PAYMENT SYSTEMS DEPARTMENT Integrating retail payment systems in the Euroland: On the road to a Single Euro Payments Area (SEPA) Sergio Gorjón Payment Systems Specialist Exploring Frontiers in Payment System Development The World Bank, International Finance Corporation & SWIFT Washington, D.C. 29 May – 1 June, 2007

PAYMENT SYSTEMS DEPARTMENT 2 On the road to a Single Euro Payments Area (SEPA) AGENDA  An introduction to the Single Euro Payments Area  A practical example of implementation: the case of Spain

PAYMENT SYSTEMS DEPARTMENT 3 On the road to a Single Euro Payments Area (SEPA) The Single Euro Payments Area (SEPA) is a market-driven initiative seeking to establish a common payments area in which consumers, companies and other economic actors will be able to make and receive payments in euro, whether between or within national boundaries under the same basic conditions, rights and obligations, regardless of their location. What is SEPA?

PAYMENT SYSTEMS DEPARTMENT 4 On the road to a Single Euro Payments Area (SEPA) Is there really a need for SEPA? National/Local solutions Diversity of standards Lack of interoperability Non-unified legal framework Euroland today Population: 315m Corporates:17m Banks:6/7k ACH Schemes:11 Card Schemes:14 POS:5m ATMs:253k Volume tr.:50bn Integrated market for payment services in the euro area

PAYMENT SYSTEMS DEPARTMENT 5 On the road to a Single Euro Payments Area (SEPA) SEPA is all about: Harmonisation as an endgame?  Restructuring, harmonising and integrating retail payment systems across the Euro area  Enhancing competition between banks, service providers and vendors  Achieving a greater consolidation in the payments market  Promoting the use of more efficient electronic payments  Modernising the European payments landscape with improved service levels and customer-oriented products

PAYMENT SYSTEMS DEPARTMENT 6 On the road to a Single Euro Payments Area (SEPA) The stakeholders The European banking industry Developing and implementing a new set of payment instruments The European Clearing and Settlement industry Ensuring that any beneficiary in the euro area can be reached using SEPA instruments Euro area companies Contributing to the development of automated processes to reduce the extent of manual intervention Public administration and consumers In their condition as end users of the new payment instruments Public authorities Removing barriers in the internal market (EC), monitoring progress and becoming increasingly involved in the preparations for the roll-out of the new SEPA schemes (NCBs/ECB). An interaction is needed between:

PAYMENT SYSTEMS DEPARTMENT 7 On the road to a Single Euro Payments Area (SEPA) Evolution of non-cash payment instruments The building blocks SEPA Credit Transfers SEPA Direct Debits SEPA Card Payments Replacement strategy Adaptation strategy Additional optional services (AOS) Wide range of product improvements and/or value added services with the ultimate purpose of making the payment itself or the process before and after a payment more efficient for customers

PAYMENT SYSTEMS DEPARTMENT 8 On the road to a Single Euro Payments Area (SEPA) The building blocks Processing infrastructures Harmonised rules and standards will be defined in the SEPA schemes. They will be generally separated from the processing infrastructures Standards Full interoperability between infrastructures shall be achieved. Processing services will be offered on a competitive basis to any bank or card scheme provider. Access shall be free and open.

PAYMENT SYSTEMS DEPARTMENT 9 On the road to a Single Euro Payments Area (SEPA) SEPA Credit Transfers (SCT) SEPA deliverables - SCT  Core product with SEPA-wide reachability (basic, non-urgent transfers)  Full amount credited to the beneficiary’s account  No value limit at scheme level  Maximum settlement time 3 business days (*)  IBAN and BIC are used as identifiers Open issues  Priority credit transfer scheme with same day settlement  Alignment with PSD (max. execution times)  Customer-to-bank standards enabling full STP

PAYMENT SYSTEMS DEPARTMENT 10 On the road to a Single Euro Payments Area (SEPA) SEPA Direct Debit (SDD) SEPA deliverables - SDD  Core product with SEPA-wide reachability  Recurrent and one-off payments  Mandate dematerialization  Maximum processing time 5 business days (first payment) and 2 business days (recurring payments)  IBAN and BIC are used as identifiers Open issues  Mandate handling is a sensitive issue  Peculiarities of B2B transactions  Reachability of all debtor banks

PAYMENT SYSTEMS DEPARTMENT 11 On the road to a Single Euro Payments Area (SEPA) SEPA Cards Framework SEPA deliverables – Card Payments  High-level principles for issuers, acquirers, card schemes and operators  Scheme governance will be separated from underlying processing  Scheme interoperability (SEPA cards will be accepted all over the euro area)  Cardholders will have a common, consistent experience at POS and ATM in the euro area  Open and transparent pricing policies  EMV implementation (Chip and PIN) Open issues  Further work on standards  Consolidation trends

PAYMENT SYSTEMS DEPARTMENT 12 On the road to a Single Euro Payments Area (SEPA) SEPA Clearing and Settlement Infrastructures SEPA deliverables – Infrastructures  Full interoperability between infrastructures through co-operation (technical and business requirements)  Different types of infrastructures are possible (e.g. PEACH, inter-group or bilateral arrangements)  Ability to process SEPA instruments (nationally and within the euro area )  Greater consolidation through competition (economies of scale and further cost reductions through modern technologies)  Readiness to cope with future developments (capability to process message standards) Open issues

PAYMENT SYSTEMS DEPARTMENT 13 On the road to a Single Euro Payments Area (SEPA) SEPA Standards - Key features SEPA deliverables – Standards  Support end-to-end STP payments  Allow for simplification and value added services (customer domain)  Remain independent from infrastructures  Use open, more secure and common message standards (UNIFI ISO XML)  Compulsory in the bank-to-bank domain and recommended in the customer-to-bank domain

PAYMENT SYSTEMS DEPARTMENT 14 On the road to a Single Euro Payments Area (SEPA) SEPA Timeline Source: EPC

PAYMENT SYSTEMS DEPARTMENT 15 On the road to a Single Euro Payments Area (SEPA) SEPA Migration Plan: Spain A practical example of implementation  SEPA objectives are common in the euro area but local conditions vary across countries  A tool is needed to translate those pan-European SEPA objectives into national goals  Local implementation will allow each bank and infrastructure provider to adapt its strategies and solutions for the gradual transition to a SEPA  NCBs/ECB should help smoothen the said implementation and monitor progress  The EPC should be made aware of each national banking community’s contribution to SEPA

PAYMENT SYSTEMS DEPARTMENT 16 On the road to a Single Euro Payments Area (SEPA) Governance structure A practical example of implementation Payment Systems Working Group SEPA Migration Monitoring Committee SEPA Observatory Other Task Forces Ad-hoc SEPA Conferences

PAYMENT SYSTEMS DEPARTMENT 17 On the road to a Single Euro Payments Area (SEPA)  Pragmatic approach: first ensure short term deliverables but don’t forget long term goals  Initial mapping exercise: what are the currently available retail payment transactions in Spain?  Breakdown of retail payments: a.) instruments subject to migration and b.) instruments that will not be migrated in the first wave  A strategy and a timetable for migration was defined for each instrument. This strategy further foresees providing the necessary support to banking customers in the adoption of the new set of instruments  The national banking community is further committed with enlarging the types of transactions to be migrated and reviewing the current migration strategy A practical example of implementation Key issues

PAYMENT SYSTEMS DEPARTMENT 18 On the road to a Single Euro Payments Area (SEPA) Migration of payment instruments A practical example of implementation Credit Transfers & Direct Debits  Gradual deployment of SEPA payment instruments from January 2008  A critical mass of SEPA transactions shall be reached by end-2010 (i.e. 95% of credit transfers & almost 100% of direct debits)  Marginal legacy products will be subject to innovative ideas in a second wave approach  Customer acceptance and PSD transposition will be key to speeding up the migration path Card Payments  Co-branding with international card schemes is the preferred strategy in the short run  EMV deployment is currently under way and will be completed by Dec  National schemes will need to change their operating rules and governance agreements to meet the goals of the SEPA Cards Framework

PAYMENT SYSTEMS DEPARTMENT 19 On the road to a Single Euro Payments Area (SEPA) A practical example of implementation Migration of infrastructures (SNCE)  Three-tiered strategy to cope with a new scenario:  Legacy products and non SEPA-compliant ones will be processed through traditional channels b)New SEPA instruments used in transactions within Spain will fall under the scope of an updated payments platform (January 2008) c)Cross-border SEPA-compliant operations will be channeled though an external provider/PE-ACH. Different options are currently under review

PAYMENT SYSTEMS DEPARTMENT 20 On the road to a Single Euro Payments Area (SEPA)  Market-driven process that intends to harmonise and modernise cashless retail payment systems across the euro area  Credit transfers, direct debits and card payments constitute the primary focus of attention  Competition, co-operation, reachability and long-term consolidation are the ultimate cornerstones of the project  Establishing common standards and procedures becomes crucial to ensure interoperability and end-to-end security of payment transactions.  Each banking community will need to define its own migration plan to meet the deadlines of the SEPA project Summary

PAYMENT SYSTEMS DEPARTMENT Thank you Sergio Gorjón