Monday, April 7, 2008

Charlie McCreevy's April Fools Address "Releasing the power of payments"

Charlie McCREEVY European Commissioner for Internal Market and ServicesSingle Euro Payments Area 7th International EPCA Conference "Releasing the power of payments" La Hulpe, 1st April 2008 "Ladies and Gentleman, Thank you for inviting me to address you this morning on the subject of SEPA, the Single Euro Payments Area. Today is April fool's day, but believe me, SEPA is not a hoax. We already have 4000 banks in Europe adhering to the EPC credit transfer scheme and a volume of more than 100,000 transfers a day. But why is SEPA so important for Europe? Let us go back a few years. I remember Sir Leon Brittan, a former EU trade Commissioner in the early 90s, telling the story about ordering a book costing around �10 from another Member State, but when the bank charges were added in the cost, it came to �30. This is why SEPA is important for Europe: it brings concrete benefits for EU citizens! Today, a cross-border transfer can be executed at the same price as a domestic one: no more than a few Euro cents! How does SEPA release the power of payments to the benefit of the whole European economy? This distinguished audience of professionals knows it better than anybody: payments are essentially a volume-related business. The integration of national payment systems though SEPA will produce substantial economies of scale thus lowering payment processing costs.
It will also enhance competition by making cross-border competition for payments possible. Together, these will reduce the cost of payments to users. Major payment users such as corporates, public authorities, retailers and SMEs should benefit from improved business efficiency and reduced operating costs linked to payments. By facilitating cross-border payment, SEPA could have a dynamic impact allowing especially SMEs to reap the full benefits of the internal market. SEPA could also have a hugely positive impact on the integration of retail financial markets. verall, SEPA will increase the competitiveness of European business and the financial sector, as well as bringing about the integration of payments markets in the EU, which was identified in 2000 as one of the key measures to achieving the goals of the Lisbon Agenda. To quote a number: 123 billion euros in the next 6 years. These are the expected benefits of SEPA according to a study carried out by Cap Gemini for the Commission. But the story does not end here: if we can use SEPA as a platform for e-invoicing, then a further 238 billion euros of savings could be achieved. In addition, SEPA could also be used as a platform for e-lending and trade financing. In the public sector, SEPA will, I hope, be used to drive e-Government and the development of transactional services in the areas of e-procurement, taxation, and customs. Ladies and Gentlemen, The future holds great potential, but there is still a long way to travel. I would like to take this opportunity to remind you also about the challenges ahead: SEPA migration, cards, additional optional services and SEPA governance.

First SEPA migration. As far as migration is concerned, we need a realistic timeline for the full completion of the project. By completion I mean the widespread use of SEPA products by retail customers, SME�s, corporates and the public sector. SEPA migration started last January and the intention is that by 2010 a critical mass of payment instruments should have migrated. However, more clarity is required on what constitutes a "critical mass of payments" in order to avoid different interpretations of such a concept in each of the Member States. Uncertainty about the end game for SEPA could easily become an excuse for delayed migration. But, the longer the transition period, the longer the period banks will have to bear duplicate costs, first-movers will be handicapped, and SEPA pricing as a whole will be suboptimal. This argues that a realistic timeline for phasing out old national payments products and migrating customers to the new SEPA products should be set up. Public authorities represent nearly 50% of EU GDP and around 15-20% of all payments. Given the wider benefits to society, public administrations could and should play a major role in kick-starting migration. In May of last year I hosted a major conference in Brussels to familiarise public authorities with the benefits of SEPA. Electronic payment services can enable the simple payment of various government fees, taxes and social benefits and SEPA could be used as a platform for e-Government. However, the Conference showed that while public authorities strongly support SEPA, concern about the pricing and performance of SEPA products may, sadly, create a negative climate for early migration. But SEPA is a market-driven process, and in a market driven process, suppliers should persuade customers of the merits of new products so that migration occurs naturally. Banks should espouse the non-deterioration principle, namely that the new SEPA products should have price/performance characteristics at least as good, and preferably better, than existing products. The ECOFIN, the Council of European Finance Ministers, has already highlighted its importance in its conclusions last year and the Commission will continue to monitor this issue and, at the same time, will strive to promote the role of public administrations in the timely and successful implementation of SEPA. A second issue, which concerns me, is what happens to national debit cards. Within SEPA, functionality will undoubtedly be expanded so that a card can in principle be used at any terminal in the euro zone. Unlike the comprehensive rule books for credit transfers and direct debits, the SEPA Cards Framework does not develop any detailed rules and standards, but rather describes three options for attaining SEPA compliance. There is a justifiable concern that under current market developments, this increased functionality could come at the cost of increased market concentration and the risk of a more expensive payment card for the merchant and consumer. At the heart of this issue is our concern that national card schemes should not be replaced by more expensive payment card schemes, using SEPA as some sort of pretext for increasing prices. More competition in the EU payment cards landscape should mitigate against such tendencies. A first decisive step has been taken by the Commission last December, with the prohibition decision addressed to Mastercard regarding MIF for cross-border payment card transactions with MasterCard and Maestro branded debit and consumer credit cards in the European Economic Area (EEA). The Decision found that Mastercard's MIF inflated the costs of card acceptance by retailers, since the MIF accounts for a large share of the final price companies pay for accepting Mastercard's payment cards, without leading to proven efficiencies. Let me be clear on one point Ladies and Gentlemen: the Decision did not conclude that all MIFs are illegal per se. However, Mastercard could not demonstrate that its MIF contributed to objective efficiencies, meaning technical and economic progress, or that it benefited consumers. I have, of course heard some voices who say that this Decision is jeopardizing SEPA, even killing it. I reject that. In fact, the Mastercard Decision supports the SEPA project in two ways: Firstly, it obliges Mastercard to refrain from implementing its new "SEPA" interchange fees for the euro zone. This ban will ensure that SEPA does not lead to permanent price increases linked to payment cards. Secondly, as a consequence of the Mastercard Decision, there will be better conditions for new schemes to compete with incumbents, as the current MIF practice has to change. Last week my colleague Neelie Kroes also opened an investigation into VISA's MIF.Of course, as regards the possible emergence of new schemes, I fully recognise that where market players are called upon to make fresh investment to create a new network, clarity on possible business models and a MIF that is compatible with EU competition law is crucial. The need for clear communication is obvious. In response, the exceptional step of publishing a provisional non-confidential version of the Mastercard Decision has been taken. But this is not the end of the story, as we will of course continue our dialogue with the industry in order to make sure that there is sufficient clarity and legal certainty in the market. There also needs to be further progress on standardisation to allow for a greater variety of card schemes on the European market. Therefore, I very much welcome the recent work initiated within the EPC on the development of card standards and urge its rapid completion.

The third issue I wish to touch on is Additional Optional Services. These will play an important role in the future European payments market and are vital for the SEPA �business case� of many institutions. Payment services will become increasingly commoditized and banks will need to develop new sources of revenue by the provision of add-on-services, such as e-invoicing. But, the risk is that the provision of these services may lead to new, national fragmentation and the economies of scale and the massive productivity gains that could be achieved by their development at EU level may not be attained. Additional Optional Services are not described at length in the EPC Rulebooks as they are considered part of the competitive space. However, I think the EPC could consider providing the industry with clear ideas for the development of AOS (beyond the core SEPA services), addressing the need for interoperability and preventing fragmentation. The fourth and final issue is SEPA governance. The Commission attaches great importance to the governance arrangements for the European payments market. If users cannot participate effectively in the SEPA governance arrangements, then it becomes doubtful whether the current and future needs of users will be adequately met on a timely basis. This is vital for a complex project such as SEPA, which involves so many different end-user groups in various countries. The creation of the stakeholders' forum by the EPC is clearly a move in the right direction, but how this user consultation is incorporated into EPC decision-making may need further reflection. Ladies and Gentlemen, You have already achieved much but more remains to be accomplished if SEPA is to become the world-class payment system that Europe's citizens and businesses deserve. As regulators, we can only try to provide a level playing field and a framework for competition. I am sure you have the capacity, skills and determination to make this opportunity a reality. Thank you for your attention.

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