Efficient Retail Payments in Europe: A balanced mixed between regulation and self-regulation

1. ECB-UNRESTRICTED Efficient Retail Payments in Europe: A balanced mixed between regulation and self-regulation Francisco Tur Hartmann European Central Bank Regulation panel Brasilia, 10 September 2014

2. Overview SEPA – A model for payment self-regulation Harmonisation through regulation 1 EU retail payment governance 2 Conclusion 3 4

3. 1 SEPA – A model for payment self-regulation 2 Harmonisation through regulation 3 EU retail payment governance 4 Conclusions

4. SEPA – A model for payment self-regulation Objective - the creation of an area of efficient non-cash payments in euros covering 34 countries SEPA has resulted in an integrated euro payments area, ensuring that cross-border payments become as easy and efficient as domestic payments SEPA covers credit transfers, payment cards and direct debits SEPA is enhancing competition by removing national barriers The Single Euro Payments Area SEPA is a market driven initiative

5. However major barriers remained in the electronic transfer of currency and the payment for goods and services between these countries The European banking industry therefore setup SEPA in response to the need for a truly euro cashless payments area The European Payments Council (EPC) was then established by the banking industry to facilitate and set out the standards on which SEPA should operate SEPA – A model for payment self-regulation Self regulation • The introduction of the euro in 1999 and the physical currency in 2002 standardised all cash transactions in the participating EU countries – Euro area

6. The EPC developed two payment schemes: • A SEPA credit transfer scheme • A SEPA direct debit scheme It also set out a framework for card payments, SCF - SEPA Cards Framework It lays down a set of interbank rules and standards that have to be observed when executing “SEPA compliant” payment transactions The schemes provide a common understanding between banks and payment services providers on how to move funds from one account to another within the SEPA area SEPA – A model for payment self-regulation European Payments Council (EPC)

7. The EPC is responsible for the development and maintenance of the SEPA payment schemes as defined in the rulebooks published by the EPC itself. The EPC publishes two main rule books: • A SEPA credit transfer (SCT) rule book • A SEPA direct debit (SDD) rule book Each rule book is built around a common message format using the global ISO 20022 xml standard The rulebooks were developed with support from all market players and are continuously redefined via public consultations SEPA – A model for payment self-regulation The SEPA rule books for credit transfers and direct debits

8. The EPC developed the SEPA for Cards Framework Outlines high level principles and rules that when implemented by the card industry, will deliver a consistent user experience to both cardholders and merchants when making or accepting euro payments or cash withdrawals. The SCF recognises the EMV standard for SEPA-wide acceptance of card payments The SCF is unlike the rule books for SCT and SDD as its allows for multiple schemes with common business rules in the area of card payments However fragmentation in the EU cards market still continues and has not reached the level of the integrated market that we now see in credit transfers and direct debits SEPA – A model for payment self-regulation SEPA for payment cards

9. 1 SEPA – A model for payment self-regulation 2 Harmonisation through regulation 3 EU retail payment governance 4 Conclusions

10. Although SEPA is a self-regulatory project of the European banking industry, its legal framework is to a large extent predetermined by three important pieces of EU legislation: The Payment Services Directive or “PSD” (Directive 2007/64/EC) Regulation (EC) No 924/2009 on cross-border payments in euro Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro The above legislation fostered the creation of SEPA through regulation rather than mandating it Harmonisation through regulation legal framework underpinning SEPA

11. Created a modern and comprehensive set of rules applicable to all payment services in the EU and improved competition by opening up payment markets to new entrants It harmonised terms and conditions across the EU for payments Provided for clear rules for a new category of payment service providers, established by the Directive called Payment Institutions (PIs) It enhanced consumer protection and set minimum service levels Provided the necessary legal platform for SEPA Currently under review Harmonisation through regulation The Payment Services Directive (PSD) - 2007

12. Principle: charges for payment transactions in euro have to be the same whether the payment is a national or a cross-border payment Applies to payments in euro, in all EU Member States Creates a “domestic payment area” for euro payments in the EU Also applies to cash withdrawals in euro across the EU Harmonisation through regulation Regulation (EC) No 924/2009 on cross-border payments in euro

13. The End-date regulation established that as of 1 February 2014 all credit transfers and direct debits in euro in the euro area should be based on common (SEPA) technical standards and business rules The regulation was subsequently amended to give a extra 6 month grace period until the 1 August 2014 EU legislators noted at even though all relevant technical and business standards were in place for euro wide credit transfers and direct debits the market was slow to move to the new standards A end-date for the phase out of all domestic and legacy systems was thus established in European law Harmonisation through regulation Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro

14. Payment Services Directive 2 (PSD2): TPP - Third Party Payment Service Provider – PSD2’s most significant proposal • Creation of a new type of regulated entity, the third party payment service provider (TPP) • A TPP can now access a payment account held with a PSP with consent from the payer • A TPP will use a payment initiation service to allow for PSP account access • A payer will have the right to use a TPP to obtain payment services • PSPs cannot refuse payments initiated by a TPP for a payer • Of key importance for e-commerce as it stimulates competition and positions SCT and SDD as alternatives to debit/credit cards Harmonisation through regulation New EU payment regulatory initiatives:

15. Harmonisation through regulation Interchange Fee Regulation Price cap: • Cap on debit card interchange of 0.2% and on credit card interchange of 0.3% of transaction value • Cap applies 2 months (cross-border) and 24 months (all) after entering into force of Regulation Card scheme business rules: • Abolishment territorial restrictions to licensing • Separation of card schemes and processing entities • Free co-badging and brand choice • Unblending of fees • Abolishment “Honour all Cards” rule New EU payment regulatory initiatives:

16. 1 SEPA – A model for payment self-regulation 2 Harmonisation through regulation 3 EU retail payment governance 4 Conclusions

17. Security Ease of use Cooperation Competition Self-regulation Regulation Essential to advance market integration, innovation and security All about weighing various interests EU retail payment governance Good governance is:

18. Retail payments industry = network industry In network industries there is the need to cooperate to be able to compete Cooperation means involvement of all relevant stakeholders, not only banks / payment service providers Cooperation needed not only at European level, also at national level: top down and bottom up coordination and fertilisation Cooperation needed not only for SCT and SDD migration, but also forinnovation, cards, standards, etc. EU retail payment governance

19. EU retail payment governance Governance is a shared responsibility in the EU SEPA Strategy and facilitation LegalFramework Catalyst,Operator New ECB chaired group European Commission Euro RetailPayments Board Eurosystem Consumers, merchants, corporations, public administrations

20. SEPA August 2014: key milestone. But work is not over! SEPA Migration:a solid base for further development and integration of retail payments in euro  start of a new phase in the European retail payments integration process. The need to address retail payment issues in their broadest sense at European levelby means of a European dialogue between banks, other payment service providers and end-users of payment services goes beyond 1 August 2014! ERPB created in December 2013 by the ECB Governing Council aims to address the above issues EU retail payment governance The new Euro Retail Payments Board (ERPB) - Why

21. EU retail payment governance Composition: ECB Chair • On the supply side of the market • four representatives of the banking community • two representatives of payment institutions • one representative of e-money institutions • On the demand side of the market • two representatives of consumers • one representative of each of the following stakeholder categories: • retailers with a physical presence, • internet retailers, • businesses/corporates, • small and medium-sized enterprises and • national public administrations. • National central banks • Five national central banks (NCBs) representing the Eurosystem and one NCB representing the non-euro area NCB community (all on rotating basis) ERPB members and participants

22. EU retail payment governance What can the ERPB achieve • Powers: ERPB to act on its own initiative, but no formal powers to impose binding measures. Close involvement of the ECB (chair) and the European Commission (active participant) to ensure that directions taken by the ERPB are not in conflict with the common European interest. • Work delivery: the ERPB will be an output-driven body. For the execution of its mandate, the ERPB may establish working groups for a limited period of time for dealing with specific work priorities. This feature introduces a substantial difference with respect to other European bodies. • www.erpb.eu

23. 1 SEPA – A model for payment self-regulation 2 Harmonisation through regulation 3 EU retail payment governance 4 Conclusions

24. Conclusions Self-regulation can foster a integrated efficient payment market SEPA is the logic consequence of European integration and was largely brought about by the actions of market players Regulation must foster integration and efficiency not hamper it EU regulations have helped the market to act to create SEPA and only introduced a end-date to create certainty for the use of the new payment standards The SEPA end-date is just the beginning SEPA will enhance competition and facilitates innovation of pan-European payment services like online e-payments, m-payments and e-invoicing. Post SEPA migration governance becomes an important driver The newly created ERPB addresses retail payment issues in their broadest sense at European level by means of a European dialogue between banks, other payment service providers and end-users of payment services

25. Conclusions SEPA could be a reference for any retail payments integration, harmonisation and/or modernisation project in other regions of the world!

26. ECB-UNRESTRICTED THANK YOU