You can’t touch me I’m part of the Union
[Dave Birch] Earlier this year, the wonderful people at Equens invited me to chair their debates at the Oxford Union. I had the honour (and fun) of chairing debates about the European Union's "Singe Euro Payments Area" (SEPA) and about innovation. The debates were set up properly, with proposers and seconders, for and against, and were meant to be educational (which they certainly were) as well as entertaining for the delegates.
It wouldn't be appropriate to talk in details about who said what and the conclusions, but if you are interested in the topics and the relationship between them, take a look at Norbert Bielfeld's December 2011 Working Paper "SEPA or payments innovation: a policy and business dilemma" [PDF] prepared for the European Savings Banks Group (ESBG). It makes for fascinating reading (for people like me). Norbert Bielefeld is the Deputy Director, Payment Systems at ESBG and someone whose writing I have long admired. I don't want to review the whole document -- you should read it for yourself -- but I do want to pull out of couple of his extremely well-informed reflections on the SEPA initiative's trajectory and traction.
Oddly the European Union policy makers seem content with bowing to the lowest common denominator for citizen satisfaction, i.e. no increase in prices and no change in practices – at a time when the rest of the world is ready to take on board the consequences of a profound transformation of the transaction context, and the related payments landscape.
Norbert points out that in the last decade (during which the mundane euro has been in use) there have been regulations and directives that were intended to make the European payment system far more efficient. And there are more to come. But what has happened? What difference has all of this made to the average European?
The answer is, of course, not a lot. Now it may be reasonable to say that that is because the SEPA project is yet to complete, but that is dodging the issue. It was clear from early on that the process would take a lot longer to complete than the ECB or Commission wanted and that banks and corporates would be reluctant to spend a lot of money on it with little business case (since almost all payments in Europe are domestic and only eight percent of European online shoppers have purchased cross-border at all).
Nevertheless, when Gertrude Tumpel-Gugerell said that: “2012 for SEPA Credit Transfers (SCT) and 2013 for SEPA Direct Debit (SDD) would be a good agenda to follow”, I could see a lot of shaking heads in the audience, as the bankers are working to 2016 and 2018 respectively and the corporates even longer[From The Financial Services Club's Blog: Understanding SEPA's long and winding road]
At that time (a couple of years ago) the prevailing wisdom was that we needed an end date to make it all happen.
The EC will "effectively derail the entire Sepa project" if upcoming regulatory intervention on migration end dates does not include deadlines for phasing out national schemes, says the European Payments Council.[From Finextra: EC migration plans would 'derail the entire Sepa project' - EPC]
They are derailing it in other ways as well, I should point out, such as by forcing retailers to accept euro coins and high-value euro banknotes, thus promoting the least efficient and most expensive payment mechanism instead of electronic alternatives that would be better for society. In fact, as Norbert points out, there is no coherence at the European level in public policy on cash. A decade ago, Europe used a quarter more cash than the US, now it is two-and-a-half times as much. (The US statistics are distorted - the statistics show a lot of cash in circulation, but in fact around two-thirds of US cash is outside the US and unlikely to be repatriated so the use of cash within the economy is much less than it appears). If electronic transactions at POS are a proxy measure for economic efficiency, Europe is becoming less efficient as time goes by.
But back to Norbert's main points. This massive legislative disruption has done nothing to make Europe more efficient [or] overcome the fragmentation of the European payments landscape so often bemoaned by policy makers and legislators. And they didn't get the "third scheme" they wanted either. Now that we have a SEPA end date, I think this is unlikely to change. That doesn't mean that we're stuck with what we have now forever.
Obviously, I think there should be new payment schemes. So do lots of people. What kinds of schemes? Different stakeholders may have different, and conflicting, goals. But I don't know what they should be and nor does the European Commission. I think I do have some understanding of what the new retail schemes might be. In June 2011, the E-Payments Merchant Initiative published a position paper that said, essentially, that merchants like the SCT (no chargebacks) so a pan-European PingIt would go down a treat. They don't like SDD (eight week cancellation period). They like wallets, prepaid, "overlay services" (i.e., merchant applications sitting on bank API) and they remarked on the potential reuse of ID/authentication as well. I'm rather sympathetic to these positions. I've written before that pushed e-billing (i.e., a combination of ID, authentication and SCT in the right mobile package) would seem to balance stakeholder requirements in a reasonable way and I'm a big fan of next-generation pre-paid "near bank" services. I also think that wallets built from bank APIs -- about which I will blog more soon -- look good. But that doesn't mean I think that the Commission should legislate to implement these ideas.
Norbert says that the root cause of the lack of progress is that European legislators have tried to shape the result that they think best, rather than set principles and let the market evolve. The landscape isn't universally bleak, because the Payment Services Directive (PSD) will undoubtedly lead to genuine innovation -- there was a good out the outlook could have been greatly improved had the European taken a different approach. Norbert says
Approaches considered by policy makers and regulators in the United States, Australia, and Canada however rely on extensive market research and public consultation. By contrast the European Union‘s approach is not very informed by market research, and public consultation appears to be used as part of a formal process, rather than an opportunity to truly engage into a wide debate.
He is not saying that these approaches are all better and should be adopted wholesale and observes the relationship between process and product innovation in the US, where price regulation of cheques led to process improvement but little product innovation (actually there are startups in the US right now still building new systems around cheque images). Having played a small role in the Canadian process, I can certainly attest to their efforts to engage a wider set of stakeholders and to explore outcomes before deciding on process. Norbert's central point, and the reason why I originally read his report because I wanted to see how it would compare to the findings from my modest efforts through the CSFI Research Fellowship, is about the framework for innovation. Should that framework be based on regulation or competition. In the CSFI roundtables, competition did seem to be seen as a better way forward. The European Union should decide on its targets (total social cost of payments?) and then find a way for competition to reach them. It's made a decent start with the PSD, despite the patchy implementation, why not let that pan out?
As far as I can understand things, which is not very far, there is to be a SEPA Update in 2018. That's two or three generations of new economy evolution. By the time that update takes place, we'll be using our mobile wallets to transact in alternative and parallel currencies and the idea of European-wide harmonised payments will be antiquated. I simply cannot see how the money spent on SEPA will ever be recovered, whatever was said at the Oxford Union!
P.S. One of the observations in Norbert's report is about the slowing of standardisation progress on "open" payment systems and therefore the advantages of three-party models. This suggests to me that a scenario where a portfolio of non-banks is offering specialised services seems far more likely than a scenario where consolidated pan-European bank-based players offer utility services. I don't think this is a bad thing at all.
P.P.S. For our younger readers, I should point out that the title of this post was a hit for noted British folk rock titans "The Strawbs" in 1973.
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