4th Paysys Breakfast Conference Frankfurter Hof, 28 March 2003 The SEPA framework and its implications for retail and card payments - A Central Bank perspective - Johannes Priesemann / Carlo Martens European Central Bank Payment Systems Policy Division

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 1 I. Introduction: the Eurosytem’s objectives II.Retail payments “yesterday” III.The vision for “tomorrow” IV.Specific issues concerning card payments Overview

4th Paysys Breakfast Conference Frankfurter Hof, 28 March 2003 I. Introduction

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 3 The statutory powers of the Eurosystem Article 105 (2) of the Treaty and Article 3 of the Statute: the basic tasks of the ESCB include the obligation “to promote the smooth functioning of payment systems”. Article 22 of the Statute: “ The ECB and the NCBs may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries”

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 4 The objectives of payment systems policy Maintaining systemic stability Ensuring efficiency and reliability of payment systems Maintaining public confidence in payment systems, payment instruments and the currency Contributing to the protection of the transmission channel for monetary policy

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 5 Requirements for public confidence Safety –no legal risks –no operational risks –no financial risks Efficiency –transparent access conditions –prompt and reliable settlement –good value for money

4th Paysys Breakfast Conference Frankfurter Hof, 28 March 2003 II. Retail Payments “yesterday”

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 7 The problem for retail payments ä Poor service level for cross-border payments in terms of pricing and execution time. ä Despite introduction of the euro (in 1999), no substantial progress. ä Problem even more visible with introduction of banknotes and coins.

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 8 The causes of the problem + ways to overcome ä IPI / generic product. ä Automation / STP. ä Implementation timetable. ä MIF ä Harmonised Balance of Payments reporting. ä ACH-type solution. ä Poor interface with clients. ä Internal costs within the banks. ä Insufficient (use of) European standards. ä Problem of remuneration of beneficiary bank. ä Differences in legal / regulatory environment. ä Lack of an appropriate interbank infrastructure.

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 9 Retail Payments: The runway to SEPA  In its report “Towards an integrated infrastructure for credit transfers in euro” (November 2001), the ECB outlined how the industry could progressively amalgamate (the processing of) cross-border and domestic credit transfers. It pointed out that economies of scale could bring costs down to a level below that of current domestic processing.  On 19 December 2001, the EU Parliament and Council imposed equal charges for cross-border and domestic payments in euro through Regulation Banks quickly realised that the Regulation “internalised” the cost problem of the industry and that, rather than just addressing it, they could actually turn it into an opportunity.

4th Paysys Breakfast Conference Frankfurter Hof, 28 March 2003 III. The vision for tomorrow

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 11 Specific context of Euroland ä The historical experience is that the evolution of the national payment systems have always been driven not by competition alone, but also by co-operation and public action. ä Co-operation among market participants has rarely materialised unless the public authorities’ catalyst role inspired and promoted it. ä While this has worked efficiently in one country, it may become a problem in Euroland: ä Strong segmentation of financial infrastructures ä Strong interests in defending the status quo

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 12 Specific context of Euroland (II) ä The overall result of a single payment area is positive, but there will indeed be losers: ä A single payment area will benefit all users, ä but only some providers ä In these circumstances ONLY great determination and/or powerful initiatives by the authorities can promote the requuired changes in the interest of end users.

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 13 The SEPA project  In spring 2002 the banking industry formed an industry governance body called the European Payments Council (EPC) and took the strategic decision to develop a single payments area.  The choice of a pan-European ACH (PE-ACH) as the main infrastructure option for credit transfers to go live mid-2003 has been confirmed.  Work is being finalised on a convention (Credeuro) for basic, reliable cross-border payments, processed straight through at low cost and with fixed execution time.  The EPC also set as an objective the development of a pan- European direct debit scheme by mid-2005 that could also be offered through PE-ACH.

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 14 Customer & Business Requirements WG End-to-end STP WG Infrastructure WG Cards WGCash WG Credit Transfer TF Direct Debit TF Credit Transfer TF Direct Debit TF P2P TF Regulatory Constraints TF Business Model TF Governance TF Business Model TF Chip/Fraud TF EPC Plenary Secretariat Coordination Group The SEPA structure

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 15 Co-operation model – Co-chairmanship EPC and ECB representatives to meet regularly in COGEPS (3 to 4 times a year) ECB has an observer status in EPC Working Groups (except Business & Customer Requirements WG) ECB representative participating in EPC Plenary Co-operation model with co-chairmanship (EPC/ECB) of the COGEPS Relationship between ECB and EPC

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 16 Pan-European ACH  PE-ACH must be able to reach all banks in the euro area (and possibly in the EU).  From the outset, PE-ACH should be more attractive than (at least) some of the existing domestic infrastructures.  It cannot and should not be ruled out that more than one PE- ACH project is launched.  National payment instruments and conventions should be encouraged to integrate with those designed for SEPA.  The real challenge is to achieve implementation by a sufficiently large part of the industry. Preparing for success and avoiding pitfalls

4th Paysys Breakfast Conference Frankfurter Hof, 28 March 2003 IV. Specific issues for card payments

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 18 The SEPA vision applied to card payments The ultimate objective can be described as : ä In Euroland (or - even better - the EU) ä consumers use any card ä at any terminal (whether POS, ATM or at home) ä to pay under the same conditions ä as they can today at “domestic” level

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 19 Key tasks for all stakeholders ä Eurosystem ä Define minimum security objectives and/or standards ä Card schemes ä Develop and implement safe and efficient card transaction technology according to these standards ä Issuers and acquirers ä “Recommend” sound practices for consumers and merchants ä EU Commission ä Harmonise consumer protection and criminal law

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 20 Obstacles for the realisation of this vision ä Lack of business development ä in terms of services ä E-purses ä P2P card payments ä in terms of acceptance ä Profitable value propositions to merchants ä No geographical limitations to acquiring ä Interoperability of terminals and cards ä Card fraud

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 21 Costs related to card fraud ä Card fraud is a business ä Cross-border transactions account for 5% of all transactions ä but for 90% of the fraud volume ä Total costs = fraud prevention + fraud compensation ä Fraud prevention = technical solution + sound practices ä Technical solution : searching for the optimal balance

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 22 Costs related to card fraud Costs Security level Security target area Fraud compensation costs Fraud prevention costs Total fraud related costs

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 23 The SEPA vision - closing remarks The realisation of the SEPA vision requires co-operation between all stakeholders ä The Eurosystem contributes to the realisation of SEPA as a catalyst, a regulator and, if necessary, also as a service provider; the Eurosystem promotes the dialogue between all stakeholders ä EU/Euroland wide standards, practices and infrastructures are being developed ä The transition of the payment infrastructure into one SEPA will significantly improve its long-term collective use ä National and international service providers react to this new situation - the integration process is going on; the banking sector has taken up the strategic challenge (EPC/SEPA)

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 24 References / contact The ECB’s publications and consultations are available at its website those of the Bank for International Settlements are available at Report on electronic money, ECB, August 1998 Improving cross-border retail payment services in the euro area - the Eurosystem’s view, ECB, Sept Role of the Eurosystem in the field of payment systems oversight, ECB, June 2000 Improving cross-border retail payment services - Progress report, ECB, September 2000 Payment and securities settlement systems in the European Union, ECB, June 2001 (Addendum incorporating 2000 figures, July 2002) Towards an integrated infrastructure for credit transfers in euro, ECB, November 2001 Consultation on electronic money security objectives, ECB, March 2002 Oversight standards for retail payment systems in euro, ECB, July 2002 Policy issues for central banks in retail payments, Bank for International Settlements, September 2002 E-payments in Europe - the Eurosystem’s perspective, ECB, September 2002 Payment and securities settlement systems in accession countries, ECB, August 2002 Contact:

4th PaySys Breakfast Conference Frankfurt, 28 March 2003 Slide 25