says Jeremy Light, senior manager with the London office of consulting group Accenture. But nothing certain has yet emerged.
  One contender is PayFair, a Brussels, Belgium-based company said to be exploring creation of a debit card scheme to compete with Maestro and VPay. PayFair executives could not be reached for comment.
  Only the 15 countries that now use the euro are obliged to meet all of SEPA’s requirements. But the commission’s long-term goal is for all 27 countries in the European Union, plus Iceland, Norway, Liechtenstein and Switzerland, to follow its guidance.
  â€œNoneuro countries will almost certainly follow SEPA due to market pressure,” Light says. He notes that a rising tide of European Commission regulations at the start of the decade propelled the payments council to mobilize its own initiatives to unify Europe’s payment systems.
  The total scale of SEPA is immense, with the euro-zone countries alone taking in 315 million citizens, 16 million to 18 million businesses, 6,000 to 7,000 banks, 4.6 million points of sale and 240,000 ATMs, according to the council.
  More than 4,000 banks already are compliant with SEPA’s first stage, funds transfers, the council says. Approximately 52% of Europe’s estimated 560 million payment cards are EMV-compliant, and that number is expected to reach 800 million cards by 2010, according to the council.
  COMMON RULES
  SEPA also calls for standardization of technology for point-of-sale terminals and the communication between acquirers and issuers. There is no formal deadline for compliance, but Hartsink says banks and merchants are working toward that goal. He expects that most merchants’ terminals will be SEPA-compliant within five years of approval of the standards.
  The total cost to banks of migrating to SEPA likely will be “in the billions,” but the overall benefits will outweigh the cost, according to the European Commission and the new European Central Bank, Hartsink says.
  One of the challenges of SEPA compliance is the diversity of processes that exist in payment systems throughout Europe. And reaching agreement on debit-card processing rules could get complicated, analysts say.
  â€œGetting 31 countries, all with different customer bases and using different technologies, to change their infrastructures within two years is a very lofty goal,” says Jon Paisner, an analyst with Boston-based Yankee Group, which anticipates that not all European countries will be fully compliant by 2010 or even 2012.
  Dutch financial giant Ing Group poured funds into SEPA preparation for years before it went live last month, says Mark Buitenhek, general manager of Payments Retail Europe for Amsterdam-based Ing. He would not disclose the bank’s total investment in SEPA.
  Ing already is processing cross-border funds transfers in compliance with the SEPA standard and gradually will upgrade its domestic direct-debit formats to SEPA-compliant ones. It also plans to replace customers’ debit cards with SEPA-compliant EMV cards, Buitenhek says.
  Buitenhek estimates Ing will be fully SEPA-compliant within three to five years. “For cards, and especially (debit) payments, the process has been very challenging,” he says.
  MARKET ‘OPENING UP’
  But the advantages already are evident, Buitenhek adds. “The market is opening up. You can see this already happening, especially with the clearinghouse and processing industries, where a huge integration is taking place. Mergers, takeovers, joint ventures are formed to create the necessary scale to compete,” he says.
  As many as 70% of European banks will outsource payment processing within the next three to four years as a result of SEPA, says Axel Pierron, an analyst in Paris with Celent, a Boston-based financial-research firm.
  NEW MODELS
  Although cross-border transactions comprise only about 20% of all European transactions, according to Celent’s estimates, Pierron says the need by banks to create the infrastructure for pan-European payments will trigger new business models for many of them.
  â€œUnder the old model, cross-border payments were a source of revenue for many banks. Under SEPA, it will be a more-level playing field, and banks will have to find other ways to make up that lost revenue by adding other value or services.”
  Among the organizations that will benefit from SEPA are corporations with large customer bases throughout Europe, such as insurance, utility and telecommunications companies, says Darrell Fielding, managing director with The SEPA Consultancy Ltd. of London.
  â€œThrough SEPA, banks can take the lead in delivering integrated cross-border payment solutions to corporations in Europe for the first time,” he says. “It’s a big opportunity.”
  Every bank may not be fully compliant by 2010, but within a few years SEPA will reshape Europe from a web of disconnected networks to a single payment system.
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