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Future Retail Payments: the Implications of Innovation for the Single Euro Payments Area
Marc Bayle de Jessé/Monika Hempel
The Eurosystem’s policy on innovation in the euro retail payments market is based on its mandate to promote the smooth operation of payment systems and its objective to ensure the safety and efficiency of payments. As a catalyst for change, the Eurosystem has strongly supported the integration of the euro retail payments market in Europe. The creation of the Single Euro Payments Area (SEPA) has led to a number of improvements in terms of both the efficiency and the safety of cashless retail payments. From a macroeconomic perspective, the realisation of a more efficient retail payments market through SEPA facilitates trade, increases competition, and moves the euro area closer to the completion of the Economic and Monetary Union. Thus, it is an important tool for strengthening EU competitiveness and growth.
The complex migration process to SEPA made evident that industry initiatives that are linked to the political and social ambition of a more integrated, competitive and innovative Europe require the establishment of an appropriate governance structure at European level. In the area of retail payments, this requirement has been addressed by the creation of the Euro Retail Payments Board (ERPB).
While the payments industry and the regulators have been working towards the full realisation of SEPA, technological, societal and economic changes related to digitalisation have created opportunities for the emergence of innovative retail payment solutions that can accommodate different payment situations and changing customer needs and expectations. Recent studies by providers of market and consumer information indicate that the consumer expectations and attitudes of Generation Z (young people aged 18 to 24) with regard to payments differ substantially from those of Generation X (those aged 35 to 49). In particular, there is a larger preference among the former for online and mobile payments and more openness towards new technologies and new (non-bank) service providers.
For the Eurosystem, the biggest challenge is to ensure that the introduction of innovative payment products and services does not reintroduce fragmentation into the European market. Proprietary innovative solutions competing for the market and/or solutions that, with increasing market adoption, continue to focus exclusively on a single national market are not considered the right way forward and may warrant public policy intervention. Instead, what is required are pan-European solutions based on common standards that are competing in the market.
This paper is organised as follows: Section 2 reviews the integration process for euro retail payments from the late 1990s up to the migration of the two core SEPA payment instruments, i.e. the SEPA credit transfer and the SEPA direct debit. Furthermore, it identifies the next steps in the retail payments integration process required for card payments and explains the overarching European governance structure for retail payments. Section 3 discusses to what extent innovation resulting from digitalisation might be a challenge in the development towards a deeper integration of retail payments in Europe. It identifies instant payments, payment initiation services and the application of distributed ledger technologies as the three most important areas where the network effects in the retail payments industry warrant cooperation between competing service providers to achieve the best possible user experience. It also explains how the Eurosystem, in its catalyst function, facilitates the development of pan-European solutions or, as a minimum, interoperable solutions to avoid (renewed) market fragmentation. Section 4 addresses the challenge to European retail payments governance from global payment service providers and section 5 concludes.
2 Retail payments integration – the Single Euro Payments Area
2.1 The creation of SEPA
The integration of the financial market is deeply embedded in the general economic, social and political context of Europe. For the past 60 years, increasing economic integration has strongly supported political reconciliation and social stability in Europe. In 1957 the Treaty of Rome laid the cornerstone for the creation of a single economic market with the free movement of people, goods, capital and services. The Single Market was realised in 1992. In the same year, the Maastricht Treaty set out to create Economic and Monetary Union (EMU) as the next stage of integration, providing the legal foundation for a single European currency. In 1999 the single currency, the euro, was introduced. In 2002 it became a tangible reality with the introduction of euro banknotes and coins. Today, 336 million Europeans in 19 countries can pay using the same banknotes and coins everywhere in the euro area.
Until the late 1990s, making payments for goods and services traded across borders remained slower, more cumbersome and more expensive than making national payments. This was due to the fact that retail payments were largely based on national payment instruments, national standards and national payment systems. For cross-border payments, these national instruments, standards and systems could not be used. What was missing was a single market for cashless payments that allowed payments for goods and services traded across Europe to be made at the same costs and in the same way as at the national level.
The origins of the SEPA initiative can be traced back to that time. In 1999 the Eurosystem, in line with its statutory task of promoting the smooth operation of payment systems, drew up a set of objectives for cross-border retail payments, calling on the banking and payment service industry to fulfil these objectives within a given period. Additional pressure was put on the financial services industry by Regulation (EC) No 2560/2001 on cross-border payments in euro. This regulation eliminated price differences for end users between cross-border and domestic retail payments in euro, provided certain conditions were met. The banking sector responded in 2002 with a roadmap entitled “Euroland: Our Single Payments Area!”, and established the European Payments Council (EPC), which is the decision-making and coordination body of the European banking industry in relation to payments.
Overall, the aim of SEPA was to enable individuals, businesses and public administrations to make cashless payments in euro, throughout Europe, from a single payment account anywhere in Europe, using a single set of payment instruments as easily, efficiently and safely as at the national level. For that purpose, the EPC created the SEPA credit transfer and the SEPA direct debit rulebooks and the SEPA cards framework.
Given that SEPA was closely linked to the political and social ambition of a more integrated, competitive and innovative Europe, it soon became clear that the actual migration to the use of SEPA instruments required the closer involvement of actors on the demand side, a broader governance structure and legislative support from the regulators. The harmonisation of the legal environment for payment services has been achieved mainly by means of the Payment Services Directive (PSD), and the harmonisation of rules and standards has been undertaken by the payments industry. The Eurosystem contributed as a facilitator by promoting private sector action, helping to overcome coordination problems, seeking to involve all relevant stakeholders and, in cooperation with the European Commission, setting public policy objectives. This helped pave the way for the banking industry to deliver the SEPA credit transfer and SEPA direct debit schemes in 2008 and 2009 respectively.
To ensure that migration to the SEPA schemes takes place in a timely manner, the...