I. Introduction
1. On 11 January 2012, the European Commission published its Green Paper on Card, Internet and Mobile Payments (the "Green Paper") and launched a consultation on that paper. The Consultation closed on 11 April 2012. Below is a summary of the key points made in the Green Paper.
2. The Green Paper identifies payments as the major barrier to growth in e-commerce (the buying and selling of products over the internet). The Green Paper therefore focuses on completing the single market for electronic payments. It identifies issues in relation to electronic payments within the euro retail payments sector and consults on appropriate solutions.
II. What is SEPA?
3. The Single Euro Payments Area ("SEPA") is an initiative set up by the European Payments Council1 at the behest of the European Central Bank, the European Commission and EU governments in the Lisbon Agenda in March 2000 to harmonise schemes for electronic euro payments. The aim of SEPA is " ... [that] consumers, businesses and governments are able to make cashless payments throughout the euro area from a single payment account anywhere in the euro area using a single set of payment instruments as easily, efficiently and safely as they can make payments today in the domestic context".2 Although SEPA relates to the euro area, it is envisaged that the effect of SEPA would spill over into the non – euro area of the EU resulting in a true digital single market at EU level.3
4. SEPA aims to:
a. integrate existing national euro credit transfer and euro direct debit schemes into a single set of European payment scheme: SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD). These are the only payment instruments for which specific pan – European schemes exist.
b. create a Single European Payments Area for cards aims at ensuring a consistent customer experience when making or accepting payments with cards throughout the euro area.
c. incentivise increased use of electronic payment instruments, while reducing the cost of wholesale cash distribution.
5. The results envisaged are that businesses and governments would be able to simplify and streamline their payments processes and centralise financial operations across the EU; merchants would benefit from cheap, efficient and secure electronic payments encouraging more use of e-payments; payment service providers ("PSPs") would benefit from economies of scale through standardising payments instruments and open market access; and technology providers would develop pan-EU instruments.
6. In order to speed up integration in relation to credit transfers and direct debits, the European Parliament and Council adopted a Regulation on 30 March 2012 which sets a deadline of 1 February 2014 for migrating all EU national payment schemes to pan – European schemes.4
III. What are the main drivers to market integration?
7. The Green Paper envisages that the benefits of integration would stem from four key drivers:
a. More competition among service providers: the Green Paper suggests the creation of common open standards to encourage cross-border trade, foster innovation and reduce payments costs as well as constraining the market power of the two current international card schemes.
b. More choice and transparency for consumers: the Green Paper proposes an integrated and transparent market to facilitate consumer awareness of the hidden costs charged for different payment instruments. This would enable consumers to make informed choices about the most efficient payment instruments and reduce the costs which are passed down to retailers and ultimately to consumers in the price of goods.
Transparency of pricing could also be increased by the systematic and comprehensive use of rebates, surcharging5 and other steering practices. In other words merchants steer customers to use certain payment cards by only accepting certain cards for values above a certain amount or alternatively explicitly indicating a preference for one type of payment method.
c. More innovation: an integrated market would enable suppliers to benefit from economies of scale and therefore save costs or increase revenue. The incentives for innovation for new market entrants would therefore be greater and would span a wider geographical area.
d. More payment security and consumer trust: increasing security of remote payments such as payments made on-line ("e-payments") and payments on mobile phones ("m-payments") would increase consumer confidence to use these payments methods, thereby increasing demand for new products and fostering innovation among suppliers.
IV. What issues were identified with the payments sector?
a. Integration depends on payment instrument and channel
8. The Green Paper recognises the growing proportion of payments made online or on mobile phones, but notes that the current degree of payment integration at EU level varies according to i) the type of payment instrument (credit transfers, direct debits and payment cards) and ii) the channel used to make the payments (cards, e or m-payments).
- Payment cards: payment is made at the point of sale with a physical card. Despite being the most frequently used electronic payment instruments, interbank fees remain too high, domestic debit card schemes are often not accepted in other EU countries and fraud is a serious concern.
- E-payments: payment is made by card through the internet, online-banking credit transfers or direct debits or payments through e-payment providers. The e-payment environment is fragmented along national borders with successful national schemes but only a limited number of international schemes from outside Europe. In addition, the cost of payments for consumers and merchants particularly for low value payments (micro-payments) is high.
- M-payments: the payment data and the payment instruction is initiated, transmitted or confirmed via a mobile phone or device. This can apply to online or offline purchases and can take place remotely over the internet/WAP
i. Remote m-payments mainly take place over the internet/WAP or through SMS services billed to the payer via the mobile network operator ('MNOs'). Most remote payments are based on card payments.
ii. Proximity payments generally take place directly at the point of sale (typically using Near Field Communication (NFC)). Payments are made by placing specifically equipped phones near a reader module at the point of sale.
iii. Market penetration of m-payments is limited because of the fragmented m-payment market. MNOs, payment service providers and mobile phone manufacturers have not yet agreed on interoperable payment solutions. The lack of a harmonised European approach addressing concerns such as technical standards, security, interoperability and cooperation between market participants perpetuates the fragmentation of the m-payments market. In addition, e- and m-payment market participants are reluctant to invest until the legal situation is clear.
b. The need to foster and accelerate market integration
9. The following issues stem from commercial practices for payment cards, however they either are applicable for e- and m-payments or have spill over effects which affect the e- and m-payments sectors indirectly (for example when an e- or m-payment is made through a payment card):
a. Market fragmentation, market access and market entry across borders. The Commission has identified the following issues:
i. Multilateral interchange fees (MIFs): these are inter-bank fees agreed bilaterally6, or multilaterally7. High MIFs may act as entry barriers to low-cost card schemes and other payment systems (e - /m-payments). Competition investigations by the European Commission8 and other National Competition Authorities9 have focussed on i) the high levels of fees which may have prevented entry of low-cost card schemes and ii) the differing levels of national fees which have fragmented the market.
ii. Cross-border acquiring: this refers to a situation where a merchant uses a PSP established in another country, thereby placing PSPs in different countries in competition with one another. This should place downward pressure on the Merchant Service Charge and result in administrative efficiencies. However, the differences in technical standards and rules used by international card schemes increase the complexity of this method and create barriers to cross-border trade.10
iii. Co-badging: this allows different payment brands (schemes) to be used on the same card or device, enabling consumers to choose when paying and enabling new schemes to enter more easily by co-badging instead of setting up a new card scheme. Schemes may impose charges for use of their card even if their brand is not used. However, the SEPA Cards Framework allows the issuing PSP in consultation with the consumer to pre-select the brand to be used on a co-badged card at the point of sale. Co-badging could therefore restrict competition if it is used to restrict or influence the choice of brand or payment instrument. Co-badging will increasingly apply to m-payments.
iv. Separating card schemes and card payment processing: some card schemes oblige participants to use their subsidiaries to process the transaction thereby creating entry barriers to competition between processors and between new card schemes. The SEPA Cards Framework ("SCF") provides for separation of scheme management and processing but does not provide a common interoperability framework.
v. Access to settlement systems: payment and e-money institutions, unlike banks, do not have direct access to clearing and settlement systems and have to use the settlement services of banks, placing them, as PSPs claim at a competitive disadvantage.
vi. Compliance with the SEPA Cards Framework: the SCF was not fully implemented on 1 January 2011 as scheduled and many of its rules are not actively applied.
vii. Information on the availability of funds: banks are the gatekeepers of prior information on the availability of funds (needed to authorise payment). Refusal to grant access (which is not justified by security and confidence issues) could hinder the emergence of alternative payment solutions.
viii. Dependence on payment card transactions: there is an increasing use of payment cards, and as a result a growing number of companies whose activities are effectively dependent on being able to accept payments by card.
b. Transparent and cost-effective pricing of payment services for consumers, retailers and other businesses.
i. There is a lack of transparency regarding the real cost of payment services for consumers and for merchants. Greater transparency about the total cost of different payment instruments could drive down total payment costs. In addition, payment fees, particularly for low value transactions, may be excessive.
ii. Currently rules applied by card schemes such as the "no-discrimination" rule11, the "honour all cards"12 rule and the blending of charges13 make it difficult for merchants to influence consumer decisions on the choice of a payment instrument and limit their own ability to accept only selected cards. This facilitates the application of high MIFs by PSPs, potentially increasing the cost of card payments and stifling competition.
c. Technical Standardisation of components protocols, interfaces, applications and services will allow increased interoperability and minimise foreclosure of potential competitors.
i. In relation to card payments, there is a lack of common technical standards in relation to data exchange between the merchant and the acquiring PSP across borders and even in the domestic market. This limits the range of potential service providers to domestic acquiring PSPs; requires merchants to maintain different systems and protocols per country and prevents debit cards being accepted abroad.
ii. E-payments do not suffer as much from a lack of open standards because of the use of the internet as a common platform with defined communication protocols. However, although initiated on the internet, they are often processed as card payments or online banking transactions.
In October 2010, the banking sector (via the EPC) and mobile network operators (via the global association of mobile operators ("GSMA")) began discussions on cooperation and standardisation. However they had not yet achieved any tangible results at the time of publishing the Green Paper and still had significant gaps in its scope.
iii. Standardisation work on m-payments should ensure full interoperability between m-payment solutions and favour open standards to enable consumer mobility. Standardisation also needs address the portability14 of m-payment applications.
d. Interoperability15 between service providers.
i. The Green Paper identifies one of the main barriers to the development of m-payments is the lack of agreement between MNOs, PSPs and manufacturers and application developers. The Commission is concerned that there is a serious risk of fragmentation through proprietary solutions as private players who control the standards and interoperability, dominate the whole payment chain: they control the device itself, the application platform and the security management.
ii. In relation to e-payments, the EPC has decided to formulate an interoperability framework that allows competition between various schemes. However, no non-bank providers have been allowed to join this work. The European Commission has opened a competition investigation into this behaviour.
e. Payments security.
i. Payments security has been identified as one of the key barriers to the widespread adoption of e-commerce.16 In particular fraud protection is of considerable concern as remote card transactions represent the majority of all fraud cases. In addition, an integrated market for secure internet payments could potentially help restrict the number of websites offering illegal content or selling counterfeited products.
ii. In the field of data protection. Any authentication mechanisms must be designed from the outset to include measures to ensure compliance with data protection laws.
f. Strategy implementation/governance
i. SEPA governance: the Green Paper suggests there is insufficient stakeholder involvement in SEPA which is currently run as a self-regulatory project by the EPC. EPC membership is predominantly made up of the banks with one seat given to a payment institution. Other PSPs, payment service providers, processors supply-side market actors and users are not represented. The Green Paper envisages a more prominent role for legislative and regulatory oversight by the European Central Bank and the European Commission through the governing body, the "SEPA Council". set up in 2010. This currently brings together high-level representatives from the demand and supply side of the payments market.
ii. Governance in the field of cards and e and m-payments The SCF does not have unanimous support from all stakeholders and there is no mechanism for enforcement. Integration efforts to produce a framework for e and m-payments have been slow to produce results. The Green Paper suggests taking a comprehensive approach involving regulation, self-regulation and competition compliance and enforcement.
V. What happens next?
10. The Consultation period is now over and on 27 June 2012, the European Commission published a summary of responses to that consultation. This can be found here
11. The European Commission has stated that it will announce further steps in late summer 2012.
12. The European Parliament forecast's a first reading plenary session to discuss the Green Paper on 19 September 2012.
Footnotes
1 The European Payments Council ("EPC") is the coordination and decision-making body of the European banking industry regarding payments. It comprises 74 members which represent payment institutions, banks and other banking communities. Its purpose is to support and promote SEPA. The EPC does this by developing payments schemes and frameworks to promote further integration within the euro payments sector. Following the introduction of the euro 2002; the European Union (EU), the European Commission and the ECB tasked the banking industry with developing harmonised schemes for electronic euro payments. In particular the EPC develops and maintains SEPA payment schemes rulebooks (SEPA Credit Transfer and SEPA Direct Debit rulebooks) set out a set of rules on how to move funds from account A to account B within SEPA. These rules and are based on technical standards defined by standards bodies such as the International Organization for Standardization.
2 http://www.europeanpaymentscouncil.eu/knowledge_bank_download.cfm?file=JointStatement EuropeanCommissionand EuropeanCentral Bank.SingleEuroPaymentsArea(May 2006).pdf
3 European Commission Green Paper Towards an integrated European Market for card, internet and mobile payments, COM (2011) 941 final Brussels 1.1.2012.
4 Regulation establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924/2009: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:094:0022:0037:EN:PDF
5 However surcharging should not be used as an additional revenue source and should reflect the cost of using the payment instrument.
6 :between paid the retailer's payment service providers to the cardholder's PSP
7 where all participating PSPs agree to be bound by the payment card scheme
8 Visa multilateral interchange fees; MasterCard http://ec.europa.eu/competition/antitrust/cases/dec_docs/39398/39398_6930_6.pdf; http://ec.europa.eu/competition/antitrust/cases/dec_docs/34579/34579_1889_2.pdf
9 Decisions in Visa, MasterCard, Polish MasterCard Decision, Hungarian MasterCard Decision, Italian
MasterCard Decision. These decisions all prohibited specific MIF arrangements.
10 -International card schemes apply special authorisation regimes and special scheme fees/license fees to acquirers offering cross-border services.
– Cross-border acquirers must pay issuing PSPs the domestic MIF applicable in the country of the point of sale. This prevents merchants from shopping for the cheapest acquirer, although the cross-border PSP has typically not signed up to the domestic MIF concerned, which is set by the PSPs in the country concerned.
– Cross-border acquirers may also be at a disadvantage in countries where domestic PSPs have parallel networks of bilateral interchange fee agreements. This impedes the development of cross-border competition as acquirers have to pay the official full MIF amount.
11 Under the no-discrimination rule, retailers are prevented from steering customers to the payment method the retailer prefers through surcharging, rebates or other means of "steering".
12 Under the honour all cards rule, merchants must accept all cards within the same brand even if the fees charged under them are different.
13 Blending practices involve the acquirer charging the Merchant an average MSC for card payments and not disclosing the MSC applied for each category of card.
14 How payment applications stay with the consumer even though it changes mobile network operator.
15 The Commission also notes that technical interoperability should be distinguished from commercial interoperability, which is the ability for merchants to choose acquirers and for customers to choose issuers irrespective of their location.
16 The public consultation on the future of e-commerce.
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