REGULATION 2560/2001: STUDY OF COMPETITION FOR CROSS-BORDER PAYMENT SERVICES

Transcription

1 REGULATION 2560/2001: STUDY OF COMPETITION FOR CROSS-BORDER PAYMENT SERVICES FINAL REPORT PROJECT N MARKT/2004/11/F Prepared for the EUROPEAN COMMISSION Internal Market and Services Directorate-General Retail Banking Research Ltd London, September 2005

2 DISCLAIMER This Report was produced by Retail Banking Research Ltd, acting as consultant to DG MARKT of the European Commission. The views expressed in this Report are those of the consultants. These views have not been adopted or in any way approved or endorsed by the Commission and should not be regarded as a statement of the views of either the European Commission or of DG MARKT. Although the information and opinions contained in this report were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy and completeness. All information and opinions are subject to change without notice. COPYRIGHT Copyright European Communities, Reproduction is authorised except for commercial purposes provided that the source is acknowledged.

3 TABLE OF CONTENTS EXECUTIVE SUMMARY Objectives Cross-border Credit Transfers Payment Card and ATM Cash Withdrawal Networks INTRODUCTION Objectives of the Study Structure of Report Scope Networks Investigated During the Study Cross-border Credit Transfers Cross-border Payment Card Transactions Cross-border ATM Cash Withdrawals Methodology Conventions Used in this Report Terminology Transaction Volumes Fees and Prices Network Rules I i i iii VII vii viii viii ix ix ix ix x x x x xi xi 1. MARKET CONTEXT SEPA Market Size SWIFT European Payments Council 4 2. CREDIT TRANSFERS Market Characteristics Consumers Small and Medium Sized Businesses Corporates Banks Networks Changes to Credit Transfer Networks PAYMENT CARDS Market Characteristics MasterCard and Visa Other Networks Changes to Payment Card Networks ATM CASH WITHDRAWALS Market Characteristics Cross-border Functionality Global ATM Alliance ATM Acceptance Networks and Transaction Volumes Networks Changes to ATM Cash Withdrawal Networks 29 CONTENTS

4 5. COMPETITION ANALYSIS Introduction Credit Transfers Payment Card Transactions ATM Cash Withdrawals Credit Transfer Networks Economic Features of the Credit Transfers Industry Transaction Shares and Volumes Product Differentiation Ownership and Governance Joining and Membership Restrictions Sunk Costs Innovation Standards Payment Card Networks Economic Features of Payment Card Networks Transaction Shares and Volumes Product Differentiation Ownership and Governance Joining and Membership Restrictions National Practices that Affect Intra-Scheme Competition Competition in Processing Sunk and Switching Costs Innovation Standards ATM Cash Withdrawal Networks Transaction Shares and Volumes Sunk and Switching Costs Standards Impact of ATM Surcharging on Intra-Network Competition RECOMMENDATIONS Cross-border Credit Transfers Banks Choice of Networks Separation of Governance, Management and Operations Co-operation and Representation Direct Access Further PEACH Operators Regulatory Requirements and Standards Payment Card Transactions Interchange Fees Sole National Acquirers Cross-border Issuing and Acquiring No Discrimination ATM Surcharging SEPA Debit Card Schemes 59 CONTENTS

5 APPENDIX A TERMS OF REFERENCE 60 APPENDIX B ORGANISATIONS CONSULTED 61 APPENDIX C GLOSSARY OF TERMS 62 APPENDIX D SEPA ACTIONS AND MILESTONES 65 APPENDIX E CREDEURO AND ICP CONVENTIONS 67 APPENDIX F CREDIT TRANSFER NETWORKS 68 APPENDIX G PAYMENT CARD SCHEMES 90 APPENDIX H ATM CASH WITHDRAWAL NETWORKS 102 APPENDIX I SEPA DEBIT CARD SCHEMES 105 TABLE OF FIGURES Figure 1 Volume of Cashless Payments in the European Union, Figure 2 Estimates of Cross-border Transactions in euro up to 12,500, Figure 3 SWIFT Statistics, 2002 and Figure 4 P2P Consumer Funds Transfer Networks 8 Figure 5 Number of Banking Relationships in Selected EU Countries, Figure 6 Traditional Low-value Cross-border Credit Transfer Networks 13 Figure 7 Cross-border Credit Transfers in euro up to 12,500 by Multilateral Bank Network 15 Figure 8 Main Changes to Credit Transfer Networks 15 Figure 9 Merchant Acceptance in EU15 Countries, end Figure 10 Cross-border Payment Card Transactions 20 Figure 11 Debit Cards in EU15 Countries, end Figure 12 MasterCard and Visa International Card Issuance, end Figure 13 Payment Card Purchases on MasterCard Europe and Visa Europe Cards, Figure 14 Main Relevant Changes to MasterCard and Visa 25 Figure 15 ATM Cash Withdrawal Networks in EU15 Countries, Figure 16 SEPA Actions Required 65 Figure 17 SEPA Milestones 66 Figure 18 Interchange Fees as a Proportion of Acquirers Operating Costs and MSCs 92 Figure 19 MasterCard Europe Purchase Transactions, Figure 20 Visa Europe Purchase Transactions, Figure 21 EUFISERV ATM Network and Cards by Country, March Figure 22 SWOT Analysis for Alternative Approaches to Creating a SEPA Debit Card Scheme 106 CONTENTS

6 EXECUTIVE SUMMARY Objectives This study has evaluated the changes to cross-border payments infrastructures as a result of Regulation 2560/2001 and other factors, and the conditions of competition in the provision of crossborder payment services. Where appropriate this report makes recommendations with a view to improving customer services. Cross-border Credit Transfers Summary of Main Findings At least 80% of bank-to-bank cross-border credit transfers currently take place through traditional correspondent banking arrangements or via intra-bank transactions. [see Section 5.2.2] No multilateral cross-border credit transfer network has a large proportion of the total volume of cross-border credit transfers. [see Section 2.1.5] Both EURO1/STEP1 and STEP2 are growing rapidly. It is likely that STEP2 will gain a significant proportion of cross-border credit transfers below 12,500 transacted through multilateral bank networks in the next one to two years currently EURO1/STEP1 and STEP2 combined represent approximately one-eighth of this volume. [see Sections and 5.2.2] As well as growth from the migration of cross-border volumes from other networks and methods, the volumes of transactions handled by EURO1/STEP1 and STEP2 will increase as the result of the migration of national traffic. [see Section and Appendix F] One of the main drivers encouraging the migration of traffic to STEP2 is the need for banks to reduce costs in response to the requirements of the Regulation. [see Section 5.2.2] Using STEP2 or the other multilateral bank networks either those operated by EBA Clearing or those with targeted membership may not always be cheaper or more efficient for banks than correspondent banking or intra-bank transactions. [see Section 5.2.2] There are limited technical barriers to creating a new multilateral bank network to compete with those now operated by EBA Clearing, and even to being a new PEACH operator to compete with EBA Clearing s STEP2, and the cost of doing so is relatively small. Far more difficult, however, is creating the requisite commercial framework and operating regulations and, more importantly, having the ability to access directly or indirectly all bank accounts in the EU. In addition it is not clear that any new multilateral bank network, including a new PEACH operator, would grow to gain the necessary economies of scale, particularly in terms of transaction processing. [see Section 5.2.6] An uncertainty for policymakers, banks and operators of credit transfer networks is the likely growth of P2P funds transfer networks and services, including MoneySend and Visa Direct. The convenience of such networks and services may become increasingly attractive to consumers as they become accustomed to using, and confident in the security, of these systems. [see Section 5.2.2] INTRODUCTION Page i

7 Cross-border credit transfer networks are segmented and display a high degree of product differentiation. Banks choose the most appropriate methods and networks to transact their and their customers cross-border credit transfers, based upon a wide range of factors. Although credit transfer networks are not perfect substitutes, banks appear to substitute relatively easily between networks. [see Sections and 5.2.3] All the cross-border credit transfer networks investigated during the study are owned by some or all of their member banks. Several banks are shareholders of more than one network, many banks have network shareholdings but also participate in other networks, while many more have membership of more than one network. Whilst conflicts of interest could theoretically arise from networks ownership and governance, the translation of these conflicts of interest into anti-competitive behaviour is unproven. [see Section 5.2.4] All the cross-border credit transfer networks investigated during the study require their members to be regulated financial institutions. Corporates are denied network membership, and with the exception of SWIFT, corporates must send credit transfers through their selected commercial bank(s). This may be inconvenient or more costly than if the corporate were a direct member of the network. In addition, as users rather than members, corporates are not involved in a network s decision making and thus a network may develop in ways that do not meet the needs of a significant sector of users. [see Section 5.2.5] For cross-border credit transfers, the biggest influences on end-user prices are national factors relating to their provision. [see Section 6] Summary of Recommendations This study makes the following recommendations on cross-border credit transfers: Further research should be conducted into the decision criteria that determine banks choice of methods and networks for cross-border credit transfers. [see Sections and 5.2.3] Specific research should be conducted to assess the advantages and disadvantages of separating the governance, management and operations of EBA Clearing and other networks. [see Section and Appendix F] The multilateral bank networks and the EPC should be asked to review their rules to allow corporates and other stakeholders direct representation at a user group rather than membership level. [see Sections and 5.2.5] The multilateral bank networks should review their rules and operational frameworks to consider providing direct access to corporates that are sponsored by their members, who would take responsibility for the corporates actions and for their settlement and other liabilities. [see Sections and 5.2.5] The EPC should ensure that the payment scheme rules for electronic credit transfers do not contain any unreasonable implicit or explicit barriers to an organisation becoming another PEACH operator and a competitor to EBA Clearing; and the Commission should monitor and audit the EPC s activities on this matter. [see Section 5.2.6] The Commission and national regulators should ensure that any new regulatory requirements on standards or inter-operability are preceded by an assessment of the degree to which they prescribe a specific business model or technological solution or inhibit future innovation. [see Sections and 5.2.8] INTRODUCTION Page ii

8 Payment Card and ATM Cash Withdrawal Networks Summary of Main Findings Payment Card Networks The share of transaction volumes held by the two main international payment card schemes, Visa and MasterCard, varies by country. In the eurozone MasterCard Europe accounted for an estimated 48% of cross-border payment card purchase transactions under 12,500 in 2004, and Visa Europe 51%; the corresponding proportions for EU15 countries were 44% and 55%. [see Sections and 5.3.2] On a European level, the merchant acceptance networks of MasterCard and Visa flag cards are similar, as are those of Maestro and Visa Electron. [see Sections and 5.3.2] There are a number of countries Austria, Belgium and Germany where all international debit cards are co-branded with a logo of just one of the international payment card schemes. [see Sections and 5.3.2] In Austria, Denmark, Finland, Luxembourg and the Netherlands, a single national organisation acquires MasterCard Europe and/or Visa Europe transactions, or transactions for a specific MasterCard or Visa brand. In addition, in Portugal one local company acquires virtually all such transactions. In other countries there are at least two major acquirers. With the exception of Finland, this is the result of a collective agreement of national banks and banking organisations. [see Sections and 5.3.2] Cross-border acquirers have not gained a significant share of acquired transactions in any country, and have not had any significant impact on MSCs. [see Sections and 5.3.2] In general in EU15 countries, consumers and businesses have a wide choice of potential issuers for their credit and charge cards, and concentration levels tend to be low. Competition in debit cards cannot normally be separated from the competition for retail banking services and therefore the concentration levels in retail banking apply. [see Sections and 5.3.2] MasterCard Europe and Visa Europe offer similar products in the areas of credit, charge and debit cards. However, there are a number of areas where they offer different products and services. [see Section 5.3.3] Acquirers compete on many facets of their services to merchants, and although they cannot compete on interchange fees, this does not preclude all price competition. [see Section 5.3.3] There is considerable product differentiation between issuers, particularly between issuers of credit and charge cards. [see Sections and 5.3.3] The degree of governance duality is high in the payment cards industry. The impact of this on competition between payment card networks has not been established in either the US or Europe, although it is clear that this duality has positive impacts on cardholder choices. [see Section 5.3.4] INTRODUCTION Page iii

9 Most large banks in the EU are members of both MasterCard Europe and Visa Europe at least 80% of the largest issuers have dual membership and many banks that are MasterCard or Visa members are also members of a national debit card scheme. Several also have some form of relationship with a T&E organisation. [see Sections and 5.3.5] There are a number of joining and membership restrictions within the payment card networks that could result in barriers to competition within networks, notably in acquiring. [see Section 5.3.5] The degree of competition within and between card payment schemes is also affected by national practices and restrictions. National restrictions are particularly important for entrants into cross-border acquiring. There are a number of obstacles that make it more difficult for a cross-border acquirer to compete successfully with indigenous local acquirers for the business of national-only merchants. [see Section 5.3.6] Competition in processing is stronger than that for other payment card services, as other banks, third party processors and suppliers compete with the payment card schemes to provide processing services to the schemes member banks. Payment schemes do not generally restrict their members from using other banks, third party processors or outsourcing suppliers to perform any or all of their acquiring or issuing processing functions. [see Section 5.3.7] The major obstacle to creating a new multilateral international payment card scheme in Europe is the difficulty of constructing a convincing business case. This is due to the very large investment required to create a new scheme with the same card-base, acceptance network, infrastructures and economies of scale as the existing schemes. We observe that no new multilateral four-party international card payment scheme has emerged worldwide in the last thirty years. [see Sections and 5.3.8] The creation of a new arrangement whereby pan-european debit card functionality is provided by making national debit card schemes inter-operable and allowing reciprocal usage of their cards is a major task. In addition to the investment required, major obstacles are the definition of operating regulations and technical standards, the agreement of a commercial framework, the need to change ATMs and merchant terminals and re-negotiate merchant contracts, and the creation of switching and clearing and settlement infrastructures for foreign authorisations and transactions. [see Section and Appendix I] Where multiple acquirers operate, the desire and ability of a merchant to switch to another acquirer, for both national and cross-border transactions, varies per country. In general, this depends upon the merchant s size and its commercial and technical relationship with its acquirer. [see Section 5.3.8] There have been significant innovations in the payments cards industry, however this may not be an indicator of the level of competition. Innovation has resulted from competition, cooperative initiatives and other factors such as SEPA. [see Sections 3.2 and 5.3.9] MasterCard Europe and Visa Europe co-operate on the technology standards that underpin the payment cards industry, such as those for smart cards and electronic purses, contactless cards, new delivery channels and fraud prevention. In general, these co-operative initiatives facilitate the operation and growth of the card payments industry. [see Section ] INTRODUCTION Page iv

10 The payment cards industry is characterised by the combination of co-operation in the development of unsponsored (common) standards and competition through the development and use of sponsored (proprietary) standards. [see Section ] The existence of sponsored standards in some aspects of the payment cards industry could create barriers to entry. However, the development of the underlying unsponsored standards such as EMV may help to remove barriers. Overall the impact of standards on competition is mixed. [see Section ] For payment card transactions, customer charges are determined by acquirers and issuers and are mainly determined by national factors. [see Section 6] ATM Cash Withdrawal Networks From a competition viewpoint, ATM cash withdrawal networks operate in a similar way to payment card networks, and are provided by the same organisations. [see Section 5.4] Excluding the T&E schemes, MasterCard Europe-branded cards accounted for an estimated 67% of cross-border ATM cash withdrawals in euro in the euro area in 2004, Visa Europebranded cards for 27% and EUFISERV for 7%. Within EU15 countries the proportions were 49%, 45% and 6%. [see Sections and 5.4.1] MasterCard Europe, Visa Europe and EUFISERV compete (inter-network competition) across a number of dimensions. These include the ATM acceptance networks, the numbers of cards issued, transaction fees, interchange fees and (except EUFISERV) card products. [see Sections and 5.4.1] MasterCard Europe and Visa Europe co-operate on the technology standards that underpin ATMs and cash dispensers, in particular on EMV and new security techniques such as Triple DES. [see Section 5.4.3] ATM surcharging is limited to a small proportion of ATMs in the Netherlands and a larger share of ATMs in the UK. It is prohibited by Visa Europe s regulations, unless a country s national law expressly requires that an ATM owner be permitted to impose a surcharge, and not allowed by MasterCard Europe s rules. In addition, there are inter-bank agreements or regulations that do not permit it in some countries. [see Section 5.4.4] ATM surcharging allows an ATM owner to charge a commercial rate for the use of its machine and thus it attracts new ATM deployers and fuels the installation of additional machines in convenience off-site locations. [see Section 5.4.4] Summary of Recommendations This study makes the following recommendations on payment card and ATM networks: The Commission and national regulators should assess the impact on cross-border acquiring and international merchants of the interchange rates set by MasterCard Europe and Visa Europe (and national organisations of these schemes where appropriate) for intra-regional (cross-border) and national (local) transactions. [see Sections and and Appendix G] INTRODUCTION Page v

11 The Commission and national regulators should investigate the impact of sole national acquirers on the provision of merchant acquiring services and on MSCs in the listed countries, from both competition and social welfare viewpoints, and consider whether it would be appropriate to change the current arrangements to enable the entry of new national acquirers. [see Sections and 5.3.2] MasterCard Europe and Visa Europe should be encouraged to take a proactive stance on the removal of national operating regulations and technical requirements within the context of the move towards SEPA. The Commission should consider whether any national regulators or banking associations impose unnecessary or discriminatory conditions on cross-border competition in these areas. [see Section and Appendix G] Visa Europe should review its no discrimination rule, and MasterCard Europe (and Visa Europe, subject to this review) should consider whether rules and measures are necessary to prevent abuse. [see Section and Appendix G] Visa Europe and MasterCard Europe, and national organisations in countries where ATM surcharging is prohibited, should review their rules preventing surcharging at ATMs. [see Section 5.4.4] The EPC should ensure that its payment card framework does not contain any unreasonable implicit or explicit barriers to the various approaches now being considered for SEPA debit card schemes; and the Commission should monitor and audit the EPC s activities on this matter. [see Sections and and Appendix I] INTRODUCTION Page vi

12 INTRODUCTION Objectives of the Study Payment systems in the EU are changing, with the objective of creating a Single Euro Payments Area (SEPA) by One of the key steps in this process was the adoption of Regulation 2560/2001 on cross-border payments in euro in December The Regulation, which establishes the principle of equality of charges for payments up to 12,500 within Member States (national) and between Member States (cross-border), has applied to ATM cash withdrawals and payment card transactions since July 2002 and to credit transfers since July The Regulation was based on Internal Market principles, according to which there should be no discrimination between national and cross-border payments. The obligation to apply the same charges to national and cross-border payments created the need for the banking industry to deploy EU-wide infrastructures in order to cut the costs and improve the service levels for cross-border credit transfers. The Regulation and the overall progress towards SEPA have also led to other changes in the networks 1 for cross-border credit transfers, ATM cash withdrawals and payment card transactions. Article 8 of the Regulation asked the European Commission to report on the application of the Regulation, and in particular on: 1. Changes in cross-border payments infrastructures. 2. The advisability of improving consumer services by strengthening the conditions of competition in the provision of cross-border payment services. 3. The impact of the application of the Regulation on charges levied for payments made within a Member State. 4. The advisability of increasing the amount provided for in Article 6 (1) of the Regulation to 50,000 as from 1 January 2006, taking into account any consequences for undertakings. In order to meet this requirement, DG MARKT (the Commission s Internal Market and Services Directorate) commissioned a study on the impact of the Regulation. The study has two parts (Lots): a) Lot 1, which addresses primarily part 2 of the Review Clause. Lot 1 s objectives are to evaluate the conditions of competition in the provision of cross-border payment services, and if appropriate to make recommendations on the need to strengthen such competition. The Terms of Reference for Lot 1, the results to be achieved by the Contractor within the Invitation to Tender document, are shown in Appendix A. b) Lot 2, which addresses part 3 of the Review Clause. The objective of Lot 2 is to determine the impact of the Regulation on customer charges levied on payments made within a Member State (national or local transactions). The study was carried out by the following companies: 1 Note: the term network is used generically to cover clearing and settlement systems, national and international payment card schemes, ATM networks and other arrangements for the designated payment services. INTRODUCTION Page vii

13 Retail Banking Research Ltd ( RBR ) RBR, the lead Partner and the contracting party with the European Commission, is a leading consultancy that provides independent information, analysis and strategic advice. It carries out evaluations of markets, products and services in retail banking and payment systems, specialising in payment systems developments, the use of technology in banking automation and the changing structure of the financial services industry. NERA UK Ltd, trading as NERA Economic Consulting ( NERA ) NERA, the sub-contractor to RBR on the study, is an international economic consulting firm and part of Mercer Consulting Group, the consulting subsidiary of Marsh & McLennan. NERA s consultants work on a wide range of issues for government departments, competition authorities, sectoral regulators, nationalised industries and private sector clients. The company has specialist expertise in competition policy in the financial services, gas, electricity, telecommunications, water, broadcasting, and health care sectors. Structure of Report This document is the final report for Lot 1. There is a separate report for Lot 2. Section 1 provides the market context for the designated cross-border payment services, including estimates of the volume of transactions in Sections 2 to 4 describe the study s findings on the networks used for cross-border credit transfers, payment card purchases and ATM cash withdrawals. Each section describes the characteristics of the market and the main relevant changes to the networks since These changes are analysed as to whether they were due to the Regulation, the progress towards SEPA or other reasons. Section 5 provides an analysis of competition within and between the multilateral bank networks that provide cross-border payment transactions. Sections 6 makes recommendations, based on the analysis in the earlier sections, with a view to improving customer services in the field of cross-border payments. The report s appendices provide supporting information. In particular, appendices F to H contain descriptions of the networks for cross-border credit transfers, payment card purchases and ATM cash withdrawals that were investigated during the study. Scope The geographic scope of Lot 1 is the 15 countries of the European Union prior to the accession of 10 new Member States in May 2004 (the EU15). The primary focus of the study has been the networks for cross-border payment services in euro, for both credit transfers and payment cards, the competition within and between these networks and the potential for new networks. In order to understand these fully, however, the study has also investigated those national networks (clearing and settlement systems for credit transfers, national card payment schemes and ATM networks) that might have had an impact on these cross-border services and/or that interface directly to the cross-border networks. The study has investigated networks that process, clear and settle payments with a value up to and including 12,500, the amount defined in the Regulation. Such payments may be made by retail customers (consumers) and businesses (SMEs and corporates). INTRODUCTION Page viii

14 The report contains a description of the key facets of the main networks that provide cross-border payments their key characteristics, ownership, governance (if appropriate), membership (if appropriate), fees and/or prices and transaction volumes. It also describes the main changes to these networks that have resulted directly or indirectly from the Regulation or the progress towards SEPA. It examines the relationship between these changes and other relevant changes and the degree of inter and intra-network competition in the provision of cross-border payment services. Networks Investigated During the Study Cross-border Credit Transfers The study has concentrated on multilateral bank networks, both those with targeted membership, such as the Eurogiro network that was originally designed for national postal organisations, and those with open membership, such as EBA Clearing s STEP2. These multilateral bank networks process credit transfers in a variety of ways and have different governance, membership and access, clearing and settlement and other characteristics. The study has also analysed some of the recent and emerging proprietary person-to-person (P2P) networks, such as PayPal; the new P2P services offered by MasterCard and Visa and other companies; and the established proprietary funds transfer services such as Western Union. These compete with the multilateral bank networks to offer cross-border credit transfer services to consumers. The study has not investigated the intra-bank and bilateral correspondent banking arrangements for cross-border credit transfers. Cross-border Payment Card Transactions For cross-border payment card transactions the study has analysed MasterCard Europe and Visa Europe, which together account for over 95% of cross-border international payment card scheme transactions in Europe. To put these networks in context it has also looked at some of the bilateral agreements that allow reciprocal acceptance of private label store (retailer) cards between merchant outlets in more than one country, as well as the main multi-country European fuel card schemes. However it has not analysed the three-party T&E schemes (American Express, Diners Club and JCB), Payment Service Providers and other companies that provide specialised processing and other services that enable cross-border payments via payment cards. Cross-border ATM Cash Withdrawals For ATM cash withdrawals the study has investigated the services provided by MasterCard Europe and Visa Europe and their members, which allow cross-border ATM cash withdrawals using cards branded Maestro, MasterCard, Cirrus, Visa, Visa Electron and PLUS. In addition the study has analysed the EUFISERV ATM-sharing network that supports ATMs in 12 European countries, including 10 within the EU15. INTRODUCTION Page ix

15 Methodology The methodology that was used for the study was as follows: Identification of the cross-border networks that provide cross-border payment services for the designated payment instruments. Identification of the national Automated Clearing Houses (ACHs) that clear and settle credit transfers in each Member State and that currently, or potentially could, interface with the identified cross-border networks. Confirmation that there are no national payment schemes or ATM-sharing networks that have a direct impact upon the identified cross-border networks for payment cards. Development of a template of factors to be used to assess inter-network and intra-network competition. Development of a checklist of topics to research and/or to discuss with the identified networks. Research into each of the identified networks. This consisted of secondary research using RBR and NERA s databases and previous studies and reports, published articles, the Internet and other sources of information; and primary research via face-to-face meetings, telephone discussions and s. Obtaining views and information from other stakeholder organisations with involvement or interest in the designated cross-border payment services. An analysis of the competition within the various networks and of the balance between cooperation and competition. The study s constraints precluded an investigation of the effects of intra-network competition on the services provided by individual network participants to individual end-users. The analysis therefore considered the conditions for and barriers to intranetwork competition facilitated by a network s governance, membership, infrastructure, operating rules, procedures and technical and commercial characteristics. An analysis of the competition between the various networks used for cross-border payment services. This included an assessment of the potential for the deployment of new networks. Appendix B shows the organisations that have provided input and information into the study. Conventions Used in this Report Terminology The terminology used within this report is shown in Appendix C. It should be noted that the term market is used colloquially in Sections 1 to 4 and not in the context of a competition policy analysis. Transaction Volumes With some exceptions, for example the networks operated by EBA Clearing, EUFISERV and Eurogiro, the study has been unable to obtain reliable, verifiable and current data on the volume of cross-border transactions. INTRODUCTION Page x

16 The study has therefore estimated many cross-border transaction volumes, based upon data in RBR s ATMs and Cash Dispensers Europe 2004 and Payment Cards in Europe 2004 reports and a detailed analysis and synthesis of national or country-based data obtained from a variety of sources. These include APACS, Cartes Bancaires, COGEBAN, Deutsche Bundesbank, Euro 6000, the European Central Bank s report Payment and Settlement Systems in the European Union (the Blue Book ), MasterCard Europe, Servired, Sistema 4B and Visa Europe. Fees and Prices The study was able to obtain data on the prices charged to consumers by operators of some of the recent and emerging proprietary P2P networks, the new P2P services and the established funds transfer services. However pricing data are not maintained by the central companies of most multilateral bank networks, or by MasterCard Europe and Visa Europe, as end-user prices are determined by their members and to collect them might be seen as anti-competitive. Although such data were provided by Eurogiro and to some extent by EBA Clearing, most organisations that operate cross-border payment networks were unwilling to provide the study with data on the joining, membership, transaction-based and other fees they charge to their members and other network participants. They stated that such information was commercially sensitive and thus confidential to their members and potential new members. Network Rules With some exceptions, the organisations contacted during the study were also unwilling to provide detailed information on their membership rules, operating regulations and so forth. Again they cited commercial confidentiality and stated that such information was open, transparent and freely available to their members and potential new members. INTRODUCTION Page xi

17 1. MARKET CONTEXT 1.1 SEPA The overall objectives of SEPA are to reduce the barriers to trade and to increase economic prosperity by ensuring there is no differentiation between national and cross-border payments within the eurozone, so that all payments become national payments that utilise the single currency. Financial integration, which is defined as a single market with participants having equal access to this market and equal treatment within it, is seen to be a crucial element of the Lisbon Strategy. This aims to make the European Union the world s most dynamic and competitive knowledge-based economy by Payment cards play a key role in financial integration, because they are currently the most efficient payment instrument for retail payments and they represent a growing share of cashless payments in the EU. The European Central Bank s (ECB s) Blue Book shows that payments by debit, charge and credit cards overtook credit transfers as the most used cashless payment instrument in the EU15 countries in We estimate that in 2004 payment card transactions also became the leading cashless payment instrument by volume within the eurozone. Figure 1 Volume of Cashless Payments in the European Union, % 30% 25% 20% 15% Cheques Payment Cards Credit Transfers Direct debits Card based e-money 10% 5% 0% 2001 euro area 2002 euro area 2001 EU EU15 Source: ECB Blue Book Addendum (April 2004) For payment cards, SEPA means that players are allowed to compete freely and equally beyond national borders, and citizens are able to use their payment cards at foreign ATM and POS terminals under the same terms and conditions as domestic transactions. Inter alia this will require transparent and level interchange fees for domestic and cross-border transactions, the removal of geographic limitations on card issuing and acquiring, all merchants accepting both national and international cards and greater standardisation and interoperability. Underpinning this should be a clear legal framework that is implemented and enforced uniformly in all EU countries. MARKET CONTEXT Page 1

18 For credit transfers and other cashless payments, SEPA means the creation of pan-european payment instruments, the availability of these instruments for national payments, the adoption of new standards and the migration of national payment traffic towards Pan-European Automated Clearing House (PEACH) operators. The ECB December 2004 document Towards a Single Euro Payments Area Third Progress Report defined the Eurosystem s requirements for actions to be taken and the milestones towards SEPA between now and These are summarised in Appendix D. The current environment and characteristics of the designated cross-border payment services vary markedly from that envisaged by the SEPA objectives. Although they are crucial for large corporates, cross-border payments do not today represent a primary need for most consumers and small to medium businesses. The latter two categories of users need them infrequently in situations determined by tourism, working, studying or retiring abroad and specific financial transactions such as the purchase of second homes and foreign goods or services (including from e-commerce merchants) and the transfer of money to friends and family. 1.2 Market Size As far as we are aware, there are no data available on the total volume of cross-border transactions in euro with values up to 12,500, either for EU15 countries or for the eurozone. We have therefore estimated these volumes, as shown in Figure 2, using this approach: a) For credit transfers we have only included bank-to-bank transactions. We have excluded those within recent and emerging proprietary P2P networks, the new P2P services and the funds transfer services provided by MoneyGram and Western Union. (However, volume data for these networks are provided in the report, for comparison purposes, where they are available.) b) We have based our calculations upon national transaction volume data. For credit transfers the estimated volumes have been crosschecked against the EPC estimate for 2001 (132 million) and the volumes of intra-eurozone and intra-eu15 SWIFT payment message volumes for 2002 and c) For Denmark, Sweden and the United Kingdom we have calculated the number of cross-border transactions in euro, credit transfers sent to eurozone countries and payment card purchases and ATM cash withdrawals that take place in such countries, with different weighting factors than for intra-eurozone transactions. d) We have assumed that 95% of the calculated number of cross-border credit transfers and all payment card purchases are below 12,500. No assumption is required for ATM cash withdrawals as all these must be below this threshold. Figure 2 Estimates of Cross-border Transactions in euro up to 12,500 (millions), 2004 Transaction Type eurozone EU15 Credit transfers Payment card purchases ATM cash withdrawals Source: RBR analysis, based upon various data sources MARKET CONTEXT Page 2

19 1.3 SWIFT The financial messaging and other services provided by SWIFT, the Belgium-based inter-bank cooperative society created in 1973 initially to automate telex transfers, are used for all except one of the multilateral bank cross-border credit transfer networks investigated during the study and for most correspondent banking arrangements. SWIFTNet is also used for national traffic. Key statistics for SWIFTNet in 2002 and 2004 are shown in Figure 3. The widespread usage of SWIFT means that any changes to its infrastructure have a profound effect upon the efficiency, costs and technical development capabilities of its users, be they individual banks or groups of banks organised as networks, and impact the products and services to customers. There have been many changes to SWIFTNet over recent years. These include: The demise of the MT100 message (previously the most-used) and its replacement by MT103. The introduction of the MT103+ message standard to facilitate STP. The introduction of SWIFT Member Administered Closed User Groups (MACUGs). This allows Closed User Groups to be set up by SWIFT members, either to transfer messages between selected members or to allow a member s corporate customers to access SWIFTNet directly to send it messages. The introduction of FileAct, which allows transfers of messages in bulk and the coupling of payment and remittance details. FileAct may be used for bank-to-ach, bank-to-bank and corporate-to-bank bulk payments, the latter within MACUGs. The development of SWIFTSolutions for cash reporting, bulk payments and corporates. These combine structured standards, use of SWIFTNet in a SWIFT managed Closed User Group and specific business rules and service level agreements. Changes to SWIFTNet s technology. X.25 communications have been replaced by the TCP/IP communications protocol (the last X.25 line was disconnected in March 2005) and XML-based messages are being phased in alongside the traditional FIN message structure. SWIFT has also agreed to replace its user authentication processes that use bilateral key exchanges by digital signatures and PKI. SWIFT says that between 2001 and 2005 it will return 281 million to its customers; 211 million as a result of reduced message prices compared to those that applied in 2001 and 70 million in rebates. In May 2005 SWIFT announced that the rebate for 2004 was 30 million and that FIN message prices had been reduced by an additional 6.5%. Figure 3 SWIFT Statistics, 2002 and eurozone EU15 World eurozone EU15 World Total messages sent (mn) , ,150 (1) 2,299 (2) Messages to other EU15 (mn) Members ,217 >518 >610 2,280 Sub-members 701 1,000 3,130 >701 >1,000 3,019 Participants (3) ,254 >306 >450 2,368 Total users 1,525 2,060 7,601 >1,525 >2,060 7,667 Source: ECB Blue Book, SWIFT, RBR analysis MARKET CONTEXT Page 3

20 Notes. Figures in italics are estimates. 1. The number of messages sent from European users in 2004 was 1,314 million, of which 872 million were payments. 2. Of these 1,342 million were payment messages, including 871 million bank-to-bank payments. 3. There are many types of participants, including brokers and dealers in securities and related financial instruments, fund administrators, MACUG participants, securities market data providers, travellers cheque issuers and treasury counterparties. 1.4 European Payments Council The European Payments Council (EPC) is the self-regulatory decision-making and co-ordination body of the European banking industry in relation to payments. Its objective is the creation of SEPA by 2010, with all payments (both cross-border intra-eurozone and national) treated as domestic payments as regards speed, security, convenience and cost. The EPC s primary focus is on core payment services, both retail and commercial, in euro in Europe. Its priorities are the creation of SEPA payment schemes for credit transfers and direct debits, the creation of a SEPA framework for debit and account-linked cards and the separation of the governance and management of the defined SEPA payment schemes/frameworks from their operation by service and infrastructure providers. A SEPA payment scheme/framework is a set of rules and practices for the provision and operation of a SEPA payment instrument, encompassing aspects such as an operational model, business and operational rules, liability and risk management procedures and ownership and governance. It is agreed at an inter-bank level within an overall competitive environment. The overall concept is that there is only one scheme/framework per payment instrument, but there may be multiple operators providing each complies with the common set of rules. The EPC was launched in June 2002 by 38 banks and banking associations, the three European Credit Sector Associations (ECSAs) and the Euro Banking Association, together the EPC s members. It had 50 members in June 2004 and now has 64 from 28 European countries. By its own admission, the EPC lost momentum in the latter part of 2003 and the first half of 2004, but it re-invigorated itself in 2004 by these activities: a) The adoption of a formal Charter, which amongst other matters established formally the membership structure and three standing bodies. The membership structure gives each country a minimum of one member, with additional members allocated based upon its population and number of national and cross-border cashless payments in 2001 (the allocation was reconfirmed in 2004). In addition, five banks have been given wild card membership. The standing bodies are: The Plenary, the EPC s decision-making committee with 64 member representatives. It meets quarterly and takes decisions on resolutions by a two-thirds majority (there is a special weighting system for resolutions that affect the eurozone, with eurozone countries given double votes). The Co-ordination Committee, which controls the EPC s Working Groups and Support Groups and submits recommendations to the Plenary. This committee has 25 Members elected by the Plenary. It meets at least quarterly. MARKET CONTEXT Page 4

21 The Nominating and Governance Committee, which consists of three banks and the three Secretary-Generals of the ECSAs. The committee s tasks include the vetting of nominations to the Plenary by individual banks and national banking associations, to ensure that there is the required balance between banking sectors, large and small banks and countries. b) The re-organisation and re-focusing of the EPC s Working Groups and Support Groups. c) Increasing the EPC s central resources, which are provided by a Secretariat, staff allocated part-time by the ECSAs and some consultants. Central resources are now claimed to be the equivalent of 10 full-time employees, including administrative staff. d) The definition of a SEPA Roadmap, which describes the way forward for the delivery of the SEPA programme until This was agreed by the Plenary in December 2004 and confirmed in March e) Alignment of ECBS and EPC governance, so that the ECBS Board now consists of the EPC Co-ordination Committee and some standards experts. f) Extending the scope of the EPC s Credeuro, ICP and Receiver Capability conventions to EEA EFTA countries (Iceland, Liechtenstein and Norway). The EPC s main activities in 2005 are to: a) Define the SEPA schemes/framework for electronic credit transfers, the PEDD and payment cards and begin each payment instrument s design and specification stage. The card framework has been drafted and is due to be presented to the Plenary in June; the others should be presented to the Plenary by December. b) Extend the Credeuro convention to all basic euro credit transfers in SEPA, not just credit transfers compliant with Regulation c) Define a combined Credeuro and ICP standard for retail cross-border credit transfers in the eurozone. d) Develop an outline operational scheme framework for SEPA payment instruments. There is no joining fee for EPC, but each member s annual contribution in 2004/5 was 17,500. MARKET CONTEXT Page 5

22 2. CREDIT TRANSFERS 2.1 Market Characteristics Consumers Use of Retail Bank Services A consumer that wants to initiate a cross-border credit transfer has to choose whether to use the retail bank with which it has a current, savings or deposit account or another non-transient relationship, or whether to use an alternative P2P or funds transfer service. For anti-money laundering and risk management reasons, retail banks do not provide cross-border transfer services to non-customers and in some cases even require their long-standing customers to verify their identities. Most consumers will initiate a cross-border credit transfer at their retail bank, because they perform few cross-border credit transfer transactions and the method and cost of performing such transactions is relatively unimportant. We estimate that on average there was less than one cross-border credit transfer per person in the EU15 countries in Consumers therefore exert minimal pressure on their banks regarding the cost and other aspects of cross-border credit transfers. They select their retail bank on the basis of other factors, and even if they were to be unhappy with their bank s handling of their infrequent cross-border credit transfers, the switching costs and inconvenience of changing bank outweigh any extra costs and any other adverse implications of their banks performance. A retail bank that offers cross-border credit transfer services will provide them as additional functionality to their customers account packages. The bank decides which services to offer and by which delivery channels, but typically a European bank will only provide the services through its branch network and customers will be required to complete paper forms. Because of low volumes, most banks do not provide cross-border credit transfer functionality as part of their retail on-line banking or telephone banking services. (Société Générale is one exception, as it announced in May 2005 that it had launched an automated speech recognition service to enable its current account customers to make international funds transfers via the telephone. This service has a 10 charge for an account-to-account transfer and 20 when the money is collected at a branch.) Often a retail bank will provide more than one cross-border transfer service, typically a standard slower and cheaper service and a more expensive premium or express service with a shorter delivery time. The bank may also allow its customers to choose whether the fees for a transfer are paid by the customer (sender), the beneficiary or are shared so that the sender pays its fees and all other fees are paid by the beneficiary (respectively the OUR, SHA or BEN options). The rapid adoption of the Credeuro convention by EU15 banks means that SHA is increasingly the default option, although the others may also be offered. A consumer that uses its retail bank to send a cross-border credit transfer has to choose from the bank s (generally limited) range of services. The service selected will depend upon the price and speed of the transfer, and will be based upon factors such as the destination country, currency and his and the beneficiary s requirements. Consumers with more than one retail banking relationship may choose from the services provided by all its banks, and thus potentially will have a wider choice. CREDIT TRANSFERS Page 6