On 28 January 2008, the Single Euro Payments Area (SEPA) became a reality, when the SEPA Credit Transfer (SCT) Scheme went live and the first SEPA payment transactions were made.  This is a significant milestone in the European Payment Council’s (EPC’s) Roadmap towards its vision for SEPA in which European citizens can make payments and cash withdrawals in Euros throughout SEPA with the same ease and convenience as in their home country.  Over 4,000 banks have adhered to the SCT Scheme and some 15 Clearing and Settlement Mechanisms (CSMs) have confirmed their intention to be SEPA compliant also, including VocaLink’s Euro CSM which processed its first SEPA transaction on day one of SEPA, from Austrian bank BAWAG P.S.K to Fortis in Belgium, with settlement effected via TARGET2.

Full migration to SEPA from 2010
SEPA payment instruments will operate alongside existing national ones, with full migration planned from the end of 2010 onwards.  The key to this will be building over the next couple of years the necessary critical mass in SEPA payment transactions.  With the huge amount of work involved in getting thus far having focussed on agreeing, testing and then adopting common standards, essentially between banks, this next phase will be more outward, customer-focussed, selling the benefits of SEPA and converting to SEPA payment instruments or customer types, especially large corporates and merchants and government departments and public authorities.

Reduced costs for corporates
As SEPA has developed, its benefits for all users have become more obvious, with the development of shared service centres operating off a standard platform enabled by potentially offering major savings for large corporates.  Better cash flow (or liquidity) management will be possible. Rationalisation of multiple accounts to the Euro zone, predictable execution times and standardised processes and formats will also reduce operational costs and associated costs such as training for all corporate users.  Even processing times and costs for retail cross-border payments are widely expected to fall.

Increased competition
Fundamental to the development of SEPA has been an unprecedented level of co-operation between banks co-ordinated by the EPC and an increased degree of inter-operability between payment infrastructure providers.  Yet there is a fine balance to be struck between such co-operation and healthy competition and concerns have been flagged about the exclusion of other non-bank payment institutions from the EPC’s governance and the desirability of a third European card payment system alongside Mastercard and Visa Europe.

In a widely anticipate move, in late December 2007, the Commission announced its decision that MaserCard’s EEA multilateral interchange fee (MIF) breaches the EC Treaty. The Commission found that the MIF – which applies to cross-border transactions using MasterCard and Maestro branded credit and debit cards and to domestic transactions in eight Member States – artificially inflates the base prices charged by banks for accepting payment cards and that the MIF is not necessary for innovation or efficiency.  MasterCard intends to appeal this decision, commenting that the decision continues the uncertainty as to what level of interchange fee is permissible and potentially damages the development of SEPA.

PSD: now officially published
Enhanced competition is also the core objective of the EC’s Payment Services Directive (PSD) which was finally published in the Official Journal on 5 December 2007 (Directive 2004/64/EC).  The PSD introduces: a new authorisation regime for non-bank payment institutions, such as money remitters, board payment service providers, non-bank card issuers, etc; transparency obligations around information to be given to users both in contract terms and conditions and in respect of individual payment transactions; and harmonised rules on the execution of payment transactions, including around consent/authorisation execution time and liability.

With an implementation deadline of 1 November 2009, Member States have begun their consultation processes, with the UK’s HM Treasury formal consultation model for others to follow.  Three key concerns are emerging around such implementation, however: first, a few Member States, including Italy, have indicated that they might adopt the PSD early, a highly unusual move which would cause transitional difficulties for payments between those early adopters and other member states.

Secondly, the meaning of new, key concepts – such as “payment accounts”, “payment instruments”, the “location” of a payment service provider and even “business day” – is not yet settled and different interpretations could significantly affect the PSD’s scope and application and negate its maximum harmonisation principle.

Thirdly, there are within the PSD a number of permitted Member State Derogations, such as where to treat micro-enterprises as consumers, which if their take-up varies across the EU, will result in different regimes.  The Commission is alive to these concerns and through implementation groups is working with stakeholders to reduce their potential negative impact on the harmonisation benefits of this new legal framework.  One other area to watch is the application of the PSD’s provisions on execution time and full amount to so-called ‘one leg in, one leg out’ transactions, ie whether either the payer’s or the payee’s payment service provider is located outside of the EU and the EEA, such as in Switzerland or the US.  While unlikely to be mandatory, this could become good practice.

Access to payment systems
One particular provision of the PSD aimed at opening up competition concerns access to payment systems. Specifically, it prohibits discrimination based upon institutional status, subject to safeguards against specific risks.  This is widely expected to result in changes to the access criteria and participation structures of, for example, MasterCard and Visa Europe and other card payment systems.

Momentous changes for payments industry
Huge developments in the payments industry have occurred in just the last couple of months, with, for example: the launch of TARGET2; the official publication of the Commission’s announcement that MasterCard’s EEA MIF breaches European law; and the start of SEPA.  In addition, new payment infrastructure continues to emerge and consolidation to occur, such as Equens merger with Seceti (Equens itself being a merger of Inter-pay and TAI).

CEOs, CFOs, treasurers and the like should therefore expect from 2008 onwards to start seeing the benefits of these developments in terms of rationalisation, significant cost reductions and more efficient cash flow management.  And they should also expect approaches from their current providers and indeed new market entrants with ideas and solutions as to how they can realise these benefits for their corporates.

For further information: paul.anning@osborneclarke.com; www.osborneclarke.com