EUROPEAN PAYMENTS IN A CHANGE A COMMERCIAL BANK´S OBSERVATIONS GÜNTHER GALL

1. EUROPEAN PAYMENTS IN A CHANGE A COMMERCIAL BANK´S OBSERVATIONS GÜNTHER GALL RAIFFEISEN ZENTRALBANK ÖSTERREICH AG, VIENNA

2. AGENDA • CUSTOMER´S EXPECTATIONS • LEGISLATION AND REGULATION • INDUSTRY REACTIONS AND SOLUTIONS • THE WAY FORWARD

3. CUSTOMER EXPECTATIONS • Payments are for most of the private customers a black box only, they should be CHEAP, FAST and ERROR-FREE • Consumer groups, on behalf of the retails customers, defined the needs for transparency and clearness for understanding the payments business • These needs were politically manifested in the directive for cross border credit transfers and the EU regulations 2560/2001

4. LEGISLATION AND REGULATIONS • The directive on cross border credit transfers and the regulation 2560/2001 of the European Parliament formulate customers expectations and govern commercial bank‘s business routines from the outside. • Transparency of business practices structured information about charges, default time of execution end2end and changes in responsibilities in case of inquiries should support the harmonisation in the payments arena • Conformity in pricing both domestic and Euro-zone cross border should accelerate the „Domestification“ of the European payment landscape and ease the handling of payments for the customer.

5. REGULATIONS IN THE PAYMENTS AREA • Those political decisions hit the European finance industry in difficult times : - Revenues are eroding due to high competition, over capacity prevails in the market and the entrance of new competitors, the non- and near banks, reduce the margins additionally. - On the contrary, a change of paradigm in customer relationship took place. Instead of the lending or investment business, payments have become the main basis for connecting customers to the banks.

6. Beneficiary Customer (Country Y) Direct Account Relationship or Intra Bank Book Transfer EBA Member Bank Local Bank (Country Y) Correspondent Bank EBA Local RTGS Local RTGS Local ACH Local ACH Global Bank Outsource Beneficiary Bank (Country Y) Originating Bank (Country X) Originating Customer (Country X) CURRENT COMPLEXITY IN THE PAYMENTS MARKET Cheque Target Electronic/ Internet Banking Request for Transfer Source: SWIFT

7. INDUSTRY REACTIONS • After enactment of the directive and the regulation into national law, the need for harmonisation of the European payment infrastructures, the product portfolio and the current various routines increased dramatically • Politicians and consumer group representatives assume that banks itselves are in the position to change market practices in payments • Therefore, the European finance industry convened in a brainstorming workshop early 2002 and defined the „White paper for SEPA“ formulating the necessities for the Single Euro(pean) Payments Area

8. DIRECT IMPACT AND NECESSARY CHANGES • All acceding countries and a large number of the accession countries to follow have adopted/will in due course adopt the legal requirements into their national laws. • Preparations for the issue and the processing of IBAN and BIC, identifying beneficiary and its bank in a full STP mode are either completed or under way • The necessary changes in legal and formatting issues have been prepared in time. BUT, additionally preparations in terms of • pricing policies • cost management in processing and • applications set-up have to take place individually by each bank!

9. CHALLENGES AHEAD OF US • Although revenues of bank‘s core business - payments - are melting away, banks have to stay in business • Customers behaviour changes/changed from a seller‘s market to a buyer‘s one • The European finance industry has to implement self-regulation to avoid external regulation • Resilience and contingency activities ( after 9/11 ) are increasing production costs • Combating against money laundering and fraud reduce STP ratios and increase cost as well

10. INDUSTRY SOLUTIONS • The European finance industry is joining forces to find solutions in the changing payment environment. • European Payments Council ( EPC) establishes the platform for developing solutions and enforcing implementation in the Single European Payment Area ( SEPA) • First solutions are : - the definition of the European basic credit transfer ( CREDEURO) - the set-up of the Pan-European Automated Clearinghouse ( PE-ACH) • Pan-European Direct Debit ( P€DD) to follow 2005/2006

11. THE WAY FORWARD • Banks will have to decide whether to - BUILD ( own infrastructures ) - BUY ( them from others, i.e. outsourcing till white labelling ) or - PARTNER ( with other banks in terms of sharing infrastructures ) in order to manage the production cost in an optimal way. Banking industry electrical industry capital goods future today 20 30- 50 50 build 80 build 20 50- 70 50 80 buy buy

12. THE WAY FORWARD • Efficient cost-cutting schemes and professional cost management will support the competitive edge and the individual position in the payments market. • The right balancing between the offer of flexibility in solutions and standardization in processing will be key. • Existing legal barriers have to be removed (i.e.EC‘s new legal frame work forms basis for further improvements and harmonisation) • Market and technical standards have to be jointly developed and once in existence, also to be used ( task for EPC, SWIFT,..) • Future competition will take place on product level only instead on infrastructures , which leads to sharing them. • And, most important, differentiation will be driven by quality mainly

13. THE WAY FORWARD • The EU payments legislation came for many banks in the Eurozone unexpectedly and/ or too early. • The assessment of the payments market and its necessary changes differ from bank to bank according to their different strategies and perceptions. • However, due to the modification of the customer´s behaviour, the increasing competition and the race for speed, there is urgent need to business re-engineer the payments routines completely, which are in place for more than 20 years rather unchanged. • Banks in the acceding and accession countries benefit from the experiences gained in the current Eurozone and are in the position to shape their change process under less time pressure as the Eurozone banks. • The European finance industry has to take the initiative in this – in their – change process and – while liaising with the EU Commission and with the help and support of the ECB – has to form the new infrastructure and the necessary product portfolio in the new , virtual domestic payments market in Europe, called SEPA.

14. THE WAY FORWARD THE SEPA DECLARATION : „We, the European banks and credit sector associations, - Share the common vision that Euroland payments are domestic payments, - Join forces to implement this vision for the benefit of European consumers, industry and banks And accordingly, - Launch the initiative „Euroland – Our Single Payment Area „!“

15. The European payments industry undergoes a dramatic change process, a process which has been commented by an German philosoph some decades ago as follows I CANNOT TELL YOU WHETHER IT WILL BECOME BETTER WHEN WE WILL CHANGE IT; BUT ONE IS FOR SURE, IT MUST CHANGE WHEN IT SHOULD BECOME BETTER ! Georg Christoph Lichtenberg