The SEPA end-game Moderator: Kyllikki Pankakoski, Pohjola Bank Speakers: Gerard Hartsink, European Payments Council Harry Leinonen, Bank of Finland

The SEPA end-game Kyllikki Pankakoski, Pohjola Bank plc

Agenda EU and EPC vision for SEPA Period of product development, legislation etc. Migration plans of Euro-countries End date for SCT End date for SDD Cards Critical mass Different stakeholders CSMs Conclusions

The EU –needs to create a single market for payments in which everybody will be able to make any payment as easily, safely, efficiently and inexpensively as within national borders, so that there are no obstacles to the free exchange of goods and services in the internal market EPC vision in 2002 –”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 customers, industry and banks, and accordingly, Launch our Single Payment Area”

Period of product development, legislation etc Migration plans of Euro countries –Finland –other countries

End date for SEPA Credit Transfer –End date 31 Dec. 2010?? End date for SEPA Direct Debit –Starting date latest with PSD 1 Nov –End date?? End date for Cards

Critical mass –more than 2% cross border now? –statistics by ECB coming End date for different stakeholders –Public sector (early adopters?) –Corporates (waiting for more standards and IBAN/BIC solutions?) –Consumers (later)

CSMs (Clearing and Settlement Mechanism) –Interoperability –How many will survive?

Conclusions –self regulating or regulating?

The SEPA End Game Gerard Hartsink Chair – European Payments Council

Agenda Expectations ECB and EC EPC Commitment and deliverables EPC Co-operation model Conclusions

Governing Council ECB (Eurosystem) Fifth progress report, July 2007 Vision: “A euro area in which all payments are domestic, where the current differentiation between national and cross-border payments no longer exists” Expected deliverables for the Euro area (EU15): –credit transfer available to customers from 28 Jan at the latest –direct debit available to customers at the latest from Nov. 2009, earlier start encouraged –cards: elimination of all technical and contractual provisions, business practices and standards from Jan –encouragement to deliver a debit card scheme –encouragement to deliver e-payments, m-payments and e-invoicing 2008: implementation –NCB’s will facilitate implementation process –public administrations should be first movers

“The European Commission and the European Central Bank share a common vision for the Single Euro Payments Area and the process leading to its realisation. Both institutions are co-operating closely in this process and encourage the European banking industry and the other relevant stakeholders to create the technical conditions for the realisation of SEPA by the end of 2010” “The commission and the ECB stress that it is important that all relevant stakeholders, in particular the public sector, contribute to achieving SEPA. By showing political support and by becoming early adopters of the SEPA products the public sector can play a vital role for the success of the SEPA” COMMISSION OF THE EUROPEAN OMMUNITIES Joint Statement 4 May 2006

The Expert Group’s tasks shall be completed by 31 December 2009 –Identifying shortcomings in the regulatory framework –Identifying e-business requirements –Identifying relevant e-invoicing data elements, especially for the linkage between the invoice and at least the procurement and the payment process –Proposing responsibilities to be assigned to standardisation bodies –Proposing the European e-Invoicing Framework An Expert Group of 30 members (with several EPC Plenary members) is executing the tasks supported by three sub groups * Decision of European Committee, 31 October 2007 COMMISSION OF THE EUROPEAN OMMUNITIES Tasks for electronic invoicing*

Net Benefit Demand Side (EUR Billion) Supply Side (EUR billion) Market (EUR billion) Payments effect E-invoicing effect Total The benefits from e-invoicing in “SEPA Big Time” Scenario COMMISSION OF THE EUROPEAN OMMUNITIES E-Invoicing Benefits to Market

Agenda Expectations ECB and EC EPC Commitment and deliverables EPC Co-operation model Conclusions

We will deliver the two new Pan-Euro Payment Schemes for electronic credit transfer and for direct debits. We will also design a Cards Framework to define a single market for cards. The scheme rulebooks and the cards framework definition will be delivered by end 2005, and the services will be operational by January We know from feedback from our community in the eurozone that by the beginning of 2008 the vast majority of banks will offer these new Pan-Euro services to their customers. We are also convinced that a critical mass of transactions will naturally migrate to these payment instruments by 2010 such that SEPA will be irreversible through the operation of market forces and network effects. SEPA will be delivered by the banking industry in close conjunction with all stakeholder communities (consumers, SMEs, merchants, corporates and government bodies) and supportive public authorities. The community of European banks is strongly committed to this ambitious programme of action, based on self-regulation and a full recognition of the role of market forces and competition. EPC Declaration 17 March 2005

Competitive and co-operative space in SEPA (two side market) Bank B  Competitive Space Co-operative Space Competitive Space Bank A  Credit Transfer Direct Debit Card POS Transaction Card ATM Transaction Co-operative space for Business Rules Priority Payments Public Ad- ministration Corporates SME’s Merchants Consumers Public Ad- ministration Corporates SME’s Merchants Consumers Co-operative space for Standards

Primary Deliverables* Credit Transfer Direct Debit Cards Complimentary Deliverables* Cash E-payments channel for web retailers M-payments channel Cooperative space for Value added services (out of scope of EPC Governance) EBA Association: Priority Payment Protocol EBA Association: e-invoicing EPC Design Deliverables *EPC Roadmap December 2004 and EPC Declaration 17 March 2005

National implementation organisation and implementation and migration plans – –Consistency (and dependency) of plans –Impact for multi country customers –Impact for multi country banks –Request of Business Europe for common end date: 2012 Commitment all stakeholders –National Central Bank –Banks –Public Administrations –Customer Associations Communication support – –Making SEPA a Reality Common start date –SEPA Credit Transfers from 28 January 2008 (version 3.2 from February 2009) –SEPA Direct Debit (version 3.1 from November 2009) –SEPA B2B Direct Debit (version 1.1 from November 2009) SEPA Implementation Model

Public Sector Overview EUR15 (in EUR bio.) GDP Total revenue Taxes Social contributions Tax expenditure Social benefits Compenstation employees Public procure- ment in % GDP n.a n.a n.a.15 Austria Belgium Cyprus Finland FranceGermanyGreeceIreland Italy Luxemb.MaltaNetherl.PortugalSpainSloveniaEUR15 Source: Eurostat Government Finance Statistics Data , 2007 Edition

Public Administrations: Some Observations National Level –Not in all 15 Euro countries PA’s demonstrate their commitment to SEPA –Not in all 15 Euro countries PA’s budgets are available for the SEPA programme –Only some concrete implementation plans of PA’s are available so far –Tenders of PA’s for payment services lack requirements for the SEPA standards –Investments in new public procurement processes and their e-invoicing solutions seem to ignore SEPA European Level –So far no representative of PA’s in EPC Customer Stakeholder Forum –No clear guidance when IBAN and BIC should be used by PA’s –No clear guidance if SEPA standards should be used by PA’s for payments tenders –No clear guidance if the SEPA standards should be used for public procurement –“No end date seems to imply no start date for PA’s”

SEPA Cards Framework (approved July 2006) Provides a single framework for the payment function of cards for –Banks –Card schemes –Service providers Cards Standardisation programme for SEPA (approved December 2006) 4 domains –card to terminal –terminal to acquirer –acquirer to issuer –certification process Focus to create (adopt) global standards: ISO, EMVco, PCI, a.o. Stakeholders Forum for Cards Standardisation ECB: “Emergence of at least one additional European Card Scheme” New Initiatives: ECB (research), EAPS, Payfair, Monnet EPC: Standardisation is a no regret step SEPA Cards

Work in progress E-Payment Channel : Way forward (approved December 2007) –A real time on line solution for initiating a SEPA payment, including a payment guarantee, for web retailers –Framework with rules and standards for SEPA core payment services –Not mandatory but optional for all banks M-Payment Channel: Way forward (approved December 2007) –Use of a mobile to initiate a payment –Framework with requirements, standards and best practices for security –Exploration cooperation models with partners such as GSMA, EMVCo –Not mandatory but optional for all banks –Co-operation agreement EPC-GSMA E-payments and M-payments

Prior-payment services –e-invoicing (EBA Association) –On-line payment initiation –Mobile payment initiation Post-payment services –e-reconciliation –On-line account statements –e-tickets on payments cards Authentication Services (re-use authentication of banks for) –All bank services (securities, accounts etc.) –e-government services –Corporates services (trade etc.) (SEPA) Value Added Services? Suggested by the ECB and others

Facts Cash is King! At least 6 out of 7 payment transactions are cash payment transactions EPC two pillar strategy (approved June 2004) Efficiency Agenda (applicable for the euro currencies) –Single Euro Cash Area Framework (approved in March 2006) Repositioning Agenda (applicable for all = 13 currencies of the EU27) “Best practices for discouraging the use of cash and promoting alternative means of payments” Cash

Agenda Expectations ECB and EC EPC Commitment and deliverables EPC Co-operation model Conclusions

Consumer Bodies Merchants Public Admins Corporate Associations National Governments European Payments Council National Central Banks National Banking Associations National Level Communication Implementation EU Level Design Monitoring European Central Bank European Commission Legal Framework Implementation Plans Monitoring SEPA design and implementation Design Schemes and Frameworks Support for national implementation SEPA Implementation Coordinating Bodies (Communication, national implementation and migration planning) Banks Stakeholders ConsumersMerchantsCorporates Public Admins Consumer Bodies Merchants Public Admins Corporate Associations Co-operation model with SEPA stakeholders

The EPC Plenary has 69 members with the major players of the payments industry and with a fair representation of the smaller players (represented by banks or associations) Proper representation of banks of 15 Euro countries and non-euro countries Inclusion of non-bank stakeholders for the design process in the Customer Stakeholders Forum and in the Stakeholders Forum for Cards Standardisation EPC Governance Framework SEPA Design Model

Audit NGC Secretariat Scheme Management Committee * Scheme Management Committee * Customer Stakeholders Forum Customer Stakeholders Forum Standards SG Standards SG SEPA Payment Schemes WG SEPA Payment Schemes WG Cards WG Cards WG Cash WG Cash WG Programme Management Forum Programme Management Forum Legal SG Legal SG Coordination Committee ** Plenary * * Decision making body ** Process decision making body Stakeholders Forum for Cards Standardisation Stakeholders Forum for Cards Standardisation Target2 WG Target2 WG EPC structure

Agenda Expectations ECB and EC EPC Commitment and deliverables EPC Co-operation model Conclusions

SEPA is created via co-regulation – for legislation by the public Authorities – for business rules and standards by market participants SEPA core services and SEPA value added services will create benefits for customers and may create benefits for banks provided that they are prepared to change. The SEPA concept and the EPC deliverables may be attractive for the non Euro communities Conclusions

The SEPA end-game Harry Leinonen, Bank of Finland

SEPA end-game = end-day for legacy services What Why Where When How Who (The honest servants of Rudyard Kipling)

Part of the implementation phase of SEPA Legacy service forms and legacy systems are closed down A given end-date is communicated to users/customers A measure to speed up and coordinate the migration process Creates concrete common milestones To what extent will customers oppose ‘forced’ changes? How to minimise the negative reactions? How to speed up voluntary migration before an end-day? What is an ‘end-day’?

Credit transfers –SEPA credit transfer rule book implemented –IBAN (and BIC) in use –20022 XML customer messages in use Card payments –Card schemes in line with the SEPA card framework –Standardised cards (EMV) and messages (XML?) Direct debits –SEPA direct debit rule book implemented –IBAN and messages –Direct debit mandates according to rule book Are the customers sufficiently interested in the SEPA offer? How to recognise the end-day? What is an ‘end-day’ in concrete terms?

Will the customers’ net benefits from current SEPA be sufficiently high to motivate rapid change? How to communicate customer benefits convincingly? How to reach a common development platform? Standardisation and harmonisation bring scale benefits With rapid changes, the benefits are achieved sooner Parallel services/systems increase costs temporarily Common platform for future developments But Change implies costs, and these are higher in ’hasty’ projects Costs can be reduced be connecting SEPA changes with other changes Delaying SEPA investments may free funds for other investments Why?

Bank and interbank systems –Infrastructures have an earlier end-day than customer services –Conversion needs for customer services –Automatic IBAN conversion support Customers’ own systems –System updates or conversion modules –Account number (IBAN) updates ERP (e.g. SAP), accounting, cash management etc. systems –System updates and conversion modules –SEPA compatible version X.x assessments How to distribute information to all the parties? How to intensify changes by software providers? Where?

Rapid change –Efficient joint project with general commitment –A strong common push towards the new future Gradual change –Individual national, bank and customer desires are accommodated –Moving in the same direction but without clear timetables Prolonged change –SEPA services will just be parallel services with old ones –Just nudging towards common standards –Locking in customers using proprietary standards How to achieve more commitment to common plans? How to increase the momentum of change? How to avoid general ‘wait & see’ approach? How to avoid one-sided non-neutral implementation? When?

SEPA will be a continuing process –SEPA will develop in versions 1.x, 2.x etc. –AOS services must also be recognised Version management document/library –Clear definitions for version content Testing support and assessment board –Common testing site(s) would reduce testing work –Common assessment board would harmonise “compatibility stamps” How to streamline and standardise implementation? How?

Voluntary customer drive –Big companies want to harmonise and standardise –IT service providers can reach a bigger market with the same version –SEPA benefits have to be tangible Self-regulation –Service providers make joint decisions –Should clearly benefit customers, otherwise abuse of market position Regulation –Authorities would enforce implementation of new standards –Requires clear positive consumer impact How to recognise end-users needs? Will we need authority regulations? How to establish well-balanced regulatory interventions? Who?

Immediate need for progress from mini-SEPA to e-SEPA Banks need to update their C-to-B SEPA services Customers need to experience visible SEPA benefits It will be the basis for future common developments SEPA migration is a big undertaking An end-day will require Service provider commitment Customer interest Authority support A balanced and rapid ‘end-day’ will be in the customers’ interest