Global Banking Symposium 2006 The Evolving European Regulatory Landscape Thomas J. Matich June 6 th 2006
Mass Payments Global Banking Symposium 2006
The evolving European regulatory landscape The introduction of the single euro payments area (SEPA) is having a significant impact on the financial services industry: Reduced pricing forcing efficiency and driving change Charges introduced for non-straight through processing payments Pressure on clearing infrastructure Increased interest in outsourcing Merger activity predicted to increase Further regulation such as the European New Legal Framework for payments and consumer pressure for faster settlement, will increase pace of change Consumer protection increased Demand for improved settlement speed Customer risk profile may change 3
Existing European infrastructure is complex There is too much infrastructure at present there are more than 100 payment systems in Europe. Each country in Europe has its own real-time gross settlement (RTGS) system. Most countries also have an Automated Clearing House (ACH) for highvolume, low value payments. Some countries have a same-day net settlement system (Finland, France and Spain) Parallel infrastructures exist for credit card processing. All of the costs are borne by banks, so consolidation is extremely likely, but competing interests will affect speed of consolidation. Some ACHs are already forming alliances. The European Banking Association is bidding to do processing for ACHs. Existing domestic ACHs reconstituting their organizational structure A pan-european direct debit (PEDD) scheme is due to be launched in the next two years. 4
New and emerging euro payments models Expected wholesale mergers between European banks have not occurred European banks are looking at their overheads for providing transaction services Some fees for domestic banking may increase as a result Legacy payment infrastructures will co-exist and run parallel to new infrastructures. Outsourcing of transactional business may be the way forward Banks will experience increasing challenges and expenses due to compliance, contingency and regulatory requirements and may look to using a euro clearing provider as buffer to this changing environment. However, until the end state is reached, banks will have to heavily invest in technology to keep up with the changes and be a clearing participant. Will service deteriorate as a result? Who will pay? 5
Industry Initiatives SEPA Definition SEPA will be the area where citizens, companies and other economic actors will be able to make and receive payments in euro, within Europe, whether between or within national boundaries under the same basic conditions, rights and obligations, regardless of their location. Regulations cover the European Union and European Economic Area (EEA) countries. SEPA Roadmap The end of 2005 marked the delivery of two pan-euro Payment scheme rulebooks by the European Payments Council: SEPA Credit Transfer Scheme Rulebook SEPA Direct Debit Scheme Rulebook The schemes will contain business rules and open standards to ensure consistency and Eurozone-wide reach. The vast majority of banks in the Eurozone (EU12) will offer these new pan-euro payment services to their customers from January 2008. Europe is currently defined to consist of the EU 25 Member States + Iceland, Norway, Liechtenstein and Switzerland 6
Industry Initiatives SEPA Single Euro Payments Area Further to the EU Commission bringing into effect Regulation 2560/2001, the European Payments Council (EPC) set out the conditions for how a euro payment in the EU could be achieved without deduction charges and established new pan-european inter-bank charging principles in its Interbank Convention on Payments (ICP). If a corporate fulfils the ICP's requirements for its payments messages, it can be sure that the beneficiary will receive the funds in full, as well as a guarantee of the timeframe within which the beneficiary will receive those funds. In line with EU regulation 2560/2001, the requirements apply to all payments up to 50,000. 7
Key SEPA developments So far So far 2000 2001 2002 2003 2004 2005 Lisbon Agenda created Euro becomes reality Regulation 2560 EPC founded Kok report ECB applies pressure criticising EPC New Legal Framework legislation finalised THE CHANGING LANDSCAPE OF PAYMENTS Coming next Coming next 2006 2007 2008 2009 2010 SEPA schemes finalised Pilots of new schemes SEPA for citizens Pan-European schemes will be able to be used for national payments ECB applies pressure criticising EPC SEPA for infrastructure National schemes phased out SEPA fully implemented for infrastructure 6 8
Industry Initiatives.. SEPA: Some Way to Go Though it goes a long way in improving the payments landscape across Europe, SEPA will not magically solve all the problems within the payments sector. In theory, post-sepa, a corporate could open an account in France and do all its payments through wire transfer or ACH to beneficiaries in Spain. In reality, there may still be corporate taxation issues and central bank reporting implications, for example, which could act as a barrier to a true SEPA. These factors will be determined by market forces and while a single infrastructure that could be referred to as a pan-european ACH (PEACH) may not come into effect immediately, it is only a matter of time before it does through market forces. 9
PE-ACH and PEDD PE-ACH Payments scope of scheme Basic credit transfers i.e. non urgent mass payments Transactions to be denominated in Euro only and to be effected between accounts in the SEPA area Maximum end to end clearing cycle of 3 days Principal to always move with no deductions BIC and IBAN identified as mandatory requirements to achieve Straight Through Processing (STP) Originator able to provide beneficiaries with remittance data 10
PE-ACH and PEDD Pan European Direct Debits (PEDD) PEDD is currently being designed and developed by the banking industry, the following are some of the identified key features: Transactions to be denominated in Euro only and are to be effected between accounts (creditor and debtor) domiciled in the SEPA area 3 day collection clearing cycle - creditor bank -> settlement -> due date Recurrent and one off Direct Debit instrument services to be provided Mandate (one time and/or re-occurring agreement) between creditor and debtor Authorises debtor bank to debit debtors account upon receipt of claim Authorises creditor to collect funds Banks not involved in mandate process Payments authorised until mandate cancelled 3 month refund period available to debtor 11
High Value Payments Global Banking Symposium 2006
Single Euro Payments Areas (SEPA) - Payments Covered Under Regulation Client-initiated payments that result in an outgoing MT103 Ordering and beneficiary account are held intra- EU/EEA, first and last BIC in the EEA. Regardless of amount, all payments require SWIFT BIC and IBAN; payments less than EUR 50,000 must meet all ICP STP criteria: SWIFT BIC, IBAN, SHA charge field and no additional payment information. 13
Single Euro Payments Areas (SEPA) - Payments Cover Under Regulation Continued All banks initiating payments via SWIFT from outside the EEA, while not covered under current resolution, should adopt these payment standards to: Avoid payment delivery delays Avoid potential repair charges IBAN and BIC will become the only beneficiary account and bank identifier code in the EU/EEA and payments not quoting them are likely to be rejected or cost more in the future. 14
Europe: Infrastructure Changes for High-Value Payment Delivery
Infrastructure Changes The high-value payment environment is also an area of change and impacted by SEPA. Collapsing infrastructures retail and wholesale, domestic and cross-border will require continued attention and change management. Target 2 is one of the first major changes being implemented. Banks need to watch this space! 16
TARGET 2 - Overview Driven by three nation central banks: Banque de France, Banca d Italia, Deutsche Bundesbank Single shared platform (SSP) approach Payment between German banks will be exactly the same as payment from German to French bank. Migration via window approach Germany is in first window. Testing will begin in May 2007. First window to go live November 2007. TARGET 1 and SSP will coexist during migration period. Opening hours will be same as TARGET. Costs will be less than TARGET. 17
TARGET 2 Single Shared Platform Increased levels of resiliency and business continuity Pooling of accounts possible Increased prioritization of payments SWIFT-based messaging Staged implementation Target 2 18