The Single Euro Payments Area, an initiative the European banking industry launched in 2002 to link European Union and other euro-based countries’ separate national payment systems into a standardized system, remains a work in progress. And not everyone believes the European Payments Council, which is responsible for the initiative that has seen several delays already, can complete the task by December 2012, as the European Commission has proposed.

“SEPA was supposed to be finished in 2010, but people are still waiting for more,” Vincent Roland, senior vice president, Europe, Middle East and Africa, at U.S.-based transaction processor First Data Corp., tells PaymentsSource.

In Roland’s view, the proposed deadline will not be met, noting “EMV migration took over 20 years to complete.” EMV is the smart card payment security standard being used increasingly throughout the world.

Indeed, most of SEPA’s initiatives were finalized in 2007 but have not been fully implemented within the region, which includes 32 countries, 27 of which are in the European Union. As such, several observers now also believe a SEPA migration is unnecessary.

The payments council, though, remains committed to completing the transition by the 2012 deadline. The council also is responsible for developing the Payment Services Directive, which provides the legal foundation for SEPA.

SEPA and its associated measures seek to create a common market for electronic payments in much of Europe, not only through cards but also through credit transfers and direct debits. The credit-transfer initiative launched two years ago.

It is the debit-related tasks, especially related to cards, that are proving more problematic. And they represent the most ambitious aspect of SEPA.

The council is working to create standard rules for card use across the participating SEPA countries. And as the continent moves toward SEPA, European Union regulators have applied pressure to Visa Europe and MasterCard Worldwide to lower interchange rates and cease card practices deemed anticompetitive.

At least three fledgling schemes hope to create European-centered card networks, but they have yet to make much headway. And the longer they fail to achieve momentum, the less likely such a scheme will emerge.

In fact, the introduction of a physical pan-European card is unlikely because plenty of debit cards usable across borders in the region exist already, contends Marc Temmerman, Visa Europe executive vice president, SEPA. So each individual nation’s card scheme would have to follow the same set of principles, he tells PaymentsSource.

Retailer Opportunities
One proposed SEPA rule would enable banks to choose their own card processors, Temmerman says, suggesting this would be a smart move because large, multi-country banks such as Barclays Group PLC want choice and competition. And, he says, “SEPA is about changing the competitive landscape for banks, merchants and consumers.”

Additionally, with the new SEPA card principles, nonfinancial institutions, such as retailers or petrol suppliers, also could develop and issue their own cards, Temmerman says.

Direct debit, though controversial in itself, appears to have a better chance to develop for cross-border transactions. The direct-debit initiative operates on a pan-European automated clearinghouse network that can settle payments across the SEPA zone. Through SEPA direct debit, consumers and businesses may pay bills directly from an account to payees in any participating country. Most countries already have a direct debit model in place.

A ‘New Way To Pay’
“SEPA direct debit is the new way to pay,” says Gerard Hartsink, council chairman.

Changing over to a SEPA-compliant scheme, however, may cause huge problems, Malte Krueger, senior consultant with Frankfurt, Germany-based PaySys Consultancy GmbH, tells PaymentsSource. “German and Austrian banks think SEPA’s direct-debit scheme is too complicated, while French banks find it to be unsafe because there isn’t a strong authentication process,” he says.

The council, however, is working to ensure a smooth transition for all banks and consumers by November of this year by making sure the schemes “include options allowing banks to meet specific customer-based needs based on different national direct-debit schemes currently in place,” Hartsink explains.

SEPA’s direct-debit scheme is based on the “creditor-driven model,” meaning consumers or debtors need only to authorize a creditor or biller, such as a telephone or electric company, to debit their accounts when they want to make a payment, Hartsink says. Consumers also could set up automated payments with creditors or billers.

Because many consumers prefer to pay bills online, the council has developed “e-mandates,” or electronic permission slips, that provide another option for consumers to authorize direct-debit payments. To ensure the method is safe, “when a consumer issues an e-mandate, the information stays directly with the consumer’s bank, which then has the option to verify the authorization of a payment,” Hartsink says.

To comply with the cross-border mandates, whether for domestic or for cross-border payments, “banks must support the SEPA direct-debit scheme, and such billers as utility companies, telecommunication providers and insurers must offer SEPA direct debit as a payment option to their consumers, Hartsink says.

Improvements Needed
However, the SEPA direct debit scheme is “no better or worse than the existing schemes,” Bob Lyddon, chairman of London-based Lyddon Consulting Services Ltd., tells PaymentsSource. Lyddon believes for the schemes to work and appeal to consumers, the council should require the existing schemes become better.

The least controversial of the SEPA-related changes are credit transfers, which went into effect in January 2008. Similar to direct debit, credit transfers also operate on a pan-European ACH network. Approximately 4,464 banks within the SEPA zone now support SEPA credit transfers, according to the council.

The scheme met with less opposition because “credit transfers were a relatively new product, so it worked well and didn’t have the potential for challenges,” Krueger says.

Online Standards
Through the credit-transfer scheme, consumers may make payments to their bank accounts or to other consumers in all countries in the SEPA area and the United Kingdom as long as they pay using euros.
The payments council plans to develop standardized rules for electronic payments under the credit-transfer scheme.

For e-payments, the rules would include a payment guarantee for online merchants–the bank of the consumer making an e-payment by SEPA credit transfer would guarantee the payment to the online merchant, Hartsink explains.

Additionally, the council hopes to create a situation in which consumers can purchase online services regardless of where they live in the SEPA zone. The council also is working to enable consumers to make payments using online banking services.

Besides direct debit, credit transfers and cards, another arm of SEPA is the Payment Services Directive, which the European Commission created in 2007. It became law in November 2009.

The Payment Services Directive will establish a common legal basis regarding consumers’ “refund rights” when making a payment using direct debit, Kevin Brown, chairman of the council’s legal support group, tells PaymentsSource.

While the council’s ability to “deliver the SEPA initiative has been closely linked to the content and progress of the Payment Services Directive, it is much more than a SEPA directive,” Brown says. The very broad and ambitious scope of the directive makes it the most significant and comprehensive piece of European Union financial services legislation in relation to the payments market, he explains.

The directive’s overall goal is to establish a comprehensive set of rules for SEPA schemes and services and for all electronic payment services in the European Union/European Economic  Area, Brown says. It is divided into four sections: payment industry scope and definitions, regulation of nonbank service providers, conditions for transparency, and relaying information to consumers regarding payment-services rights and obligations, he explains.

Enhanced Competition
Also, to comply with the payment industry perspective, the European Commission included more “far-reaching provisions,” such as the inclusion of payment institutions–a new category of nonbank payment-service providers–to create more competition, Brown says.

Most European Economic Area countries, except Iceland, Greece, Poland, Sweden and Finland, have implemented the directive, Brown says. Those countries plan to do so by year end, he notes.

The directive included a few option clauses, giving countries the freedom to use the laws in different ways, PaySys’ Krueger says. For example, the current law enables merchants and acquirers to set a surcharge for transactions. Under the directive law, however, only merchants have the right to decide the surcharge, Krueger says.

In Europe, “if existing systems are able to continue, then there never will really be a total migration,” Krueger contends. He suggests that, because the council is “afraid no one will want to use the SEPA products, they are using force to implement the program,” and “it will be a very sorry state of affairs if you have to force people to use a new product.”

In the end, though, “it comes down to national banks versus small, local banks,” Temmerman says. For large, multi-country banks, retailers and corporations, a SEPA migration means more competition and more business in other countries, he says.

Though some observers believe a complete SEPA migration poses several challenges, the European Payments Council is confident SEPA countries eventually will have a single euro payment supported by a synchronized payments industry.  PS

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