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

Rubric © Overview 2 Harmonisation through regulation EU retail payment governance SEPA – A model for payment self-regulation Conclusion

Rubric © Harmonisation through regulation EU retail payment governance SEPA – A model for payment self-regulation Conclusions

Rubric © 4 SEPA – A model for payment self-regulation The Single Euro Payments Area 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 SEPA is a market driven initiative

Rubric © Self regulation 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 5 The introduction of the euro in 1999 and the physical currency in 2002 standardised all cash transactions in the participating EU countries – Euro area

Rubric © European Payments Council (EPC) 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 6

Rubric © The SEPA rule books for credit transfers and direct debits 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 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 7

Rubric © SEPA for payment cards 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 8

Rubric © Harmonisation through regulation EU retail payment governance SEPA – A model for payment self-regulation Conclusions

Rubric © legal framework underpinning SEPA 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: 1.The Payment Services Directive or “PSD” (Directive 2007/64/EC) 2.Regulation (EC) No 924/2009 on cross-border payments in euro 3.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 10

Rubric © The Payment Services Directive (PSD) 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 11

Rubric © Regulation (EC) No 924/2009 on cross-border payments in euro 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 12

Rubric © Regulation (EU) No 260/2012 establishing technical and business requirements for credit transfers and direct debits in euro 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 13

Rubric © New EU payment regulatory initiatives: 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 14

Rubric © New EU payment regulatory initiatives: Harmonisation through regulation 15 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

Rubric © Harmonisation through regulation EU retail payment governance SEPA – A model for payment self-regulation Conclusions

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

Rubric © 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 for innovation, cards, standards, etc. EU retail payment governance 18

Rubric © Governance is a shared responsibility in the EU EU retail payment governance 19 SEPA European Commission Eurosystem Euro Retail Payments Board Legal Framework Catalyst, Operator Strategy and facilitation Consumers, merchants, corporations, public administrations New ECB chaired group

Rubric © The new Euro Retail Payments Board (ERPB) - Why 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 level by 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 20

Rubric © ERPB members and participants EU retail payment governance 21 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: o retailers with a physical presence, o internet retailers, o businesses/corporates, o small and medium-sized enterprises and o 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)

Rubric © What can the ERPB achieve EU retail payment governance 22 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.

Rubric © Harmonisation through regulation EU retail payment governance SEPA – A model for payment self-regulation Conclusions

Rubric © Conclusions 24 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

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

Rubric © 26 THANK YOU ECB-UNRESTRICTED