v1 25/04/06 driving the sepa train how to implement the sepa cards framework ebug seminar, lisbon...

V1 25/04/06

Driving the SEPA TrainHow to Implement the SEPA Cards Framework

EBUG Seminar, LisbonWednesday 26th April 2006

EBUG Lisbon April 20062V1 25/04/06

SEPA - Opening up Europe’s Payments Markets The Story So Far…

Long delays – banks did not deliver on promises

National interest – not EU

Protectionism – not open market

Threats of regulation

Overdoses of politics

Monopolies and duopolies

Major infrastructural projects

Lack of progress, not good enough!Lack of progress, not good enough!


“Politics is the art of looking for trouble,

finding it whether it exists or not,

diagnosing it incorrectly and applying

the wrong remedy”

Sir Ernest Bevin, 1930


Agenda

SEPA Background and Content

Overview of SEPA Cards Framework (SCF)

Analysis of Implementation Options

Summary and Conclusions


The ‘F’ Word - A Story of Failure…

Failure to achieve EC’s vision

Failure to think EU / euro-zone

Failure to standardise

Failure to inter-operate

Failure to consolidate

Over 15 Years of Delay and Vacillation in Delivering an Open and Common Payments Infrastructure… But now we have SEPA

Over 15 Years of Delay and Vacillation in Delivering an Open and Common Payments Infrastructure… But now we have SEPA


At last the SEPA train has left the station

2006

You can be upfront with the driver, or sitting comfortably in First Class, or being thrown around hanging off the back… or left in the Station!

You can be upfront with the driver, or sitting comfortably in First Class, or being thrown around hanging off the back… or left in the Station!

sepa


SEPAland - The SEPA Vision

“SEPA is achieved when people can make payments through the whole euro area from one bank

account or by using one card as easily and safely as national payment is conducted today … the

choice of bank or location should make no difference … all euro area payments should

become domestic”

Gertrude Tumpel-Gugerell, ECB, September 2004

ECB rationale for SEPA:

Current account access by card anywhere

Common processes for all payments (not just cards)

Improved banking competition

SEPA will do for electronic payments and cards and what the euro has done for cash

SEPA will do for electronic payments and cards and what the euro has done for cash


Key Owners of the SEPA Concept

1. European Central Bank – owns broad requirements and timing – responsible as for euro

2. European Commission – owns harmonisation plan – 15 years pressure – legal framework

3. European Payments Council – design/specification – self regulation

Key stakeholders are merchants, corporates, consumers, government and representative associations

Key stakeholders are merchants, corporates, consumers, government and representative associations


Today Tomorrow

Euro-Area EU-25 EEA

SEPA Scope & the vision for tomorrow

Reduced complexity, improved efficiency

Cross-border complexity and risk

Harmonisation and consolidation Fragmented industry

Improved inter-operability No inter-operability of national schemes

Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws

Different schemes, experiences, standards, consumer protection laws

Common “local” solutions National / local solutions

Tomorrow –Harmonised SEPA

Today –Fragmented National Markets

Reduced complexity, improved efficiency

Cross-border complexity and risk

Harmonisation and consolidation Fragmented industry

Improved inter-operability No inter-operability of national schemes

Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws

Different schemes, experiences, standards, consumer protection laws

Common “local” solutions National / local solutions

Tomorrow –Harmonised SEPA

Today –Fragmented National Markets

euro-zone 12 Nations

EU New Member States

EU Nations outside euro

EEA

Switzerland

Key: = voluntary alignment; = Requirement

= For new Member States domestic payments when they join the euro

PSD Directive

Domestic Payments

All Euro Payments

Region

euro-zone 12 Nations

EU New Member States

EU Nations outside euro

EEA

Switzerland

Key: = voluntary alignment; = Requirement

= For new Member States domestic payments when they join the euro

PSD Directive

Domestic Payments

All Euro Payments

Region


SEPA Infrastructure Impacts

SEPA is the most significant change in EU’s payments in the past 20 yearsSEPA is the most significant change in EU’s payments in the past 20 years

SEPA is a major harmonisation project which will replace the fragmented national payment infrastructures

All payments will be carried out using common frameworks, rule books and the new Legal Structure (PSD)

Every citizen, bank, merchant and corporate enterprise will be impacted by the SEPA implementation

SEPA is not about cross border payments, it is about standardising each national market

12 euro 29 EU

Population 310m 470m

Corporates 17m 25m

Banks 7k-8k 9k

ACH Schemes 10 20+

Card Schemes 14+ 18+

POS 4.5m 6.2m

ATMs 238k 326k

Electronic txns 50bn 73bn


SEPA - EPC Timeframe

Design & preparation

Implementation & deployment

Co-existence & gradual migration

Programme activities

2

1

DesignSpecification

Implementation

Pilots

National migration

Early adopters

Programme management, planning, communication, monitoring

Launch

Milestones

1. EPC instruments available to citizens

2. Critical mass migrated so SEPA is irreversible

Source: EPC Chair, SIBOS Sep 2005

201020092008200720062005

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q4Q3Q2Q1

201020092008200720062005

Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q2 Q3 Q4Q4Q3Q2Q1

Feasible for ACH schemes – but realistic for cards?Feasible for ACH schemes – but realistic for cards?


SEPA – the Size of the Change

Year 2000………

The euro………..

SEPA………………………

….. and customers will be looking for solutions to help digest it….. and customers will be looking for solutions to help digest it

How do you eat an elephant?……… one piece at a timeHow do you eat an elephant?……… one piece at a time

€8-13bn*

* Tower Group estimate


New CSM/

PEACH

New CSM/

PEACH

Old ETS Schemes and Infrastructure


Today - 2006 Tomorrow – 2010

Old ACH Schemes and

Processing Infrastructure



Old Card Schemes and

Processing Infrastructure

New CSM/

PEACHInfrastructures

12

3

Replace

Adapt

Separate

Separate New CSM/

PEACH

New CSM/

PEACH

Card Processing

Infrastructure

12

3

New CSM/

PEACH

New CSM/

PEACH

Modified Existing Schemes

1 23

ACH – Replace with ETS Schemes and Separate Processing

Cards - Adapt to SEPA Cards Framework and Separate Processing

New ETS Common

SCT/ SDDSchemes

Comparison SEPA Schemes Design Features


SCF General Observations

Framework is a multi-national compromise – so is a great achievement

Applies to all general purpose euro payment cards - focus is on debit

Self regulatory framework – not a scheme, lower cost – schemes must “adapt” – banks follow

SCF does not substitute for card scheme rules/regulations

Principle is to foster competition at debit scheme level – but potential for ICS duopoly

Scheme brand/infrastructure unbundling has the greatest potential for change – particularly ICS


SCF Impact on Card Schemes

SCF Statement

Scheme Organisation/Activities – must ensure legal/commercial barriers removed

Separation of Scheme Governance from Processing and other functions – no longer mandate use of processing services – no longer self certify

Participation – transparent and non discrimatory criteria

Principles of Interchange Fees – MIF and bilateral acceptable – local MIFs allowable with SEPA wide default

Licensing – single licence enables offer of all scheme products/services – on us applies to the SEPA

EMV Supporting Technology – commitment to EMV for all cards (credit/debit) by 1st January 201

Scheme Pricing – transparent pricing, no bundling

Liability Shift – all schemes to introduce liability shift rule plus incentives

Open Business Model – no discrimination, ensure merchants/ATM owners can accept SEPA compliant cards from other schemes

Fraud – commitment to fraud statistics/reporting

Operational Quality – must provide benchmarks and how policed


SCF Impact on Card Schemes – cont’d

SCF Statement

Issuer Authorisation – all transactions to be online or offline by chip

Cardholder Experience – must be consistent at POS/ATM – schemes cannot mandate specific payment application, common flow, English mandated

Merchant Experience – one single terminal to access multiple acquirers – merchants free to switch acquirers and can accept any scheme (SEPA acceptance parity)

Inter-operability – all four domains must have inter-operability – cardholder to terminal; card to terminal (EMV); terminal to acquirer; acquirer to issuer

Certification Principles – open market – certification no longer only a scheme function

Terminal Certification – schemes to release terminal security requirements – post certification approval/allowable

Scheme Rules – schemes to commit to convergence over non competitive elements


SCF Impact on Acquirers

Business Technical / Operational

Potential new scheme membership rules governance

Merchant communication campaign on SCF/SEPA impacts/benefits

Common consistent experience for cardholders

Changes to merchant contract terms – removal of barriers to acceptance

New terminal strategy – elimination of multiple terminals

New SCF/SEPA card acceptance policy by 2008 for one or more SEPA compliant card schemes in terminals

New rules for provision of DCC (PSD)

EMV/SCF compliance/acceptance for all cards schemes /terminals

Implementation of SEPA compliant card scheme

Potential new core terminal applications and upgrades

New multi acquirer terminal application in some countries

Acceptance of multi function cards

New terminal to host interfaces

New acquirer to issuer interfaces

Possibly new clearing and settlement arrangements (eg. Berlin Group)

Build new processes for fraud management/reporting

Implementation of EMV by 2010 and liability shift


SEPA Impact on Debit Card Issuers

Business Technical / Operational

Potential new scheme membership rules, governance

Offer at least one SCF compliant card provided from 1st January 2008 onwards

All general purpose cards issued become SCF compliant

Re-issuance of cards to new scheme

Communications plan – potential brand change

Communication campaign SCF/SEPA benefits to cardholders

Complete migration to EMV by end 2010

New rules for consumer redress (PSD)

Implementation of new debit scheme infrastructure

Implementation EMV for all cards issued

Implement new standards for:

cardholder to terminal interface

card to terminal (EMV)

issuer to acquirer interface

Potentially new debit/credit default features for multi application cards

Implementation of new/modified card management processes

Implementation of new/modified authorisation and credit management systems

Possibly implement new clearing and settlement arrangements


SCF Key Issues

SCF was the easy bit – how to implement and enforce?

Is scale and scope beyond banks/schemes/EPC?

Created by team of experts within ECB broad requirements

Pressing need for standards and guidelines – terminals POS/host, issuer, acquirer

Need to remove many national blockages and barriers

New operational model chargebacks, merchant accounting, PINS/HSMs

Can current structure manage specification and delivery of Europe’s largest ever project – card share €7bn to €8bn

Can current structure manage specification and delivery of Europe’s largest ever project – card share €7bn to €8bn


European Infrastructure ChangeWhat Does History Tell Us?

Past Cards Infrastructure Projects SCF

Phased smaller projects more successful – large much less (EMV)

Large scope 12 domestic plus all euro systems – no phases yet

Strong consumer/merchant proposition Weak consumer but strong merchant

Good business case Short term poor – long term good

Strong commitment – large national banks – will to fund

Strong large bank commitment, but no funding

Interbank company implements and provides delivery service

EPC represents all banks and monitors, but no more

Strong scheme mandates incentivise change (EMV example)

Lack of basis for mandates – no operational revenues

What structures to use for implementation?What structures to use for implementation?


Four Strategic SCF Implementation Scenarios

Scenario 1 – Open Market Devolved Strategy (Current)

Scenario 2 – Separate Implementation Only Company (SEPACo)

Scenario 3 – New Infrastructure and Implementation Company

Scenario 4 – Regulated Implementation


Scenario 1 – Open Market Devolved Strategy(Current)

Strengths Weaknesses

EPC monitoring

Leverages banks ownership of schemes (pressure)

Open market competitive principles for schemes

Open market competitive principles for network construction (Berlin Group)

Strong commitment by largest banks

Standards/guidelines to be produced

Poor history of open market driven developments

No central control or network

Voluntary body – EPC’s limited resources

No experience of implementation

No mandates incentives/penalties

Aggressive delivery dates

Schemes sign up to concept and compete, banks make choices. Scheme/infrastructure separation stimulates processor sector. Implementation devolved to national associations, no central co-ordination body. Standards developed by consensus, networks evolve through market demand by processing sector. Current timelines retained.

Conclusion – chances of success modestConclusion – chances of success modest


Scenario 2 – Separate Implementation Only Company(SEPACo)


EPC continues to provide leadership

Professional project managers (lower risk)

Realistic road map construction

Standards rapidly developed

Separation of policy/execution

Incentives and penalties

Cost of SEPACo set up/operation

Does not deliver an infrastructure

No guarantee of success

EPC member resistance to penalties

Separate governance needed, professionally managed, fully funded SEPACo. Powerful mandate to co-ordinate, lead, plan, monitor, manage. 30-40 staff €20m-€30m per annum. Sets standards, best practice, network architecture, certification/compliance. Operates PMO, owns macro SEPA plan. Negotiates revised time scales - two years slippage. EPC allowed to fine non/slow participants.

Conclusion – would work but who pays?Conclusion – would work but who pays?


Scenario 3 – New Infrastructure and Implementation Company


Professionally implements/delivers

Avoids fragmentation

Equal to and competes with ICS networks

Delivers solution for direct debits/credits

High cost and risk

Uncertain volumes/efficiency improvement

Unfair cost sharing

Already exists within ICS

Follows traditional interbank model. NewCo created (includes SEPACo functions), permanent infrastructure to implement SEPA and operate network to link all national debit. Builds network equal to that of Visa/MasterCard, draws in Berlin Group. NewCo sets standards for all aspects.

Conclusion – workable but cost/riskConclusion – workable but cost/risk


Scenario 4 – Regulated Implementation


Ensures all schemes and banks sign up to SEPA/SCF

Penalties strong motivator

Level playing field for competition

Regulations more directive than SCF

Support from some bank players

Pioneering regulation of standards specifications

Banks work to rule – work arounds

Unintended consequences and collateral damage

High risk project – EC micro manage

Failure damages EC credibility

Commission decides will only happen through legislation. SCF turned into a regulation. Highly prescriptive, mandates deliverables and timelines. Includes regulation of interchange and MSCs. Penalties if not achieved. PSD tightened up to strengthen legal framework.

Conclusion – an interesting option!Conclusion – an interesting option!


Summary Assessment of Scenarios

Scenario Feasibility Risk Complexity Cost Certainty of Delivery

Scenario 1Current Open Market Strategy

H L

Scenario 2SEPACo

M M

Scenario 3New InfrastructureCo

M M/H

Scenario 4Regulated Implementation

H H


Conclusions - SCF

SEPA Europe’s largest infrastructure project – will impact all

Timeframes highly ambitious, unlikely to be achieved for cards

Europe poor history of major EU wide change (euro excluded)

Current implementation plan suitable for ACH

SEPACo and NewCo unlikely to be funded

Some form of regulation highly likely

That’s the way politics goes!That’s the way politics goes!


“Politics is not the art of the possible.

It consists of choosing between the

disastrous and the unpalatable”

J K Galbraith, 1969

Peter JonesManaging Director

+44 (0) 20 8891 6244

[email protected]

v1 25/04/06 driving the sepa train how to implement the sepa cards framework ebug seminar, lisbon...

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