Working Paper on SEPA Migration End-Date Swedbank Group response 2010-06-24 Swedbank Group Kirstine Nilsson SEPA Coordinator Swedbank Group e-mail: kirstine.nilsson@swedbank.se mobile: +46 703 746 734 Version 1.0
Executive Summary 3 General comment 4 Working Paper response 4 Scope 4 Reachability 5 Interoperability 5 Level playing field 5 SEPA Migration End-date 6 Essential requirements 6 Payment account opening 7 Annex: Essential requirements 7 (1) Credit transfers and direct debit transactions. 7 (2) Credit transfers 8 (3) Direct debit 8 Working Paper on SEPA Migration End-date. Swedbank Group response 2
Executive Summary SEPA is and have always been a politically initiated project. A part of SEPA project has been to develop the payment infrastructure and instrument necessary to support such a political project, this work has honourably been achieved by European banks through EPC and the European Credit Sector Associations. For the EU Commission to state that the achievements made have proven not sufficient must surely be a mistake. A pan SEPA payment infrastructure is in place and two pan-sepa payment instruments (SEPA Credit Transfer and SEPA Direct Debit) are up and running although the promised legislation (Payment Services Directive) is not implemented SEPA wide. To move forward and drive the SEPA migration successfully all stakeholders, Regulators, Overseers, Buy side and Sell side, need to agree on and support the SEPA migration goal. To achieve SEPA in full through self-regulation by all stakeholders is, in our opinion, not possible. Self-regulation as an implementation method demand strong stakeholder organisations, total commitment to defined goals and clearly identified benefits for all participants. Such is not the case with SEPA. Regulators and overseers have to acknowledge that many consumers and corporate do not, in the short term, benefit from SEPA. Consumers and corporates with a strong local presence, without aspiration to extend their purchase behaviour or business cross border have little to gain short term, benefits for these categories of stakeholders can possibly be found long term. Therefore Swedbank welcomes a step up in involvement by regulators and the setting of SEPA Migration End-date. We expect the EU Commission to draft an EU Regulation to ensure a SEPA wide simultaneous implementation and that the Regulation supports the achievements made by European banks i.e. SEPA payment infrastructure and instruments. The objective of the SEPA Migration End-date regulation must be to phase out legacy national euro credit transfers and/or direct debit schemes and infrastructure in favour of SEPA equivalent schemes and SEPA infrastructure, Pan-European ACH instead of local ACH. As always when legislation is used to steer a market in the right direction it is of utmost importance that the regulators refrain from taking the very tempting path of overregulation. Although we regard an EU Regulation to be the only instrument to ensure SEPA Migration we are aware of the risk that a regulation may introduce. The purpose of an EU Regulation on SEPA Migration End-date must have the objective to ensure development of a SEPA payment market infrastructure that allows normal market forces to act and react as close to normal market practises as possible. If the regulation focuses on addressing reachability, interoperability, standards & formats in the cooperative space without entering into and hampering the competitive space a regulation on SEPA Migration would be beneficial to all stakeholders. However if the objective of the regulation and the purpose of the EU Commission is to legislate product development and customer offering in such detail as suggested in the annex on Essential requirements the risk is very high that normal product and offering evolution and development is severely hampered. Working Paper on SEPA Migration End-date. Swedbank Group response 3
This could lead to the payment products and customer offerings within the SEPA region being fully compliant with EU regulation but outdated and inefficient in comparison with other payment markets. Swedbank recommends that the EU Commission focuses on a regulation with the objective to create an efficient SEPA payment infrastructure with full reachability and refrain from mandating and regulating product offerings and consumer services. General comment Swedbank expects that a SEPA Migration End-date regulation is coherent with the Payment Service Directive and that adjustments are made to Regulation 924/2009 to eliminate the discrimination of debtor banks as participants to the Direct Debit process. Swedbank accepts that the EU Commission has found a price regulation necessary but is of the same opinion as ECOFIN and EU Parliament; a price regulation must allow for normal market forces to compete and may not discriminate any participant i.e. preventing recuperation of cost. Working Paper response The response is based on the assumption that the EU Commission will propose an EU Regulation coherent with the Payment Services Directive and that necessary changes are made to Regulation 924/2009. Swedbank would like to raise the question why there is no mentioning of cards in the SEPA Migration End-date working paper. In the early days of defining the vision for SEPA three payment instruments was identified as crucial for an efficient payment market, Credit Transfers, Direct Debit and Cards. To at this stage discuss a SEPA Migration End-date for two of the instrument without mentioning the status/future of the third is not possible if the intention of the EU Commission is to give a clear message on SEPA Migration End-date. It would be beneficial to all if SEPA Stakeholders if investments and projects could be coordinated and planned for all three instruments. Swedbank recommend the EU Commission to include Card as part of any future discussion on SEPA Migration End-date. A suggested way forward is to, as a first step, include an Migration End-date for Card issuing along the lines defined in the EPC document SEPA Card Framework v 2.1, a clear end date for issuing of and migration to SCF compliant cards. All the general purpose payment cards must be SCF compliant from 31 December 2010 and onwards. On the acquiring side of the card payment business discussion work must continue and EU Commission working paper could be a valuable contribution to and part of such discussions Scope The scope of the regulation will be for the execution of credit transfer and direct debit transactions denominated in euro within the EU where both the payer s payment service provider and the payee s payment service provider are, or the sole payment service provider in the payment transaction is, located in the EU and rules on payment account opening. Working Paper on SEPA Migration End-date. Swedbank Group response 4
Swedbank assumes that any such regulation also will include obligations on national regulators, overseers and alike to harmonise reporting, checking etc. requirements on payment service provider in line with the regulation. It is of essence that present reporting and checking obligation based on accountholder status is eliminated and that the scope of any future reporting obligation for payment service providers is in line with SEPA vision and goal. Reachability Reachability is one of the cornerstones of SEPA, without it there is no SEPA. At the same time as reachability must be made mandatory it must be prevented that a payment service provider is required to connect to more than one SEPA payment scheme. Therefore Swedbank would recommend that reachability is mandated through payment service providers being obligated to participate, direct or indirect, to a Pan European Automated Clearing House; with emphasis Pan European i.e. SEPA wide reach. This would ensure that all payment service providers are reachable for any other payment service provider through at least one payment scheme (one for SCT and one for SDD). Should a payment service provider in addition to being participant to a PE-ACH want to be participate to other ACH they should be free to do so. However a pre-condition is that the payment service provider is able to process all incoming and outgoing payments with the same efficiency, speed, prising principle and service regardless of through which clearing mechanism they are sent and/or received. Interoperability Interoperability between clearing mechanisms (ACH) is of essence to achieve reachability. However to regulate interoperability is extremely difficult. On the one hand it should be mandatory for all clearing mechanisms providing SEPA payment services on the other if interoperability requirement is mandatory it may lead to cementing of existing legacy payment infrastructure. Therefore it is recommended that regulation places its focus on payment service providers being reachable through a PE-ACH and not on all ACH:s becoming connected (interoperating) with a PE-ACH. A regulation on payment service provider reachability would force payment service providers to choose a clearing mechanism that either in itself has a Pan-SEPA reach or has created interoperability/connectivity to a PE-ACH that can guarantee Pan- SEPA reach. Level playing field To prevent cementing of existing national payment infrastructure that would hamper the SEPA vision fulfilment it will be necessary for the EU Commission to regulate that any clearing mechanism, be it private initiative, national central bank service or ECB service, must carry its own costs. This is of essence to create a level playing field between private initiatives and central bank initiatives (or other public company initiatives) so that competition is encouraged. It has been seen that in some countries NCB has, to maintain its position and the national payment infrastructure, offered to develop SEPA related services without distributing cost of development per SEPA transaction. This must be avoided. Working Paper on SEPA Migration End-date. Swedbank Group response 5
For this reason it will also be necessary for EU Commission to include equal right for private clearing mechanisms as for National Central Bank to participate in settlement mechanisms in EUR, both settlement mechanisms run by NCB and TARGET2. This does off course not exclude prudent risk management set up by the NCB and/or ECB on settlement participants, SEPA Migration End-date Swedbank accepts that intention of the EU Commission to set separate Migration End-dates for Credit Transfer and for Direct Debit. However the SEPA Migration End-date Regulation should have ONE and only ONE date of entry into force with a migration period of different length for the respective instruments. If this route is chosen by the EU Commission Swedbank would recommend that the time given for migration of CT be set at 12 month after the date of entry into force of a possible regulation whereas the time given for migration of DD should be 36 months after the date of entry into force. This would allow all stakeholders to focus on a successful migration of one payment instruments at the time i.e. a step by step approach using the same resources would be possible. A different and by Swedbank preferred approach to achieve the same outcome is to set ONE SEPA Migration End-date at European level and leaving it open for the different countries/legacy payment infrastructure to set the time table within that period for phasing out legacy infrastructure and instruments. This approach would allow for a clear SEPA Migration End-date without forcing all countries and legacy infrastructure to set up projects and activities according to a time table that is most appropriate, within a specific period of time. Essential requirements Essential requirements should take advantage of the work already achieved by EPC when developing and implementing the two existing SEPA payment instruments, SEPA Credit Transfer and SEPA Direct Debit. Some EU countries have already migrated or have come very far in their migration plan and it is important that the EU Commission do not contribute to yet another first mover disadvantage. For the bank-to-bank interface, the approach for a binding Migration End-date should be based on Common SEPA schemes for credit transfers and direct debits, developed by the EPC. For the customer-to-bank interface, the Essential Requirements has to be fully interoperable with SEPA Schemes, in order for the payment service providers to fulfill their requirements. The Rulebooks define what information should be given by the Payer and what information could be expected by the Payee. In case the EU Commission wishes to establish essential requirements for End-users these requirements should be based on these parts of the Rulebooks. For Payment account identifiers, Swedbank supports the EU Commission in that IBAN and BIC should become the unique identifier used for payments within SEPA. If the EU Commission maintain its intention to develop a SEPA-certification based on essential requirements Swedbank recommend the Commission to open up for a detailed discussion with banks on what could be included in essential requirements Working Paper on SEPA Migration End-date. Swedbank Group response 6
that would achieve the goal of the Commission without hampering market innovation and developments. Payment account opening Swedbank also assumes that inclusion of opening payment account in the scope will ensure payment service providers ability to perform KYC/AML checking as well as normal risk mitigation. Although it should be the right of all citizens to have a payment account it can not be the obligations of a bank to open a payment account for anybody without performing regulated checking obligations and conducting normal risk mitigation. Annex: Essential requirements Swedbank assume that the essential requirements stated in this annex will NOT be included in a SEPA Migration End-date regulation. A SEPA Migration End-date Regulation should set the high level scope and objectives of SEPA migration as is normally the purpose of legislation. It is important that the EU Commission refrain from regulating a requirement specification as this would hamper innovation and development and lead to one size fit all SEPA schemes. (1) Credit transfers and direct debit transactions. Remittance data field and requirements that payment schemes should allow for up to 980 characters. Swedbank would recommend the EU Commission to re-think this requirement as it would lead to all payment schemes regardless of underlying business requirements to adhere to a regulation for a specific part of the standard. If a payment scheme is developed with the purpose of carrying payments initiated via Mobile in the form of credit transfers would users of such a scheme benefit from such a payment scheme being regulated to allow for 980 characters technically? No user could take advantage of that as the payment initiation channel would not allow for it but as it is regulated the standard and technique have to be developed to cater for it. Swedbank appreciates that there are some Stakeholders that would want to be able to send more than 140 characters of remittance data in some of their credit transfers and/or direct debits and that their need must be met. However Swedbank would recommend that these customer requirements are met by payment service providers offering this type of payment service and not through regulation mandating it for all payment schemes regardless if such payments are processed under such a scheme or not. Especially not through a regulation that would mandate all SEPA payment schemes to allow for it whether it is of benefit for users or not. Minimum threshold for the amount of the payment transaction. The scope of a suggested regulation is defined as all credit transfers and direct debit transactions denominated in euro within the EU. This is, as stated in the working paper a very Broad scope. The working paper also refers to regular payments and exclude payment card transactions, money remittance and payment transactions through means of any telecommunication, digital or IT device which do not result in a credit transfer or direct debit. This would mean that the regulation would apply to high value payments (financial) as well as regular payments (commercial). Such a wide approach may lead to requirements being stated as mandatory for all payment schemes (high value and regular) although the need and Working Paper on SEPA Migration End-date. Swedbank Group response 7
benefit would only apply to some of them. For this reason Swedbank recommend the EU Commission to refrain from including requirements such as payment schemes being prevented from setting minimum threshold for the amount of the payment transaction. For specific payment schemes and for specific purposes such thresholds may not only be needed but also required. (2) Credit transfers (b) The IBAN of the account of the payer This requirement would mandate changes in present national legislation on consumer data protection. This would also mean that while banks and other stakeholders are making huge investments to protect consumer data in all its payment products and processes the Commission suggests that making the consumer IBAN available to the payee would become mandatory. Swedbank would recommend the Commission to reconsider as this would NOT be beneficial to consumers or corporate acting as payers. (3) Direct debit Part of the requirements mentioned in point 3 address services provided between Debtor and Debtor Bank and should not be regulated as it will prevent normal market forces to drive evolvement of the payment market. The majority of the DD transactions in euro within the SEPA region are based on a creditor driven mandate flow. This means that the agreement and mandate is set up between the creditor and debtor. The creditor driven DD process provide for standardised Debtor protection such as 8 weeks refund right without any questions asked, 13 month refund right for unauthorised DD transactions and the possibility for Debtor to block the payment account for DD transactions under the SEPA DD scheme. In addition to these standardised debtor protection measures a Debtor bank wanting to be competitive for this service has the possibility to build payment service provider individual DD product with value added services such as for example; Acceptance of Mandate by Debtor prior to DD transaction Ability to block specific Creditors Ability to limit DD amount/transaction (min-max) Ability to limit number of DD per week/month/year etc. These value added services will be provided by Debtor Banks in the very competitive market of retail and consumer business. To regulate that such services become mandatory for all payment service providers as is suggested by the EU Commission would only lead to hampering competition, favouritism of DD transactions (PULL) in relationship to for example e-invoicing (PUSH) which is a more modern payment instrument than the DD and which by its nature (a push instrument) already provide the higher level of consumer protection. If it is not the intention of the EU Commission to hamper evolution and development and prevent more modern payment instrument from phasing out older and less consumer friendly instruments the Commission should refrain from including these requirements in any SEPA Migration End-date regulation. (e)the IBAN of the account of the payer This requirement would mandate changes in present national legislation on consumer data protection. This would also mean that while banks and other Working Paper on SEPA Migration End-date. Swedbank Group response 8
stakeholders are making huge investments to protect consumer data in all its payment products and processes the Commission suggests that making the consumer IBAN available to the payee would become mandatory. Swedbank would recommend the Commission to reconsider as this would NOT be beneficial to consumers or corporate acting as payers. Working Paper on SEPA Migration End-date. Swedbank Group response 9