Gertrude Tumpel-Gugerell of the European Central Bank’s Executive Board recently compared the launch of the EU’s flagship direct debit scheme with the maiden voyage of the Cutty Sark, the nineteenth century British merchant ship built to transport tea from China. The Cutty Sark was the fastest, most technologically advanced clipper of its time, renowned for its beauty.

With that in mind, policy makers in Frankfurt and Brussels must have been disappointed to note that in December last year, one month on from the launch, interbank clearing house EBA processed only 20 of the new-style direct debits (SDD, SEPA direct debit), with a value of around €17,000. In 2008, the total value of all direct debit transactions in the eurozone was over €15 trillion.

The launch was the second salvo in a bid by the European Commission and the ECB to create a Single Euro Payments Area (SEPA), where euro users can transfer money, pay bills and use cards abroad at the same price as they do at home. The rationale was simple: the Commission was receiving countless complaints that banks were charging “considerably more” for cross-border euro payments than domestic transfers, even after a regulation was introduced to equalize fees (EC/2560/2001). “Payment systems were organised by banks nationally and the infrastructures for cross-border payments were inefficient and slow,” the EU executive said in a report on the functioning of the 2001 law.

Gerard Hartsink, chair of the European Payments Council (EPC), which steers SEPA, told Europoliticsthe philosophy behind the project. “We want to create a euro area in which all euro payments are domestic, where the current differentiation between national and cross-border euro payments no longer exists.” In fact, SEPA goes beyond the eurozone and even beyond the EU, with 32 countries so far on board: the 27 member states, Iceland, Liechtenstein, Monaco, Norway and Switzerland.

Hartsink’s group began life in 2002. Its function is to write up detailed rulebooks on how the new payments should work and encourage banks to change over. Around 75 institutions make up its membership list, including European giants, such as the Royal Bank of Scotland (RBS), Credit Suisse, ING and BNP Paribas. But progress since 2002 has hardly been plain sailing.

CREDIT LIMITS

SEPA’s opening shot came with the launch of its flagship credit transfer (SCT, SEPA credit transfer) back in January 2008, but take-up has been sluggish: by December last year, only 4.8% of all eurozone credit transfers were SEPA-branded, even though more than 4,300 banks had signed up to the scheme. To compare, the total value of eurozone credit transfers hit €120 trillion in 2008.

The abiding problem is that SEPA is an exercise in self-regulation, implemented by banks themselves. There is also one very important factor missing, says Patrick Poncelet, a senior adviser with the European Banking Federation (EBF): a deadline. “All big projects, especially those of a financial nature, always have an end date. The easiest to compare it to is the euro. Without it, Germany and France, for instance, would not have switched over,” he said.

But end dates are divisive. The Commission indicated in a September 2009 road map that it was ready to set one. “As for the euro changeover, fixing an end-date for SCT and SDD migration provides certainty and predictability and acts as a strong incentive for both industry and users to speed up migration,” the communication said (COM(2009)471). Back in March last year, the European Parliament called on the Commission to “set a clear, appropriate and binding end-date, which date should not be later than 31 December 2012, for migrating to SEPA products, after which date all payments in euro would have to be made using the SEPA standards”.

But a coalition of SEPA end-users - including consumer, merchant and business groups - opposes setting a deadline before the problems they have identified are solved. A fight over governance is most certainly in the offing. Merchants and consumer groups have put their foot down over the way the project is run and say they are not being consulted by the EPC before crucial decisions are made. “End-users are frustrated because the banking industry does not seem to listen to their proposals. Some are even starting to boycott the whole project,” says Cécile Grégoire, a senior adviser on payment systems at EuroCommerce.

While there are a few technical kinks to be worked out with credit transfers - the rules in place are “acceptable,” says Olivier Brissaud of the European Association of Corporate Treasurers - users’ woes over direct debits are threatening to scupper the entire deal (see separate article). Consumer group BEUC says the new-style debits are open to “massive” fraud, while other groups, such as UEAPME, have competition concerns on fees.

It makes setting an end-date for the whole project near impossible. Brissaud, who also heads up the End Users’ Committee, says, “Either we go for an end-date for the whole process of SEPA, and users say ‘no’, or we accept that it is a process and keep working on the direct debit - because it is not mature”.

A 2009 report by Capgemini consultants found that there is a real risk of a ‘mini SEPA’ emerging, where national systems are used for domestic payments, while SEPA is used for cross-border transfers. The Commission says the cost of running two systems at once could be as high as €43 billion. “The risk of a mini-SEPA remains real unless stakeholders get certainty on key issues: an end-date for full migration to SEPA; evidence that SEPA solutions can provide tangible improvements in operational performance; and clarity on standards to be used for SEPA payments (eg around data) so participants can prioritise IT investments,” the report says.

Banks across the bloc should be starting to standardise the data they use, jettisoning national account numbers in favour of international IBAN and BIC codes, but in fact, only Belgium and Luxembourg have completed the task.

CHARTING THE COURSE

Norbert Bielefeld, deputy director of payment systems at the European Savings Banks Group (ESBG), says that nothing will change until governments take the initiative. “Clearly, what has been missing is a strong commitment and strong action from public administrations and related entities throughout the EU,” he told Europolitics. The EBF’s Poncelet agrees. “The biggest payers and payees are public administrations. They pay pensions and receive taxes, and they won’t move if they’re not forced.”

The public sector in the EU is worth 50% of the bloc’s gross domestic product, and makes 20% of its total cashless payments, the Commission says. But apart from Belgium and Luxembourg, no public body in the EU is buying into the new credit transfers, not even the Commission and ECB (although they have set themselves a June 2010 deadline). “They must be the ones that show the way,” says Brissaud.

Good old-fashioned nationalism could be at the heart of the problem, says Poncelet - why bother changing when domestic systems function well enough? But money is also an issue. “What is not helping is the crisis,” he admits. “Investments on the banking side were done before the crisis. One of the lessons of the crisis is to come back to basics.” At a very rough estimate, the bill for the changeover could amount to €8 billion to €10 billion per country, Bielefeld says, or anywhere up to €150 million per bank. “The only thing that is certain is that there are additional costs,” he admits.

SEA CHANGE?

The first two moves to complete SEPA - credit transfers and direct debits - will benefit corporates, rather than consumers, Poncelet explains. “Most consumers don’t pay abroad. They are not the ones that are going to benefit. The people who are really interested are telecommunications companies, for instance, who have millions of customers.” And there is money to be made. The EPC estimates that operating costs could come down by €123 billion over six years and the Commission says an extra €243 billion could be saved by using SEPA to launch electronic invoicing.

Besides that, clearing and settlement will become more centralised. There are currently over 30 – highly nationalised – clearing and settlement systems in Europe, but these will merge into two or three pan-European houses, Poncelet estimates. It means economies of scale for banks, he says. “It’s fantastic for banks; they will be able to sell their products to a market of 450 million consumers.”

Moreover, by 2012, all payments will have to be credited to the receiver’s account within one working day, a rule mandated by the Payment Services Directive (2007/64/EC). The current execution time is five days.

Consumers will see the benefits when SEPA’s third building block is in place: cards. Although new SEPA-compliant card schemes are emerging, efforts to push them have been stalled by pending anti-trust cases against Visa and MasterCard (see separate article).

Whether SEPA delivers like the Cutty Sark or sinks like the Titanic remains to be seen.

“End-users are frustrated... Some are even starting to boycott the whole project”   

What is SEPA?

The Single Euro Payments Area is the name given to the EU’s aim to equalise cross-border and national payment fees. It should cost no more to transfer money or pay a bill abroad than it does at home. The three SEPA building blocks are:

SEPA credit transfers (launched 2008)

SEPA direct debits (launched 2009)

SEPA cards (ongoing)

SEPA timeline

2001 - Regulation on cross-border payments in euro equalises fees

2002 - European Payments Council (EPC) set up

2007 - Payment Services Directive (PSD) adopted

2008 - SEPA credit transfers go live

2009 - Deadline for PSD implementation; SEPA direct debits go live

2010 - Deadline for “reachability” of banks

2011 - Cards must be SEPA-compliant 

2012 - MIFs on direct debit transactions to be abolished

SEPA in numbers

32 - number of countries participating

123 billion euro - potential savings (over six years)

43 billion euro - cost of maintaining national systems alongside SEPA

4,300 - number of banks that have signed up for SEPA credit transfers

4,950 - number of banks that have signed up for SEPA direct debits

4.8% - percentage of credit transfers that are SEPA-branded

120 trillion euro - value of eurozone credit transfers in 2008

8 weeks - refund deadline for mistakes on direct debits

13 months - refund deadline for unauthorised direct debits

1 day - maximum execution time for transactions in euro (after 2012)