SEPA: the long and winding road

As the first deadline for implementation of the Single Euro Payments Area approaches in February 2014, you could be forgiven for thinking that it is pretty much all over – or at least will be by October 2016, when the second deadline arrives.

Don’t count on it, cautions Ruth Wandhöfer, global head, regulatory & market strategy, Citi Transaction Services. “I see two themes – the old challenges, which arguably people should have been getting on with for quite some time – SEPA in terms of bank operations and making sure that customers are ready, and new problems that are arising as things change,” she says.

As of 1 February 2014 in Eurozone countries and 31 October 2016 in non-Eurozone countries, banks and corporates will be required to use SEPA formats for euro payments and direct debits. Any organisation making or receiving payments is likely to be affected by this new regulation, yet a large number of organisations of all sizes have not yet begun their SEPA migration, say many observers.

SEPA formats require the use of XML, which is where Wandhöfer sees the first hurdle. “It is challenging for regulators. On the one hand they don’t really understand the technology requirements. It is very difficult, as a supervisor, to assess whether the new platforms are XML compliant,” she says. “Will we move to a fully harmonised environment? Clearly not – this will take much more time. Banks will be polishing their systems after the end-date.”

How this translates into practice is also unlikely to be uniform across the European Union because it’s a question for individual member states, which have the responsibility for making sure that their banks and payment service providers are ready.

There is also the fact that there is still quite a lot of wiggle room, or as Wandhöfer bluntly puts it: “No one really understands the actual SEPA rulebooks – which make up the basis of the technical standards implementation – in the same way.”

All of that, however, is part of the old set of challenges.

The new game changers for banks, as she sees it, started when the Payment Services Directive came into force in 2009. “The PSD introduced non-bank payment service providers into the market, which meant more competition for banks, for example in payment processing, and cards acquiring and issuing etc. In addition, it has emerged that some new entrants are starting to offer services without being regulated, given their new business models were developed quite purposefully outside the law,” she says. “That becomes even more relevant when you look at the question of where banking, in terms of payment services, stands over the next few years.”

Aside from the emergence of new players, several other threads run through Wandhöfer’s views: the differences between the consumer and SME markets and the large multinational corporates that Citi Transaction Services largely deals with, and the interplay between those and the types of instruments that will prevail in the future.

“The business-to-business space has been overlooked a little bit in the SEPA debate because most bank’s discussions have been more retail and e-commerce focused,” she says. “Looking at it from the large corporate space, the benefits of SEPA on paper are very clear [but] when it comes to implementation it is more uncertain what is going to happen, particularly with SEPA Direct Debit. With credit transfers it has been easier, although not all banks have been able to handle the additional options provided by XML, given their recourse to conversion processes.”

The issue is that with Direct Debits, the debtor banks have to have a product capability in place to process the instrument, where some have clearly not been ready. Wandhöfer says that this can cause collections to fail.

“We are encouraging all of our large multinational corporates to reach out to their debtors and creditors and tell them that they will be doing SEPA from 1 February and tell them to ensure that their bank is ready,” she says.

The other part of the SEPA agenda is at the consumer/merchant end of the scale, and the complications here are likely to be even greater. It is also an area that some banks have not paid much attention to for many years.

“This last mile where the seller/merchant and payment provider is interacting with the consumer has been really overtaken by many different niche players,” she says. “This has been a sort of disintermediation – banks didn’t necessarily continue evolving their consumer offerings in this space and clearly the absence of a pan-European e-commerce payment process outside of cards is a sign of this.”

The banks, it can be argued, gave up that part of the chain a long time ago with the creation of the credit card schemes. Ironically, it is the cost of credit cards that most exercises the merchants and consumers.

It could be, however, that legislation on card interchange fees could remove or significantly reduce that cost barrier. “All of the complaints of the past few years have taken us to the point where in June or July we’re actively expecting EU regulation reducing those interchange fees,” says Wandhöfer. “Arguably a payment solution for online or e-commerce is potentially not necessary if the card business gets cheaper – merchants can do what they want to do more cheaply, which is what they want. Perhaps all of that fuss will have gone away …”

That would remove the complication of rolling out a pan-European e-commerce scheme, which even with SEPA would be complicated. “Creating such a new scheme and process flow is not going to be easy because you need investment money and technology, and many banks are clearly struggling with the Eurozone crisis and SEPA itself and, of course, Basel III,” she says.

Moreover, there is a great deal of uncertainty about what is actually required in the e-commerce payment space. Many, for instance, think of real-time payments as an instant end-to-end irrevocable transfer, but this is not necessarily the case and arguably not even required.

“Very often we talk about real-time payments when what the consumer and merchant in an e-commerce transaction actually want is a payment guarantee,” she says. “You don’t necessarily have to have settlement in real-time: If that were to happen everywhere it could actually increase risk.”

More subtly, there are big differences in the payment habits of consumers (and the preferences of merchants) across Europe. In the consumer/merchant payment space across Germany and Austria, for instance, it is common to use something called an ELV – Elektronisches Lastschriftverfahren or Electronic Debit Procedure – which allows the consumer to authorise a merchant to collect money from their bank account at POS.

Wandhöfer says that it stems directly from a large German merchant working with a large German bank on a solution that was cheaper than cards. “The merchant said. ‘I know all my customers and I’m not going to sell to anyone I don’t know, so I’m happy to take the counterparty risk’, ” she says. “The consumer comes into the shop, at the point-of-sale the merchant reads the mag stripe and initiates a one-off direct debit where the customer signs a mandate giving the authorisation to the merchant to debit their account.”

It’s also the sort of thing that the SEPA schemes have not been designed for. “That’s why the ELV scheme has been exempted from SEPA 2014, and it’s unlikely to dissolve into a SEPA-compliant direct debit by 2016, by the way,” she says.

There have been suggestions that the ELV may stay around and even spread to other countries as a one off instrument that creates the immediate ability to collect, based on the consumer one-off mandate.

Unfortunately, SEPA requires a timeline, currently five days under the core SDD scheme, for presenting the collection to the debtor bank before same day settlement happens on D.

That, says Wandhöfer, “means that the timeline for processing a direct debit is much longer than in an ELV transaction and hence cannot be used in an immediate POS context. At the same time several German corporates have started voicing risks of cash flow and liquidity problems if they move from domestic direct debits to SEPA.”

Similarly, while merchants might be happy to use the ELV mechanism for known customers – loyalty card holders, perhaps – the wider it is operated, the less likely they are to be comfortable; German merchants only take cards that are that are branded with the EC-cash logo.

There is also the small fact that “banks don’t like ELV because they don’t make any money from it,” she points out.

Meanwhile, it “remains to be seen what will happen with Direct Debit,” she says. “Will people be moved to a direct payment, the great Finnish example, which is actually a Direct Debit in disguise”? How will the industry align?”

These are questions that we may well still be asking after the 2016 deadline. BT

Ruth Wandhöfer will be one of the keynote speakers and moderators at the European Payments conference on 4-5 July 2013 in Amsterdam.