1. Some thoughts on how to get more competition in the field of retail payments: The European experience Competition panel Brasilia, 10 September 2014 Francisco Tur Hartmann European Central Bank ECB-UNRESTRICTED

2. Rubric www.ecb.europa.eu © Overview Some thoughts on how to get more competition in the field of retail payments: The European experience 2 Some thoughts on how to get more competition in the field of retail payments: The European experience 1 2 3 SEPA building blocks SEPA beyond The SEPA project 4Conclusions ECB-UNRESTRICTED

3. Rubric www.ecb.europa.eu ©Some thoughts on how to get more competition in the field of retail payments: The European experience 3 1 2 3 4 ECB-UNRESTRICTED SEPA building blocks SEPA beyond The SEPA project Conclusions Some thoughts on how to get more competition in the field of retail payments: The European experience

4. Rubric www.ecb.europa.eu © As of 2014 SEPA comprises 34 countries: EU-28 + Iceland, Liechtenstein, Monaco, Norway, San Marino, Switzerland Around 520 million inhabitants (euro area 332 million), together making 94 billion payments (euro area 64 billion)* Around 9,300 institutions offer payment services All EU payments in euro are directly subject to SEPA provisions 4 The Single Euro Payments Area ECB-UNRESTRICTED The SEPA project Some thoughts on how to get more competition in the field of retail payments: The European experience * Elaboration on Eurostat and ECB data (2012)

5. Rubric www.ecb.europa.eu © 5 Consumers, companies, merchants −Any account holder reachable in SEPA easily & efficiently −Harmonised terms and conditions of payments −Increased choice of payment service providers Banks, clearing & settlement infrastructures −Can offer their services SEPA-wide −Can reduce costs due to straight-through-processing and transparently compete on service and price Banks and non-bank service providers −Can develop innovative services based on agreed standards, e.g. internet & mobile payments, e-invoicing How can SEPA bring about increased competition? The SEPA project Some thoughts on how to get more competition in the field of retail payments: The European experience ECB-UNRESTRICTED

6. Rubric www.ecb.europa.eu ©Some thoughts on how to get more competition in the field of retail payments: The European experience 6 1 2 3 4 ECB-UNRESTRICTED SEPA building blocks SEPA beyond The SEPA project Conclusions Some thoughts on how to get more competition in the field of retail payments: The European experience

7. Rubric www.ecb.europa.eu © 7 Harmonised business rules Legislation Agreed set of instruments Standardised infrastructure ECB-UNRESTRICTED Several levels of harmonisation SEPA building blocks Some thoughts on how to get more competition in the field of retail payments: The European experience ECB-UNRESTRICTED

8. Rubric www.ecb.europa.eu © SEPA credit transfer SCT –Provides users with a single means of transferring funds, regardless of whether within a single country or cross-border SEPA direct debit SDD –Makes it possible, for the first time, to charge directly an account in one European country for services provided by a company based in another EU regulation 260/12 set the 1 Feb 2014 (with a grace period until 1 August 2014) as the end date for euro area countries to migrate their credit transfers and direct debits to SEPA (2016 for non euro countries) SEPA for cards –Should enable consumers to use the same cards they use in their own country for purchases everywhere in Europe more conveniently. For merchants, accepting cards will become easier and more attractive E-payments, m-payments and innovative payment solutions in general are expected to build on the existing SEPA instruments 8 SEPA instruments Some thoughts on how to get more competition in the field of retail payments: The European experience ECB-UNRESTRICTED SEPA building blocks

9. Rubric www.ecb.europa.eu © International Bank Account Number (IBAN) Business Identifier Code (BIC, to be phased out) ISO20022 XML EMV chip on all payment cards Functional and security standards for cards and terminals 9 Common technical requirements ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience SEPA building blocks ECB-UNRESTRICTED

10. Rubric www.ecb.europa.eu © ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience 10 SEPA building blocks Examples of European Automated Clearing Houses (excluding card and cheque clearing systems) SEPA for infrastructures

11. Rubric www.ecb.europa.eu © How is SEPA affecting infrastructures? SEPA is pushing for changes in the organisation of clearing and settlement of retail payments in Europe Infrastructures represent an enabling factor for the realisation of SEPA Two main models: European Automated Clearing House Association (EACHA) and STEP2 Increasing integration is expected, but it may take time: –market-driven process –heterogeneous starting points in different countries –End-date regulation may accelerate such integration The Eurosystem as a catalyst promotes standardisation, interoperability, reachability, transparency of services and pricing (reference criteria for SEPA compliance of retail payment infrastructures) ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience 11 SEPA building blocks

12. Rubric www.ecb.europa.eu © ECB-UNRESTRICTED The two main models developed on the market 1.interoperability framework for SEPA-compliant payments processing by EACHA (European Automated Clearing House Association, 25 members) –technical framework to facilitate the interoperability of infrastructures, particularly as regards message formats, message flows, routing provisions, network and connectivity provisions and the mechanism for the settlement of inter-ACH transactions 2.clearing and settlement of SEPA payments in STEP2 –retail payment infrastructures connected to STEP2 as “technical facilitators” to allow their participants to send and receive payments from STEP2 –they need a direct participant (bank or central bank) in STEP2 to act as a settlement agent Both models should be able to deliver an efficient and competitive underlying infrastructure for retail payments Some thoughts on how to get more competition in the field of retail payments: The European experience 12 SEPA building blocks

13. Rubric www.ecb.europa.eu © The retail payments industry is a network industry In network industries there is the need to cooperate to be able to compete SEPA payments are competitively provided based on agreed rulebooks and frameworks The EPC (European Payments Council) and the EACHA (European Automated Clearing House Association) are prominent examples of cooperative initiatives among payment service providers and infrastructure providers in Europe, respectively The EPC scheme rulebooks and the EACHA interoperability framework exemplify self-regulation in the field 13 Market self-regulation Some thoughts on how to get more competition in the field of retail payments: The European experience ECB-UNRESTRICTED SEPA building blocks

14. Rubric www.ecb.europa.eu ©Some thoughts on how to get more competition in the field of retail payments: The European experience 14 ECB-UNRESTRICTED EU legislation aimed at creating a level playing field for incumbents and new entrants on the retail payments market Regulation 2560/2001 on cross-border payments in euro (replaced by Regulation 924/2009) –Eliminates the differences in charges for cross-border and national payments in euro –Applies to payments in euro, in all EU Member States –Principle: charges for payment transactions in euro have to be the same whether the payment is a national or a cross-border payment Payment Services Directive 2007/64 (under review) –Harmonised terms and conditions –Harmonised transparency and information requirements –New category of service providers: payment institutions Regulation 260/2012 establishing EU-wide requirements for credit transfers and direct debits in euro –Sets end dates for migrating credit transfers and direct debits in euro ECB-UNRESTRICTED Harmonised regulatory framework SEPA building blocks

15. Rubric www.ecb.europa.eu © The EPC payment schemes contain mandatory as well as optional elements Implementation of the ISO20022 standard may vary at country level AOSs (Additional Optional Services) allow adapting the schemes to the needs of different user communities EU legislation entails exemptions and transitional derogations, and may leave some leeway for national implementation Does this foster increased competition? To what extent can this risk to reproduce national fragmentation? 15 Balance between harmonisation and customisation ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience SEPA building blocks ECB-UNRESTRICTED

16. Rubric www.ecb.europa.eu ©Some thoughts on how to get more competition in the field of retail payments: The European experience 16 1 2 3 4 ECB-UNRESTRICTED SEPA building blocks SEPA beyond The SEPA project Conclusions Some thoughts on how to get more competition in the field of retail payments: The European experience

17. Rubric www.ecb.europa.eu © 17 ECB-UNRESTRICTED SEPA beyond What’s missing still in the cards market Cardholder’s perspective: card payments are not accepted as much as one would expect given the efficiency, safety and convenience compared to cash card payments are less accepted or even absent in specific sectors some cards, even though SEPA-compliant, are not accepted at locations where other SEPA-compliant cards are being accepted Perspective of a merchant: decision to accept card payments will be influenced by expected unit costs, but there can also be technical restrictions merchants do not always have a great choice of acquirers, and cannot easily choose to use a foreign acquirer international retailers face different business practices and rules within SEPA, different functional and security requirements for their payment terminals Some thoughts on how to get more competition in the field of retail payments: The European experience

18. Rubric www.ecb.europa.eu © 18 ECB-UNRESTRICTED SEPA beyond Security of card payments / prevention of card fraud Separation of scheme management and processing entities and establishing a competitive card processing market ECB to provide guidance on: Standardisation efforts (setting requirements, writing specifications and their implementation) Harmonising business practices and rules Some thoughts on how to get more competition in the field of retail payments: The European experience Angles of approach to the cards market

19. Rubric www.ecb.europa.eu © 19 ECB-UNRESTRICTED Focus on cards Security of card payments / prevention of card fraud SecuRe Pay recommendations for stricter security measures for card-not-present transactions via the internet and their implementation by payment service providers and the governance authorities of payment schemes no later than 1 February 2015. Full migration to EMV (cards, terminals and transactions) for card- present transactions. Until all SEPA issued cards are chip-only, and as long as there are large parts of the world where EMV- migration has not taken place in full, non-EMV transactions outside SEPA should be blocked by default. KEY MESSAGES Some thoughts on how to get more competition in the field of retail payments: The European experience

20. Rubric www.ecb.europa.eu © 20 ECB-UNRESTRICTED Focus on cards KEY MESSAGES Separation of scheme management and processing entities and establishing a competitive card processing market Separation is a core element in increasing competition and efficiency in card payments. The principle of separation should apply at the corporate level, including in particular operational separation, information separation, financial/accounting separation, commercial separation and ideally also legal separation. Eurosystem reiterates its invitation to the industry to establish a SEPA card processing framework and a technical interoperability framework and strongly encourages all interested stakeholders to produce tangible results. Some thoughts on how to get more competition in the field of retail payments: The European experience

21. Rubric www.ecb.europa.eu © 21 ECB-UNRESTRICTED Focus on cards KEY MESSAGES Harmonising business practices and rules - pricing and fees Neutral stance on interchange fees, as this is for competition authorities or legislative instances, but should not lead to negative price signals towards payers / payees. Clarity is welcomed. Surcharging and/or rebating could be an instrument to steer users towards more efficient payment instruments, but should not be applied undifferentiated or misused to the payer’s disadvantage. More transparency of fees is better for competition and efficiency. “Core and basic” card payment services are cashless alternative to banknotes and should be offered separately from other services. No more country-specific licences for issuing and acquiring. Scheme-internal fee differentiation based on geographic criteria for cross-border transactions within SEPA should disappear. Some thoughts on how to get more competition in the field of retail payments: The European experience

22. Rubric www.ecb.europa.eu © 22 ECB-UNRESTRICTED Focus on cards KEY MESSAGES Harmonising business practices and rules - steering practices Issuers should be free to decide which schemes/brands they want to issue on one and the same card; co-branding can contribute to reach, but not used as excuse to maintain national fragmentation. Merchants should have freedom to accept only those card schemes and/or brands best suited to their need. Differentiating / declining commercial cards if they involve higher fees than consumer cards. Merchants to decide not to accept cards that provide a low level of security or if the acquirer does not guarantee the full payment of authorised transactions. Customer and merchant agree jointly on conditions of payment. Practical solutions are needed, but should not replace or override the legal principle. Some thoughts on how to get more competition in the field of retail payments: The European experience

23. Rubric www.ecb.europa.eu © 23 ECB-UNRESTRICTED Standardisation efforts (requirements, specifications and their implementation) Eurosystem welcomes inclusive work to standardise functional and security requirements. The world is larger than SEPA, but European requirements can go beyond, and be more ambitious, than in other parts of the world. Support for ISO 20022 for card messages in the terminal-to- acquirer and acquirer-to-issuer domains. The “labelling” process is step towards further harmonisation in functional standardisation and “technical interoperability” of specifications (i.e. ability to communicate) is an essential part. A harmonised security evaluation and certification process for cards and terminals lowers market entry barrier for manufacturers. KEY MESSAGES Some thoughts on how to get more competition in the field of retail payments: The European experience Focus on cards

24. Rubric www.ecb.europa.eu © Main points of the European Commission’s proposal 24 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 of territorial restrictions to licensing –Separation of card schemes and processing entities –Free co-badging and brand choice –Unblending of fees –Abolishment of “Honour all Cards” rule ECB-UNRESTRICTED Focus on Regulation on Interchange Fees for Cards Some thoughts on how to get more competition in the field of retail payments: The European experience

25. Rubric www.ecb.europa.eu © SEPA beyond Some thoughts on how to get more competition in the field of retail payments: The European experience 25 Our wallets are changing … and SEPA may be a springboard for innovation PASTPRESENTAND FUTURE? ECB-UNRESTRICTED

26. Rubric www.ecb.europa.eu © SEPA beyond 26 E-commerce payments Various providers are active, but only few developments - and certainly not at Europe-wide or worldwide scale - of efficient, safe and reliable e-commerce payment solutions New type of providers that access existing (internet-enabled) payment accounts held with banks; example in Germany: Sofort European Commission has proposed (PSD2) to regulate such services and license their providers “Access”: a confirmation that a payment order is irrevocable for the customer and will be executed if funds are still available, or that availability of funds for the payment order is already insufficient 26 ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience

27. Rubric www.ecb.europa.eu © How the proposal for PSD2 addresses TPPs (Third Party payment service Providers) 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 enhances competition by leveraging online banking and SCT (and SDD) as alternatives to credit/debit cards Focus on PSD2 27 ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience

28. Rubric www.ecb.europa.eu © 28 ECB-UNRESTRICTED SEPA beyond E-commerce has prompted demand for increased speed of payment To answer that demand, several solutions are in place or planned at global level and in Europe (especially outside the euro area) Such solutions: –are understood to be mainly based on credit transfers, available 24/7/365 and resulting in the immediate or close to immediate crediting of the payee’s account –can generally provide an alternative to cash, cheques, card payments and could even become a competitor to international remittances –have a potential for any kind of proximity and remote payment - be it a P2P, C2B, B2B, e- commerce or government payment - and will blur any distinction between such different kinds of payments The ECB observes that the market is moving towards increased speed of payment and encourages progress in this direction Innovative instant payment solutions should leverage the harmonisation achieved with SEPA in order to avoid reproducing national fragmentation Scope for further innovation: “Instant payments” Some thoughts on how to get more competition in the field of retail payments: The European experience

29. Rubric www.ecb.europa.eu © 29 ECB-UNRESTRICTED SEPA beyond SEPA governance and the role of the Euro Retail Payments Board (ERPB) A board chaired by the ECB with the aim 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 to contribute to and to facilitate the creation of an integrated, competitive and innovative market for euro retail payments in the EU based on a level playing field Start of a new phase in the European retail payments integration process after the SEPA migration Approach: cooperative approach reinforced by the Europe-wide reach of the ERPB, combined with the output-driven focus Some thoughts on how to get more competition in the field of retail payments: The European experience

30. Rubric www.ecb.europa.eu ©Some thoughts on how to get more competition in the field of retail payments: The European experience 30 1 2 3 4 ECB-UNRESTRICTED SEPA building blocks SEPA beyond The SEPA project Conclusions Some thoughts on how to get more competition in the field of retail payments: The European experience

31. Rubric www.ecb.europa.eu © 31 ECB-UNRESTRICTED Conclusions Same fees for cross-border as for national payments and harmonised EU legal framework for retail payments across Europe Eurosystem reinforces efforts for SEPA for cards – a harmonised, competitive and innovative European card payment area Advances in technology and changes in users’ needs push for innovation and speed in retail payments ERPB to facilitate the creation of an integrated, competitive, innovative and level-playing field market for euro retail payments in the EU Payments are becoming less local and more global… and the ECB aims to “ensure efficient and sound clearing and payment systems” within the EU and with other countries What difference is SEPA making for Europe? Some thoughts on how to get more competition in the field of retail payments: The European experience

32. Rubric www.ecb.europa.eu © 32 THANK YOU ECB-UNRESTRICTED Some thoughts on how to get more competition in the field of retail payments: The European experience