Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor: Professor Philip Molyneux

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1 Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor: Professor Philip Molyneux The Palgrave Macmillan Studies in Banking and Financial Institutions are international in orientation and include studies of banking within particular countries or regions, and studies of particular themes such as Corporate Banking, Risk Management, Mergers and Acquisitions, etc. The books focus is on research and practice, and they include up-to-date and innovative studies on contemporary topics in banking that will have global impact and influence. Titles include: Yener Altunbaş, Blaise Gadanecz and Alper Kara SYNDICATED LOANS A Hybrid of Relationship Lending and Publicly Traded Debt Yener Altunbaş, Alper Kara and Öslem Olgu TURKISH BANKING Banking under Political Instability and Chronic High Inflation Elena Beccalli IT AND EUROPEAN BANK PERFORMANCE Paola Bongini, Stefano Chiarlone and Giovanni Ferri (editors) EMERGING BANKING SYSTEMS Vittorio Boscia, Alessandro Carretta and Paola Schwizer COOPERATIVE BANKING:INNOVATIONS AND DEVELOPMENTS COOPERATIVE BANKING IN EUROPE Case Studies Roberto Bottiglia, Elisabetta Gualandri and Gian Nereo Mazzocco (editors) CONSOLIDATION IN THE EUROPEAN FINANCIAL INDUSTRY Alessandro Carretta, Franco Fiordelisi and Gianluca Mattarocci (editors) NEW DRIVERS OF PERFORMANCE IN A CHANGING FINANCIAL WORLD Dimitris N. Chorafas CAPITALISM WITHOUT CAPITAL Dimitris N. Chorafas FINANCIAL BOOM AND GLOOM The Credit and Banking Crisis of and Beyond Violaine Cousin BANKING IN CHINA Vincenzo D Apice and Giovanni Ferri FINANCIAL INSTABILITY Toolkit for Interpreting Boom and Bust Cycles Peter Falush and Robert L. Carter OBE THE BRITISH INSURANCE INDUSTRY SINCE 1900 The Era of Transformation Franco Fiordelisi MERGERS AND ACQUISITIONS IN EUROPEAN BANKING Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL AND CREDIT MARKETS Franco Fiordelisi, Philip Molyneux and Daniele Previati (editors) NEW ISSUES IN FINANCIAL INSTITUTIONS MANAGEMENT Franco Fiordelisi and Philip Molyneux SHAREHOLDER VALUE IN BANKING Hans Genberg and Cho-Hoi Hui THE BANKING CENTRE IN HONG KONG Competition, Efficiency, Performance and Risk Carlo Gola and Alessandro Roselli THE UK BANKING SYSTEM AND ITS REGULATORY AND SUPERVISORY FRAMEWORK Elisabetta Gualandri and Valeria Venturelli (editors) BRIDGING THE EQUITY GAP FOR INNOVATIVE SMEs

2 Kim Hawtrey AFFORDABLE HOUSING FINANCE Otto Hieronymi (editor) GLOBALIZATION AND THE REFORM OF THE INTERNATIONAL BANKING AND MONETARY SYSTEM Munawar Iqbal and Philip Molyneux THIRTY YEARS OF ISLAMIC BANKING History, Performance and Prospects Sven Janssen BRITISH AND GERMAN BANKING STRATEGIES Kimio Kase and Tanguy Jacopin CEOs AS LEADERS AND STRATEGY DESIGNERS Explaining the Success of Spanish Banks Alexandros-Andreas Kyrtsis (editor) FINANCIAL MARKETS AND ORGANIZATIONAL TECHNOLOGIES System Architectures, Practices and Risks in the Era of Deregulation M. Mansoor Khan and M. Ishaq Bhatti DEVELOPMENTS IN ISLAMIC BANKING The Case of Pakistan Mario La Torre and Gianfranco A. Vento MICROFINANCE Philip Molyneux and Eleuterio Vallelado (editors) FRONTIERS OF BANKS IN A GLOBAL WORLD Simon Mouatt and Carl Adams (editors) CORPORATE AND SOCIAL TRANSFORMATION OF MONEY AND BANKING Breaking the Serfdom Anastasia Nesvetailova FRAGILE FINANCE Debt, Speculation and Crisis in the Age of Global Credit Anders Ögren (editor) THE SWEDISH FINANCIAL REVOLUTION Dominique Rambure and Alec Nacamuli PAYMENT SYSTEMS From the Salt Mines to the Board Room Catherine Schenk (editor) HONG KONG SAR s MONETARY AND EXCHANGE RATE CHALLENGES Historical Perspectives Noël K. Tshiani BUILDING CREDIBLE CENTRAL BANKS Policy Lessons for Emerging Economies Ruth Wandhöfer EU PAYMENTS INTEGRATION The Tale of SEPA, PSD and Other Milestones Along the Road The full list of titles available is on the website: Palgrave Macmillan Studies in Banking and Financial Institutions Series Standing Order ISBN You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

3 EU Payments Integration The Tale of SEPA, PSD and Other Milestones Along the Road Ruth Wandhöfer

4 Ruth Wandhöfer 2010 Foreword Gertrude Tumpel-Gugerell 2010 Softcover reprint of the hardcoverm 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted her rights to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 2010 by PALGRAVE MACMILLAN. Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Wandhöfer, Ruth, 1976 EU payments integration: the tale of SEPA, PSD and other milestones along the road/ruth Wandhöfer. p. cm. (Palgrave Macmillan studies in banking and financial institutions) ISBN (hardback) 1. Finance European Union countries. 2. Payment European Union countries. 3. Euro area. I. Title. HG186.A2W '78 dc

5 Contents List of Tables List of Figures Foreword by Gertrude Tumpel-Gugerell About the Author Acknowledgements Commonly Used Abbreviations and Acronyms viii x xi xiv xv xvi Title I The Opening Act: The Beginning of the End or Just the End of the Beginning? 1 (1) Prelude 1 (2) Overture 3 Title II EU Financial Regulation Explained: The Powers and the Pitfalls 5 Introduction 5 (1) Single Market legislation: origins and architecture 6 (2) The institutions, instruments and regulatory processes 11 (3) EU legislation in action and the Heisenberg principle 28 Title III SEPA: A New Hope 33 Introduction 33 (1) The growing web of payments legislation 33 (2) European banking and payments landscape 40 (3) The Euro as a trigger for further evolution 44 (4) Coping with the Euro introduction: the Heathrow Group 45 (5) Rattling sabres and a pricing regulation 51 (6) The birth and early years of the EPC 57 (7) A Roadmap emerges 73 v

6 vi Contents Title IV PSD A Parallel Universe to SEPA: The Odyssey from the First Ideas to the Final Text 77 Introduction 77 (1) A great idea or rather lots and lots of them 77 (2) From the NLF to the final text 86 (3) A last sanity check against SEPA requirements 115 Title V From Publication to Transposition: The Directive Dilemma 118 Introduction 118 (1) First reactions from the market 118 (2) The Transposition Working Group and the PSD Expert Group 120 (3) PSD interpretation: a web of ambiguity emerges 122 (4) PSD national implementation: the Midas touch 128 (5) Industry guidance to help smooth the path 133 (6) Review of related legislation 135 Title VI SEPA From Design to Launch: Finding Your Way through the SEPA Jungle 142 Introduction 142 (1) SEPA standards, design principles and geography 143 (2) The SEPA schemes: What s inside? 152 (3) So what benefits can the SEPA schemes bring to users? 165 (4) The launch of SEPA: reality versus expectation 172 (5) SEPA for cards: pump up the volume 176 (6) Infrastructures in SEPA: a fresh look 182 (7) SEPA for cash update: has the bleeding stopped yet? 185 Title VII Postlude: The Future for European Payments and the Emergence of a Global Agenda 187 Introduction 187 (1) PSD: Life after implementation? 187 (2) Je Ne SEPA?: Achievements so far and next steps 197 (3) Completing the picture: the world is watching 221

7 Contents vii Epilogue 254 Appendix I: PSD Implementation: Use of Derogations in Titles III and IV by EU/EEA Member States 256 Appendix II: PSD Implementation: Examples of cases of gold-plating, non-conforming transposition and other interesting transposition features at Member State level 275 Notes 279 Index 284

8 List of Tables 3.1 Summary of credit institutions and branches in key EU member states as at Overview of average use of payment types per citizen across a number of individual EU member states plus the EU 27 as at EC Communication 2000/36: Objectives Convention on Credit Transfers in Euro: Key features ICP Convention: Key features Initial SEPA indicators Key SEPA milestones presented during the October 2003 SEPA workshop The initial EPC recommendations on cards SEPA for cash: the nine recommendations The CSM Model Key Deliverables Requested in the ECB s Third Progress Report on Retail Payments An overview of the 21 Annexes The PSD s co-decision timeline Article 75 of the PSD List of Member State derogations within the PSD PSD industry guidance overview Article 3 of Directive 2009/111/EC Summary of the Finnish SCT migration plan SCF-compliant options SEPA scheme compliant CSMs and PE-ACH providers Examples of practical issues experienced since PSD went live 188 viii

9 List of Tables ix 7.2 EU payments harmonisation: the four forces of change List of African regional cooperations Membership of the African regional cooperation groupings 230

10 List of Figures 2.1 The key elements of the Single Market The curve of legislative influence The Co-decision process An overview of EU payments legislation in Other EU legislation relevant for payments in The original EPC governance structure The SEPA Four Corner Model The SDD process flow Regional cooperation on the African continent Illustration of African regional integration plans x

11 Foreword Gertrude Tumpel-Gugerell Member of the European Central Bank s Executive Board It is a great pleasure to write this foreword to an important contribution concerning the Single Euro Payments Area. This book delivers a very timely reflection on the evolution of the European payments landscape and its role as a building block for the Single Market. Readers from Europe and outside may benefit from learning about one of the biggest integration initiatives in Europe that has ever taken place. The European Single Market forms the largest domestic market in the world, with a population of roughly 500 million people and accounting for about 21 per cent of world GDP. The road to integration, involving the free movement of people, goods, services and capital is removing many obstacles to intra-european trade. An integrated EU market is more competitive and offers more opportunities than a market divided by national borders could ever do. It provides opportunities for economies of scale and scope, innovation and entrepreneurship. A vital component of the Single Market is the area of payments. Payments are an essential ingredient of all economic transactions. The introduction of the Euro, which in itself has significantly improved trading and financial transactions for both companies and private citizens, has not led to a fully integrated payments market yet. Retail payments especially have long remained fragmented along national lines. This is not entirely surprising, given the very different evolution of the payments industries and of user habits within individual countries. Yet the Single Market and especially the common currency should also enable its users to make payments in one domestic way, no matter where the payer and the payee are situated. This is why two landmark initiatives were launched: the creation of the Single Euro Payments Area (SEPA) and the introduction of a harmonised legal framework through the Payment Services Directive (PSD). This book provides an essential descriptive analysis of these initiatives, exploring the design and implementation of the new European landscape for payments. The SEPA project was started by the banking industry in Once SEPA is completed, all Euro payments will become truly domestic, allowing us to fully reap the benefits of the single currency. With one set of payment instruments, citizens will be able to make payments throughout the Euro area as quickly and easily as they make national xi

12 xii Foreword payments today. This will make payments more efficient and will bring cost savings for all payment users in Europe. The harmonised legal framework, as defined by the PSD and by now implemented in national legislation, plays a key role in providing the legal basis for SEPA. The PSD also harmonises consumer protection rules across all adhering countries. For example, the PSD significantly reduces transaction times for payments to a maximum of one day by 1 January It provides a clear and concise set of harmonised information requirements. These must be fulfilled by all payment service providers, regardless of whether they offer SEPA products or existing national payment products. This will improve transparency for customers. It also provides clarity and certainty with regard to the core rights and obligations of both users and providers of payment services. Harmonising the European retail payment markets will also promote new sources of competition. Payment services may now be provided by new non-bank players, called payments institutions, in addition to the services offered by banks and e-money institutions. This creates a level playing field with enhanced competition, which will also help foster innovation. Based on the new common payment instruments, rulebooks and frameworks, the providers of payments infrastructure (for instance, clearing houses, card schemes and payment networks) are able to evolve in a way that promotes higher levels of efficiency, quality and security and supports the necessary reach across the newly integrated market. The use of modern information and communication technology and international standards are key essentials of Europe s new payment strategy. There is significant potential for the provision of new innovative services such as e-invoicing, e-payments and mobile payments. Thanks to the united efforts of the European banking community, legislators and the central banking community, SEPA has made a successful start with the introduction of the SEPA credit transfer more than two years ago and the SEPA direct debit last year (2009). But, of course, SEPA is far from complete. The full migration to SEPA credit transfers and SEPA direct debits will take some time. The European Commission has just published a paper discussing a SEPA migration end-date for SEPA credit transfers and SEPA direct debits. In the world of payment cards, card schemes and processors need further to adapt to the expectations set out in the SEPA Cards Framework. I believe that Europe should develop at least one additional SEPA-wide cards scheme. Despite the financial crisis, cashless payments increased on a global basis by almost 9 per cent to 250 billion transactions per year in Of this growth, card

13 Foreword xiii payments were the strongest driver. In the European Union, card payments reached a total of over 29 billion transactions in 2008, also growing at a rate of almost 9 per cent. This shows the immense potential of this payment instrument for the financial industry and demonstrates that without the success of SEPA for cards, the project will not be complete. One question I am frequently asked is whether the financial crisis has had an impact on the SEPA project and the pace of migration. During the financial crisis, the retail payments business of banks has proven to be a solid and stable source of revenue. Combined with the fact that the aim of SEPA is to make payments in Euro more efficient, not just for customers but also for banks, this would rather strengthen the case for investments in the SEPA project. To conclude, I would recommend this book to anyone looking for a comprehensive and stimulating insight into the forces and events that have shaped and are still shaping the story of EU payments harmonisation. I very much welcome this effort to educate and inform at a key moment.

14 About the Author Ruth Wandhöfer is well known in the European banking industry for her in-depth knowledge of the regulatory, market and competitive landscape and in particular is acknowledged as one of the foremost authorities on SEPA and the PSD. She holds a number of influential positions, including the chairmanship of the European banking industry s PSD Expert Group, membership of the Plenary and Co-ordination Committee of the European Payments Council (EPC), chairmanship of the EPC s Information Security Support Group and membership of the EU Commission s Payment Systems Market Expert Group. Ruth is currently responsible for Market Policy & Strategy within Citi s EMEA Global Transaction Services business. As such, she has external responsibility for engaging with and influencing the evolving regulatory and market/standards environment on a wide range of established and emerging topics, as well as driving and coordinating the business response within Citi GTS. In a SEPA and PSD context, this has included responsibility for Citi GTS PSD implementation project as well as the product evolution and thought leadership in relation to all aspects of Citi s response to SEPA. Prior to joining Citi, Ruth worked for the European Banking Federation where amongst her other responsibilities she was closely involved with the EPC in developing the SEPA Credit Transfer scheme rulebook, as well as being a high profile and influential lobbyist in the negotiation of the PSD and other relevant legislation with the European Commission, Council and Parliament. Previously, Ruth worked in financial management in the banking sector as well as in the European Commission DG Economic and Financial Affairs. She speaks five languages and has completed studies in various countries, including an MA in Financial Economics in the UK, an MA in International Politics in France and an LLM in International Economic Law in the UK. xiv

15 Acknowledgements First of all I would like to express my thanks to Gertrude Tumpel- Gugerell, Member of the Executive Board of the ECB, who honoured me by agreeing to write the foreword to this book. I am also indebted to my colleague and friend Simon Newstead, who provided editorial assistance throughout the creation of this saga. Also a big thank you to Akinbo Akinwunmi, Madhadevan Balakrishnan, Charles Bryant, Gerard Hartsink, Harry Leinonen, Michael Montoya, Liz Oakes, Eric Sepkes, Joleen Young and the EPC Rulebooks(!). Finally, I wish to thank Paese who supported me with constant patience, warm meals late at night and his valued opinions. xv

16 Commonly Used Abbreviations and Acronyms ACH AML AOS ASEAN ATM B2B B2C BIC CEMAC/ EMCCA CMA CMF COMESA COR CSD CSM DD DMF EAC EACB EBA/ABE EBF EC ECCAS ECB ECOWAS ECON Automated Clearing House Anti Money Laundering Additional Optional Service Association of Southeast Asian Nations Automated Teller Machine Business-to-Business Business-to-Consumer Bank Identifier Code Economic and Monetary Community of Central Africa Common Monetary Area Creditor Mandate Flow Common Market for East and Southern Africa Committee of Regions Central Securities Depository Clearing and Settlement Mechanism Direct Debit Debtor Mandate Flow East African Community European Association of Cooperative Banks Euro Banking Association European Banking Federation European Commission Economic Community of Central African States European Central Bank Economic Community of West African States Economic and Monetary Committee of the European Parliament xvi

17 Commonly Used Abbreviations and Acronyms xvii ECOSOC Economic and Social Committee ECSA European Credit Sector Association EEA European Economic Area EMI e-money Institution EMV Europay MasterCard Visa programme to implement CHIP and PIN security for card transactions EP European Parliament EPC European Payments Council ESBG European Savings Bank Group ESSC European Community for Steel and Coal EU European Union Eurosystem European System of Central Banks Euratom European Atomic Energy Community Euro Area 16 EU countries using the euro as legal tender (as of 2009) FATF Financial Action Task Force FSAP European Commission s Financial Services Action Plan GCC Gulf Cooperation Council GDP Gross Domestic Product IA Impact Assessment IBAN International Bank Account Number (ISO norm) ICP Interbank Convention on Payments ICSD International Central Securities Depository IPF International Payments Framework initiative ISO International Organisation for Standardisation JASDEC Japanese Securities Depositary Centre MBP Multilateral Balancing Payment MENA Middle East and North Africa MEP Member of the European Parliament MIF Multilateral Interchange Fee NCB National Central Bank NFC Near Field Communications NLF New Legal Framework

18 xviii Commonly Used Abbreviations and Acronyms NPCI P2P PE-ACH PEDD PI PSD EG PSMEG PSP PSU RTGS SADC SCF SECA SEPA SEPA B2B DD SEPA Core DD SEPA CT SMEs STP SWIFT TARGET2 T2S WAEMU/ UEMOA WAMZ WATCH XML National Payments Corporation of India Person-to-Person Pan-European Automated Clearing House Pan-European Direct Debit, the original working title for what would become the SEPA Direct Debit Scheme Payment Institution European Banking Industry s PSD Expert Group European Commission s Payment Systems Market Expert Group Payment Service Provider Payment Service User Real Time Gross Settlement Southern African Development Community SEPA Cards Framework Single Euro Cash Area Single Euro Payments Area SEPA Business to Business Direct Debit SEPA Direct Debit SEPA Credit Transfer Small and Medium-sized Enterprises Straight-Through Processing Society for Worldwide Interbank Financial Telecommunication Eurosystem s Trans-European Automated Real-time Gross settlement Express Transfer system TARGET2 for Securities West African Economic and Monetary Union West African Monetary Zone Worldwide Automated Transaction Clearing House initiative Extensible Mark-up Language