With the announcement that French banks are delaying the implementation of the Direct Debit scheme in the Single Euro Payments Area by a year, and continued uncertainty and national disagreements about the Payment Services Directive (PSD), which is supposed to provide the legal framework for SEPA, the grand European harmonisation project is hardly running like clockwork. David Adams investigates the troubles, how the jigsaw can be made to fit, and looks ahead to a time when European-wide payments provide far-sighted banks with economies-of-scale savings and more business

Just imagine if you were given sole responsibility for bringing the Single European Payments Area into being. The job would send you mad. On the way to insanity, I find it easy to imagine that one of the various delirious thoughts passing through your addled mind would be what a shame it is that human beings aren't a bit more like ants. After all, when it comes to collective endeavour, ants are magnificent: systematic, efficient, and effective. At the start of July the media reported the mind-boggling news that a single 'mega-colony' of ants has now spread across every continent in the world except Antarctica.

Human beings and organisations can be systematic, efficient and effective too, but it's far harder to get us working together in pursuit of a common goal. This is why the European project in general and SEPA in particular are taking so long to come to fruition: their laudable aims are delayed or frustrated at every turn by national governments, industry bodies and individual companies more concerned about pursuing more individually rewarding goals. In the case of SEPA there is another problem too, in that achieving each of the different phases of the project entails technical challenges, as well as political and financial hurdles.

The SEPA Credit Transfer (SCT) scheme is now up and running, following its launch in January 2008, and banks and processors across the continent are now preparing for implementation of SEPA Direct Debit (SDD), due to launch this November. But SDD involves far more complex (and expensive) challenges than did SCT. It is an entirely new payments method, replacing a host of different direct debit schemes across Europe. Of course, the big SEPA news story of 2009 so far is the decision by France's SEPA Committee, chaired by the Banque de France and the French Banking Federation, to postpone implementation of SDD there until November 2010. The EC had been pushing for the original start date to be adhered to and will no doubt bring pressure to bear, fearing other recalcitrant countries may follow France's lead.

Meanwhile, until the EU's troubled Payment Services Directive (PSD) passes into law across Europe there is also no legal framework obliging financial companies to achieve SEPA compliance. There's another problem, as Jonathan Williams, director of strategic development at Experian Payments, explains. "Corporates and retail customers have the whip hand when it comes to whether their transaction is going to be SEPA or not," he says. "If a corporate doesn't provide the right information - that is, an international bank account number - then it won't be a SEPA transaction." He believes some of the larger public sector organisations across the continent could help increase impetus behind SEPA by making more use of the SCT scheme. At present SCT transactions still number less than four per cent of eligible transactions.

That's hardly helping to encourage banks to work harder on the much larger SDD changeover, where progress is still pretty slow, although for understandable reasons. "The two biggest challenges facing the banks are timing and the level of investment," says Andy Stewart, director, financial services Europe, at the vendor, Fujitsu. "By timing, I mean that because there isn't any mandating of the move towards the use of SEPA instruments from the ECB, the European Parliament or the EPC (European Payments Council), there's no requirement for governments to tell companies to stop using national instruments and start using SEPA instruments. There are no fixed end dates, so everybody's sort of ignoring it, which is quite an expensive thing to do because you end up running two systems in parallel."

Payment Services Directive
The PSD would provide some forward impetus, but the epic struggle to settle on a consistent continent-wide interpretation of the Directive has, in effect, been pushing SEPA scheme launch dates backwards for a number of years. Even when the necessary compromises have been made the PSD may run into a series of new obstacles. For Bob Mackman, head of wholesale business services at payments software specialist ACI, these problems stem from the fact that the Directive is primarily designed for consumer protection. He fears the PSD will create contractual issues between banks and corporate customers. "For example, if you think a transaction's not been authorised the bank has to give you credit within two hours and investigate to find out what happened," he notes. "As a business, let's say you've issued a $250 million payment. What do you do if that's gone? You can't just investigate that kind of thing in a few seconds. That's an example of something that's OK on the consumer side, but ceases to work on the business side.

"I think there are some aspects of the PSD that need to be re-thought completely," he continues. "Part of the problem is that this was dreamed up by politicians and now bankers are beginning to realise that parts of it are unworkable. It could end up having to be rewritten completely. My guess would be that we'll end up with a PSD II in a couple of years."

Direct Debits
The push to comply with SDD has been given a boost by the European Commission's move to extend Regulation 2560/2001, which stipulates that banks cannot charge more for cross-border credit transfers than for the equivalent domestic credit transfer. It has now been extended to cover SDD, meaning that when the extended Regulation comes into force in November 2010 it will be mandatory for banks to be able to use SDD. Yet this useful step forward for SEPA was one of the reasons why the French postponed SDD compliance in France. A case of one step forward, two steps back perhaps..

In countries like the UK, where financial institutions are being asked to comply with the original SEPA deadlines, how well are banks' preparations progressing for SDD? The best should already be awaiting the firing gun or signed up with a processor that can take the worry away from them. Simon Newstead, head of the financial institutions advisory group, global transaction services (GTS) at RBS, is confident all is well. He's a member of the EPC's SEPA Payment Schemes Working Group, where he sits as a representative of the UK market, as well as for RBS. He's also a member of the EC's recently established Payment Systems Market Expert Group; chair of the UK Payment Council's PSD Working Group and a member of the European banking industry's PSD Expert Group. Newstead admits that the impact of the economic downturn may well have trimmed the sails of some SEPA projects: "Maybe in some cases institutions that might have been planning a more strategic solution to revolutionise their payments capabilities, as SEPA comes in, will now have to do it on a more compliance-based basis initially. They're possibly not being as original and creative as they wanted to be in the beginning."

ACI's Mackman puts it a little more bluntly: "A lot of banks are just doing enough to meet compliance. If it goes on at the current rate it'll take another 45 years to happen."

Budget constraints: Outsourcing
Experian's Jonathan Williams believes that while doing the bare minimum may be the most common reaction to the downturn, it's important to note the ways that many others have decided to tackle the challenge. "In some cases banks have partnered with other banks, or with service providers, to process SEPA transactions, while large banks like Deutsche Bank have taken a more proactive approach, to invest in SEPA as an opportunity to win 'white label' business. The last reaction has been to band together as a group of banks and buy the services they feel they need from service providers." A number of firms are offering this 'outsourcing' option, including numerous vendors and the major processors such as Equens, STET, EBA Clearing or VocaLink.

Indeed, the development of the outsourced payments services market may yet prove to be one of the most important changes that occur as a result of SEPA. There are significant developments underway within those larger banks aiming for 'white label' business. Deutsche Bank, for example, which launched its SEPA Connector as a service to offer to other banks is seeking to use a compliant SDD debtor solution; while existing payment services providers and various other corporates are trying to work out how best they might exploit the new business opportunities starting to appear in this area.

"Banks are re-evaluating operational models," says Martin Wilson, chief commercial officer at payments specialist VocaLink. "As they scrutinise modes of operation they are turning to other organisations that can provide skills and resilience to meet the challenges of the market. Banks don't have to do it all themselves."

New opportunities, but when?
But this marvellous new market, with white label providers and regional processors, can't begin to exist until SEPA comes into being. So this is one reason why support for the imposition of 'real' deadlines for SEPA, in the form of hard end dates for compliance, is growing. "Setting an end-date would provide certainty to banks and corporates, and help them to secure the funding that they need to support the switch," says Doina Nicolici, European consultant at the (UK) Payments Council. "Without an end date, the rate of migration towards SEPA systems will be slowed, leading to increased costs due to the need to support both legacy - i.e. national - and SEPA payment instruments simultaneously."

Daniel Szmukler, head of communications and corporate governance, at EBA Clearing, believes the whole SEPA project risks stalling precisely because of this lack of an end date. "Every large industry project requires an end date, especially those that are of a self-regulatory nature," he says. "If banks don't know at what time they have to shut down their national schemes and infrastructures then obviously, for understandable reasons, some are postponing it. There are many payment practitioners who feel it would be easier if the end date were enforced by the regulator. Without that we may find ourselves with an end date for only some of the payment instruments, schemes or countries."

At the time of writing, the European Commission has begun work on a consultation (which runs until mid-August) to canvas opinion on the case for end dates and the timescales that should be involved. "With this consultation I think we are now going in the right direction," says Michael Steinbach, chairman of the board of directors at payment processor Equens. He expects to see an end date for SCT around 2012 and one for SDD set for 2013, or 2014.

But even the process of selecting an end date is bound to take a while, points out Gareth Lodge, regional research director at the Tower Group consultancy. "After the consultation ends the EC have got to analyse it, so you could see six months, even a year, go by before they come to a firm conclusion," he says. "Even if they did decide on a course of action it's going to be interesting to see how the countries react."

Yet, despite all these difficulties, there is no doubt that one day, probably not that far into the future, SEPA will be completed. And there will be reasons to be glad. "It's definitely going to create efficiencies for us and for most banks and for corporates," says Andy Ponsford, executive director, head of cash product capabilities, EMEA, at JP Morgan. "From a banking point of view it's going to help consolidate the payments function and create efficiencies, both from which clearing and settlement mechanisms we route those payments through, and in our own systems.

"From a corporate's perspective it's very positive: it enables the corporates to do business across the SEPA zone much more readily. That's something we shouldn't lose sight of, that's the real driving force. It is a very logical and constructive step towards increasing the competitiveness of the EU." As long as the ants don't have some kind of sinister masterplan, that means a brighter future for everyone. Of course, the jigsaw has to come together first, but some pain now in reaching a consensus will be richly rewarded later on.

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