By Peter Jones, PSE Consulting

The European Union’s card harmonisation project appears to have stalled, and there is increasing evidence of growing disillusionment with the plans for card standards. What actions must the key stakeholders take to reinvigorate an initiative that has lost its sense of direction?

Many believe that the European Union’s expensive plans to remove the barriers to card business entry across the region are just not happening. If you are a non-European bank seeking to set up an acquiring operation in the European Union’s 29 nations, consider thinking carefully before you start. It will take you at least 15 months before you get full regulatory approval. Similarly, when you start to acquire, do not expect common processes and standards. Despite a massive harmonization project (SEPA — the Single European Payments Area) backed by legislation (the Payment Services Directive), each country still operates under its own specific rules and regulations. Processes and procedures across the European Union vary enormously.

Governments and central banks are in a reflective mood as they review the difficult events of the past year. One thing is clear: We must all expect a return to the basics of banking and a refocus on core traditional activities, such as acceptance. But will the European Union banking community’s plans for harmonization meet the expectations of merchants and acquirers? Is real progress being made? More importantly, can the voluntary bank-owned SEPA governance model really deliver on its promises?

The current SEPA structure reflects a compromise between the three key European Union stakeholders and owners. The European Central Bank desires a common, efficient eurozone payments process. The European Commission DG Markets seeks complete European harmonisation, common legal processes and increased competition. The banking sector, through the European Payments Council, has the role of implementation with arms-length monitoring by the European Commission and the European Central Bank.

This model has worked well for electronic and clearing house payment instruments. Despite tensions and scoping constraints, the common SEPA Credit Transfer scheme was implemented on time. New versions will enable many of the specifics of larger corporations to be incorporated. SEPA Direct Debits (for pan-European Union payments) represent a more significant harmonisation project and, despite its complexity, will likely be delivered once the Payment Services Directive is in place next year. To sum up, the SEPA governance structure for electronic payments represents a best practice model for successful harmonisation projects.

A Complex Business Model

However, success in electronic payments has not come as easily in the more complex cards business. During the past six years, the three stakeholders have struggled to understand card business models and the roles of the international and domestic card schemes. There have been steep learning curves, and many of the SEPA players are by background and temperament more comfortable with interbank electronic payments, where structures and frameworks are simpler and easier to replace.

The cards harmonisation project is thus very much the product of the European Payment Council’s Cards Working Group, a team of card specialists drawn from banks across the European Union. For a variety of reasons the Cards Working Group took an “all or nothing” bet that changing the structures and practices of the eurozone’s 11+ domestic debit card schemes would result in harmonisation, common acceptance processes and the creation of the SEPA Cards Harmonisation Framework.

Due to time pressures, political issues and lack of a budget, no country-specific surveys were carried out to assess the processing barriers and blockages that restrict competition. In addition, there was little research on the needs of large and small merchants and limited consultation with card processors to, most importantly, determine the specific needs of acquirers. As a result, the Cards Framework was delivered in July 2006 as the only silver bullet SEPA solution. With hindsight it is now evident that a lack of thorough research resulted in a high-level document that lacked clarification and contained many ambiguities. In addition, the exclusion of the international and domestic card schemes from the European Payments Council Committees did little to ensure the Cards Framework buy-in by the key players, as did the lack of a mandate to enforce change.

If the aim of the European Union’s Cards Framework is to enable a cardholder to use their card across the border as easily as they do at home, then the harmonisation project must primarily focus on acceptance. The objective of any common card acceptance process should be to open the cards market to enable particularly acquirers to join schemes and acquire in any nation while easily utilising or interfacing with the domestic market processing infrastructure.

Ask any European Union acquirer if they believe the barriers to full, multi-country operation will be sufficiently removed by the end of 2010 and will enable an all-cards acceptance offer anywhere in the eurozone — the answer will be a resounding “no.” Acquirers must still expect to build and support country-specific delivery infrastructure for at least the next five to seven years, if not longer.

The Cards Framework focuses on commercial structures and intra-eurozone card acceptance at the expense of practical operational and technology changes in each country that could enable common processing rules. Again, with hindsight, if there had been an early focus on detailed procedures and processes in 2003, we would now be in a position to implement and deliver harmonization by end 2010.

Skepticism and Disillusion

It is not surprising that disillusionment has spread amongst those who initially supported the Cards Framework’s objectives. It is now increasingly evident that many of the Cards Framework recommendations are unlikely to be implemented, partly because no one agrees to the definition of compliance with many claiming they have already implemented the requested changes. In addition, several key Cards Framework concepts have been damaged by compromises and limitations in scope.

Perhaps this outcome should not be a surprise. The Cards Framework’s extensive focus on scheme changes had a collateral impact on the stakeholders. Both the European Commission and the European Central bank gradually understood the implications of the Cards Framework recommendations. Common pricing was suddenly perceived as part of the harmonisation plan. Fear of an International Card Scheme (Visa and MasterCard) duopoly and higher interchange resulted in calls for a European Union champion card scheme, a concept outside the original SEPA remit. Statements by stakeholders have attempted to influence the Cards Framework direction, when in reality all the payment sector needs is a set of practical changes to processes, the unblocking of some processor practices and an agreed set of card acceptance standards. In many ways all that was needed was to take the successes in electronic payments (which are standards based) and apply them in the same manner to the cards world.

So where are we now? To many observers, the Cards Framework initiative appears to have stalled. The European Central Bank appears to have recently reached similar conclusions. The European Commission appears unsure over the next step for card pricing. Embryonic European Union card schemes are formulating EAPS, the European Association of Payments Schemes, backed by the smaller banks; and Monnet, a new scheme backed by French and German banks. But their success has been damaged by the European Payments Council clarification that national debit schemes need not now have European Union-wide acceptance. Plans for scheme change and migration appear to have faltered in many nations. Some have placed on hold elements of the SEPA initiative. The card standards initiative has started but most observers believe it will be many years before implementation and their use in practice.

A Prescription for Change

There is, therefore, a pressing need to stand back and rethink the basis of the Cards Framework and to refocus on real-world change that can be delivered. The key stakeholders need to find a means of re-invigorating the Cards Framework. This could happen through a review of governance structures as recently suggested by the European Central Bank. New temporary ownership and management might enable the cards initiative to be repositioned, capitalise on work already completed and enable the SEPA objective to succeed.

Recommendations to Improve

The committee’s specific objectives should be action and deliverables focused with a clear responsibility to get the SEPA cards plans back on course. Specific activities could include:

• To be responsible for ensuring that all committee recommendations are implemented where necessary using the European Commission and the European Central Bank to help mandate change.

• To conduct a survey for each country to redefine the changes needed to implement the Cards Framework. This survey should be inclusive and draw on the views of merchants, banks, processors and schemes to identify all barriers and limitations to acceptance and processing in each country, not just those relating to domestic debit card schemes.

• Based on the survey output, to identify a prioritised, phased list of practical changes in business, operations and processing that card schemes, interbank processors, banks and merchants can implement that will remove barriers and achieve harmonisation and common processing. The objective would be to identify quick hits a well as longer-term change. It should identify those changes that can be initially mandated by banking federations, international and domestic card schemes, and those which may need the support of the European Commission and the European Central Bank penalties.

• To review and develop with representatives from each country the prioritised changes and also to review the progress made and readiness for implementing the Cards Framework. Ask local stakeholders to draw up a country action list and to provide solid commitment to a new set of implementation dates.

• To review the proposed SEPA standards initiative to ensure it reflects the requirements of the market and to draw up a phased plan to accelerate the process. Mandate the implementation not later than end 2012.

• To establish an overarching implementation plan for the Cards Framework, a budget and a clear definition of compliance that can be objectively tested.

If a new structure is needed, how should it be constructed? It’s no question that times are changing. Within the European Union, governments and regulators now realise that free-market competition among banks often works against co-operation and that compliance can often only be achieved through intervention. To be effective, any new structure should have the close involvement of the European Commission and the European Central Bank.

The new structure or Cards Task Force Committee would require the active participation of the European Payments Council and an independent chair nominated by the European Commission. Representation is needed from the banking sector, processors, major card schemes and the retailer/corporate associations. The committee should be limited to 10 members and supported by two or three small working groups. Its objective would be to refocus the Cards Framework and to ensure that a high proportion of harmonization is achieved within three years, using penalties where absolutely necessary to ensure compliance.

So what conclusions can be drawn from this analysis? The banking sector’s voluntary SEPA initiative for interbank electronic payments has been successful and the governance structure adopted has worked well. With hindsight, the SEPA initiative was set at too high a level, assuming that restructuring domestic debit card scheme frameworks would deliver the Cards Framework. For a variety of reasons the detailed barriers to entry have not been researched, fully documented or addressed. In addition, time and attention has been lost through the political diversions of common pricing, the threats from duopoly and the promotion of European Union champion schemes. The implementation model adopted should have been closer to that followed for the successful Credit Transfer scheme backed by an enforcement mandate.

In these troubled times, governments and central banks want rapid change. The SEPA initiative appears to have stalled. Standardisation progress is slow. A new initiative, strong mandates and management structure is now urgently needed to be accountable for the cards plans, in order to refocus on the details and rescue the failing SEPA Cards Framework project.

About the Author

Peter Jones is managing director of PSE Consulting and has more than 36 years of business and IT experience with a major European retailer, a UK clearing bank and payment systems consulting organizations. He is the founder and owner of PSE Consulting, which he established in 1991. He has particular expertise in high- and low-value payments, debit and credit cards, card schemes, interchange, EftPos, cross-border acquiring and eCommerce payments.