The next step in European ACH competition?

The next step in European ACH competition?
Yesterday saw very interesting news coming out of Europe regarding a joint venture between 6 European ACHs.  To understand why many of us have sat up and taken VERY close interest in the announcement, we need to review some recent history first. Much of this will be covered in more detail in a forthcoming report on ACHs. In the very early days of SEPA, the European Commission made many public comments. As SEPA was as much a political goal as anything, many of these were observations on how the Commission thought the market ought to develop. Given the size of the task and the perceived reluctance to the banks to do anything about SEPA, the Commission narrowed down the observations to a set of specific requirements, eventually culminating in the regulations that made migration mandatory in Euro countries. The downside is that some of the initial elements triggered some activity, but they were never fully pushed through. One such item was the Commissions perceiving their to be an over-supply in payments processors. In the Commissions view, a single market would reduce the 50+ processors to between 5 and 7. That would be enough for a competitive market, but not so many for an inefficient market. The latter stance is based on the fact that processing is broadly a fixed cost business and so the larger the volumes processed, the cheaper the cost per transaction is to process. As a result of this statement was a flurry of activity amongst the ACHs to be one of the “survivors”. It triggered a wave of mergers (Equens is a German/Dutch/Italian merger for example), near mergers (everyone courted everyone else!) and direct approaches to banks and markets to acquire them as customers and boost volumes. But whilst there were mergers, the market broadly remained unchanged. Indeed, some markets chose to build their own SEPA compliant ACH, rather than use the services of a SEPA-ready ACH. There are many reasons for this, not least ownership and control. The announcement yesterday therefore was very significant. At face value, 6 ACHs are going to collaboratively process cross-border SEPA payments. Given the tiny volumes, this isn’t exciting. However, dig deeper, and it becomes clear that Equens – arguably the largest ACH in Europe – is providing all the infrastructure and services to the new company, and the new joint entity company is registered at… Equens HQ. Those other 5 ACHs are considerably smaller – their volumes combined are still dwarfed by Equens. Secondly – it’s for cross-border SEPA payments today but mentions possibly delivering the real-time payments interoperability that’ll be required going forward. That means more ad more services that will be offered by Equens to these other ACHs. It’s particularly noteworthy as many believe that EBA Clearing has been positioning itself to provide exactly that service, and has been leading the discussions. The third point is a broader one. There has been considerably more talk in the last few months about processing, given various elements of PSD2. It’s not yet clear whether the scheme/processor split will apply to “just” card companies, particularly when some of the ACHs process cards. A number of organisations have also mooted whether the XS2A provision potentially provides a way to bypass ACHs – that is break the connection between bank and ACH. Given the range of potential impacts, it seems likely that there will at least some impact. Finally, we are aware of more than one discussion in Europe about the future of that countries ACH, particularly as they ponder on how to deliver a real-time payments solution for that country. All bets are off. The net result suggests to me that we’re entering new phase for payments processors, particulalrly ACH, which has been a relatively stable market for many years. The industry – and technology – is in a very different place than when the discussions happened in c. 2005. What made sense then may not make sense now. We believe that the announcement yesterday will be just the first of a number over the next 2 years. The phrases exciting times and ACHs can be at last mentioned in the same sentence!

Better SEPA Late Than Never

Better SEPA Late Than Never
The news on January 15th that the SEPA deadline would be extended came as both a shock, but at the same time, not a surprise. The regulator, based on the levels of migration (available here ), has proposed a 6 month grace period. At the heart of the problem are the low levels of SEPA take-up ahead of the “immoveable” deadline of Feb 1st 2014. Corporates have complained that the deadline was too soon. The original announcement of the deadline came in December 2011, after many corporates had already finalised their budgets for the following financial year, leaving effectively 13 months for compliance. Furthermore, survey after survey have shown a distinct lack of knowledge of SEPA, let alone preparation for it, particularly amongst SME’s. This move seems to show desperation from the regulator and perhaps a lack of understanding. The migration numbers show volumes from those companies that have migrated; it doesn’t show those who *could* migrate, but who have chosen not to do so yet. At least one large biller has claimed that their SEPA transaction pricing would be higher than their current pricing. As a result, they have stated that they aim to migrate at the last possible moment. Equally, those corporates who have embraced the vision of SEPA may have consolidated their volumes to a payments factory, with the net result that some countries volumes will increase (theoretically at least, and possibly pushing low cost countries to over 100% migration!), whilst others will decrease. Regardless of the actual impact, the numbers are only an indicator, and not a measure, which is how the regulator has used them. Indeed, for a change of this size, there seems to be a distinct lack of real measures that we in the real world have to apply to any project we do!.  This seems to have been borne out by the latest figures. As corporates thought the deadline was Feb 1st, Decembers figures for direct debit saw a 60% increase. Did the regulator blink too soon? They can’t know as they weren’t actually using the right measures. The regulator also seems to have not understood the implications of their statement. In conversations so far, the market is not grateful but angry. It has created confusion and complication, rather than helped the situation. Firstly, it’s sent the wrong message to the corporates. As one corporate has said: we were in a standoff, but the regulator blinked first; therefore we believe that a minimum that they might blink again, so perhaps we should just sit tight and not migrate at all? Secondly, when is a deadline, not a deadline? Or rather, when is an extension, not an extension? When it’s no longer yours to extend. The competent authorities in each country are the enforcers of compliance. One thing many have missed is that this is a proposal, not a legal change to the regulation. The release calls on the competent authorities to adopt the proposal and contains phrases such as:

  “….should the proposal still be in process of adoption on 1 February 2014….”

Fine. But how should a bank compliance officer react in that instance? A small poll, but so far, the belief amongst those I have spoken to is they have to work on the assumption that Feb 1st is the deadline, not August 1st. For example, does it require every authority to agree to the proposal or is it on a country by country basis? How long will that process take? By the time there is absolute clarity, the 2nd deadline is likely to have passed! Furthermore initial indications suggest that some countries, because of the progress to date, may decide to press ahead with the original deadline. Whilst admirable on one level, equally it does potentially cause complications by creating a multi-deadline deadline! It’s early days as to the actual impact. For most, this announcement came out of the blue. But, just as the boy who cried wolf was eventually ignored, the regulator who cried “No plan B!” may find that they have now created a series of problems for themselves.    

International Payments Summit 2013 Recap

International Payments Summit 2013 Recap
I was at International Payments Summit in London last week. I spoke on a panel on real time payments, the insights of which will be the basis of a later blog.  But here are the highlights for me: IPS may well be back I last attended IPS 5 or 6 years ago. I stopped going for a number of reasons. Firstly, cost. After Sibos it must be about the most expensive conferences on the circuit – the most expensive flavour is over £3,500 (although cheaper options are available). One doesn’t mind paying for quality, but at the time it failed to deliver. IPS suffered from a probably deserved reputation of, er, “over influence” from sponsors. Frankly, I’d heard some of the vendor pitches so often I could have given them. I don’t begrudge the vendors as they’d paid for that opportunity, but equally it didn’t add value. This year the quality of speakers and sessions was dramatically up. A few “usual suspects” appeared but who can generally be relied upon to say something, let alone something interesting. Indeed, one positive over Sibos was the willingness of the panelists to actually discuss things rather than read prepared statements that sometimes happens at Sibos. Based on this event, whilst it hasn’t gone back to “Must”, it’s certainly moved to 3rd slot behind EBADay and Sibos. It’s Catch-22. If this event can significantly increase the audience size, then its value will significantly increase as well. I wish Katie and her team well for next year.   SEPA With less than 12 months to go, you’d think that everything that could be said, has been said. Wrong. Even the experts seemed to be learning things, particularly from the panels with corporates. Key issues include the cost of compliance (one corporate suggested over 10m€); readiness of banks, particularly around direct debit; and the misunderstandings that pervade. On the latter point, it is worth pointing out that some of these are perhaps self-inflicted. For example, there is a belief that the regulation now means that the requirement for a BIC has been removed. Yet few – including myself – had realised that if customer arrangements put in place as a result of the PSD, the requirement for a BIC still holds. As a result, whilst the one party may not require a BIC, another may, and with no easy way of telling.   SEPA#2  Based on the corporate forums, and polling sessions, some things were very clear. Neither banks nor corporates see any benefit from SEPA, that they view it as a compliance issue, and that they, the corporates, will be worse off. Hardly a ringing endorsement, but equally not new news. But I think the level of terror and the antipathy from the clients still shocked many. One corporate estimated that they will receive approximately 15,000€ benefit from SEPA, but it has cost them over 400,000€ to achieve SEPA compliance.   Real time There is a real belief that real time is the future. But what is less clear is what that means. Some of the systems held up are real time, in the strictest sense, aren’t. They authorise the payment in real-time, and the client may access the money straight away, but settlement takes place later. Furthermore, many are conflating real-time with “always on”. The trend I certainly to have greater availability, but understanding the difference is important in understanding the impacts on the back-end systems in a bank.   Operating model Several conversations I had and a number of the presentations referred to the need for banks to address the cost of service/execution, with a number of banks undertaking significant projects to move to a different operating model. ING is one example, with Mark Buitenhek using an unusual but effective analogy of pasta! They’re moving from spaghetti (lots of long processes, interwoven and difficult to untangle) to lasagne (multiple discrete layers of service, creating building blocks of components).          

The New EC Green Paper: Missed Opportunities?

The New EC Green Paper: Missed Opportunities?
It was interesting to read the European Commission’s Green Paper “Towards an integrated European market for card, internet and mobile payments” published a couple of days ago. My colleague Gareth has already provided some insightful commentary in his blog below, and I wanted to add a few further points. My first reaction was to applaud the Commission for recognising the increasing convergence of physical and online worlds and deciding to cover in this paper three types of electronic retail payments, namely cards, internet and mobile payments. However, my excitment waned as I continued reading, as the paper is mostly dominated by card-related issues with relatively little attention on internet or mobile payments. Also, in contrast to some very specific issues around cards, such as MIF, cross-border acquiring, specific scheme rules, etc., the questions related to e- and m-payments are rather vague and quite high-level. As a result, we probably shouldn’t expect the consultation feedback and responses to be concrete and actionable proposals. The paper envisages that “an integrated EU market for payment services could also produce, as a by-product, administrative data that could be used for the production of harmonised statistics.” However, it completely misses the opportunity to recognise the complexities of gathering payment statistics in the converged world, where a card payment might be initiated via a mobile phone, or where an e-wallet might be used to pay for a purchase online, whilst at the same time trigerring a card transaction to fund the wallet. Harmonised payments market by itself will not be sufficient – a common taxonomy and agreement is needed to differentiate between payment instruments and channels, and how various transcations are going to be accounted for. I couldn’t help but think that a lot of the questions and phrasings in the paper were a thinly veiled swipe at Visa and MasterCard, two recognised international schemes on which Europe also relies to provide SEPA-compliant international payment instruments. It again raises many of the sensitive issues around MIF, surcharging, co-badging, Honour All Cards rule and others, and the reader is left with a feeling that the Commission would like to see a change in many of today’s practices. I could imagine that the schemes must feel rather aggrieved and probably feel that their efforts and investments in maintaining and innovating the payments infrastructure are underappreciated by the authorities. Continuing with the theme of what’s missing from the paper, one of the most interesting ommissions to me was the fact that nowhere in the document there is any mention of the need for a third European card scheme. There are probably good reasons for it – we have been conducting some very interesting interviews in the market and will summarise our views in a forthcoming report – keep an eye on it over the next month or so. This is a consultation document and interested parties are encouraged to submit their responses to the Commission by 11 April 2012. The Commission expects that any new proposals would be adopted by Q4/12 or Q1/13, and that “any future legislative or non-legislative proposal will be accompanied by an extensive impact assessment.” In other words, it will take some time. And the risk is that the grander the vision, the bigger the likely gap between that vision and the reality, and the longer until the actual changes take place.

Is SEPA in danger of becoming FEPA?

Is SEPA in danger of becoming FEPA?
I spent quite a bit of my time last week attending various industry events and conferences and discussing payments-related topics with industry participants. As it always is in Europe, the conversation inevitably turns to SEPA and PSD, and the overwhelming sentiments there these days seem to be frustration and confusion. Banks are frustrated by the lack of progress in migrating to SEPA instruments and decommissioning old instruments and infrastructures. Most are in favour of a clear end date – as one banker said, “we, banks, are excellent at meeting deadlines and terrible at implementing anything without one”. Some are confused by the apparently increased flexibility in interpreting the proposed SEPA standards, leading another commentator to quip that “at this rate, SEPA will soon become FEPA – a Fragmented European Payments Area”. There were times at the conference when I had to pinch myself and ask if it was really 2010 and not the late 90s, as banks continued to lament their inability to measure the P&L of their payments business and corporate customers continued to lambast their banks for being unable to meet even the most basic requirements, such as delivering a payments message in full rather than truncated (and STP benefits wiped out) or opening an account in less than five months (yes, really!) or without reams of complex documentation in Greek or Italian. I am yet to attend an event which would not discuss payments innovation and iDeal and PayPal were among the most frequently cited examples of what can be achieved via innovation. While iDeal is a Dutch banking industry initiative, I was somewhat perplexed that the banking establishment did not seem to be moved much by PayPal’s progress. To some extent this can be explained by the fact that most PayPal’s transactions to-date have been funded individually using one of the banking payment instruments, such as card or bank transfer. Banks still seem to view PayPal as an “overlay” on the banking infrastructure and therefore, ‘nothing to be worried about’ – a dangerously short-sighted perception in my opinion. And, while we are on the subject of innovation, expect to hear more in the coming months about Ixaris and Syncada – two of the most interesting and innovative companies I met last week.

SEPA’s sDD (small ‘s’, big ‘DD’)

SEPA’s sDD (small ‘s’, big ‘DD’)

The end date for the application of the Payment Service Directive (PSD) just expired on November 2nd. The transposition of PSD into country legislation was presented as the last hurdle before the full deployment of SEPA Direct Debit (SDD).

The European Payments Council (EPC) keeps on confirming a successful kick-off, where to-date 2,607 banks, representing about 70 per cent of SEPA payment volumes, have signed up to the new schemes of the SDD services.

There are no evident signs of significant uptake by banks, least by corporates.

What we perceive from banks, in reality, is an investment strategy focused on applying new direct debit schemes at local level, with a country-by-country piecemeal approach.

This is why I think we should refer to an ‘sDD’ implementation.

A small ‘s’, because in reality the spirit of SEPA is being betrayed, and a big ‘DD’, because each bank is looking at its own backyard and developing ad-hoc DD schemes.

Bottom line for banks

Get involved with corporate representative bodies (e.g., EACT- European Association of Corporate Treasurers) to guide your investment strategy and select key countries.

Bottom line for corporates

Get your banks explain in practical terms how they intend to deploy their SDD (i.e., ‘Big S’) services.

Question to the reader

Is this an area that requires further investigation?

Read Celent’s existing research reports.

http://www.celent.com/124_458.htm

http://www.celent.com/124_327.htm