The Impact of the Single European Payments Area (SEPA)

1. The Impact of the Single European Payments Area (SEPA) IntellectUK 30 March 2006

2. Opening up Europe’s Payments Markets, The Story So Far… • Long delays – failure to deliver on promises! (1991 – 2001) • National interest – not EU! • Protectionism – not open market! • Threats of regulation! • Overdoses of politics! • Monopolies and duopolies! • Major infrastructural projects! SEPA – the most significant change in EU’s payments in the past 20 years

3. “Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly and applying the wrong remedy” Sir Ernest Bevin, 1930

4. The Pressing Need to Harmonise Europe’sChaotic Payments Landscape • Few common standards and processes for both ACH/electronic and cards • Widely different ACH and card scheme commercial practices • Variable card inter-operability (Benelux, Germany, Scandinavia) • Many national wholesale barriers and inhibitors to entry • Many inefficiencies - processing over capacity Ideally SEPA should not be a political initiative – it is a long overdue change in banking infrastructure

5. The SEPA Triumvirate Banks Requirements Timelines International Card Schemes ECB Domestic Schemes ACH’s Processors SEPA Schemes/ Framework EPC Businesses Consumers New Legal Framework/ PSD EC

6. “SEPA is achieved when people can make payments through the whole euro area from one bank account or by using one card as easily and safely as national payment is conducted today … the choice of bank or location should make no difference … all euro area payments should become domestic” Gertrude Tumpel-Gugerell, ECB, September 2004 ECB rationale for SEPA: Current account access by card anywhere Common processes for all payments (not just cards) Improved banking competition ECB’s SEPA Vision 2004 SEPA will do for electronic and cards payments what the euro has done for cash!

7. The SEPA / NLF / PSD Headline Features EPC – SEPA – Self Regulation EC – Payment Services Directive • Removal of national boundaries – SEPA zone becomes “domestic market” • One ‘replacement’ common ACH scheme • “Adaptation” for card schemes • Separation of “schemes” from “delivery systems” • Common governance rules/regulations • Common standards for all payment instruments interoperability • Removal of barriers, inhibitors and harmonisation of process • SEPA compliant cards (EMV), terminals, settlement infrastructures • Open membership of all ACH’s, ATM and card schemes • Displacement of cash to cards • Enhanced competition between national payment markets by opening up markets • Simplified and fully harmonised information and rules on contract terms and provisions • Displacement of divergent national rules, customs and practices • Legal harmonisation of payment settlement • Increased market transparency for both providers and users • Common rules for execution times, value dates and refunds • Standardised rights and obligations for providers and users of payment services SEPA zone = euro zone 12 + euro systems in 25/29 countries

8. Some Key SEPA Questions • Can the mixture of self regulation, directives and threats deliver? • Can the EPC implement SEPA without enforcement mandates? • Will the creation of a common “replacement” ACH scheme produce a monopoly utility? • Will card scheme “adaptation” lead to a duopoly in the cards business and displace national debit? • How will the ICS and domestic schemes adapt to scheme/network separation? • Will the EU’s 25+ interbank ACH/card and processors survive? • What does SEPA offer to the end user – corporate, merchant, consumer? Answers to some, but not all follow!

9. Key SEPA Timelines Ambitions are high… • All banks and schemes to commit to SEPA mid 2006 • Initial deliverables 2008 • Complete Implementation 2010 But… • Two ACH schemes well developed/advanced • Planning for development and implementation commenced for ACH • No business/technical specifics or standards for cards - little planning • Implementation devolved to each euro nation Complex high risk and High Cost Project - €8bn to €12bn

10. SEPA - European Banks Perspective • Large support - perceive substantial benefits long term • Banking Associations and Savings/ Co-op banks cautious/fearful • euro-zone worried over competitive disadvantages unless participate – but see non euro-zone with lower costs • Price transparency, lower cost products encourages switching • Increased regulatory burden and new mandated rules add to operational costs • Lower revenue streams from ACH/cards • Substantial costs – business case not clear Some major concerns and issues to be resolved

11. SEPA – Typical Bank Strategies - PSE Feedback • Option 1 - Accept as mandated change and implement at lowest cost • Option 2 - Delay and seek mini SEPA work arounds • Option 3 - Leverage SEPA opportunity – develop new “SEPA” domestic and multi-country propositions (300m market) - build new common platform: • new account products – domestic/EU wide features • multi country workers/students products • high net worth – cross border home owners/tourists • new large corporate products – single relationship • cross border trading – small corporate products – lower risk • online/e-banking • Build new acquiring processing platforms – replace old, attack new open market • Develop white label payment processing services for smaller banks • Plan for increased M&A – common platform will support multiple nations Plus implementation of SEPA infrastructure changes

12. SEPA - International Card Schemes Opportunities • Creation of two new commercial businesses, new revenue streams • Potential for new and value added processing products – multi brand • Greater scheme focus on member service, standards, processes Impacts • Major impact - separation of scheme from processing (see recent EC Incentives Paper) • Major growth of debit market share – potential duopoly • Loss of mandated use of networks (VisaNet /MCI Net) • Potential for reduced scheme revenues • New governance structures • Potential to undermine global frameworks and damage product development Many uncomfortable impacts – potential to radically change EU ICS structure

13. SEPA – 20+ Domestic ACH / Debit Card / ATM Schemes Opportunities • Potential to become pan-EU schemes • More efficient, lower cost operations, new products/services Impacts • Loss of national ACH and debit card schemes • Migration to ICS debit brands • Open membership – any bank/player • New SEPA scheme rule books/frameworks – centrally controlled • Separation of schemes from processor – reduced revenues/ resources • Increased transparency and regulation • Survival in the new competitive SEPA domestic market – for most unlikely • Migration to four party card model (Germany) Many threats and challenges – one or two will survive!

14. SEPA – 20+ Interbank ACH / Card / ATM Processors Opportunities • Windfall revenues to members from privatisation / M&A • New alliances and partnerships for ACH’s and cards • Improved efficiency, lower costs, increased competitiveness • New pan-EU products / services / clients • New opportunities as C.S.M.’s / PEACH’s Impacts • Suddenly players in wider SEPA market – high cost of commercialisation • Potential for interbank processors M&A / sale /JV’s • Short time period to adapt / adjust – cost / skills/ resources • High cost SEPA implementation (new platforms needed?) • Members breakaway / in-house / new solutions SEPA already happening – potentially 7 major players in 5 years

15. SEPA - Merchant and Corporate • Rapid growth of pan-EU acquirers/ processors – increased competition – lower prices • Major changes to card acceptance, terminal applications, bank interfaces – cost of implementation • Fewer bank relationships, pooling single file submissions and increased remittance data – lower costs • Lower merchant service charges and common interchange – lower costs • Common ACH schemes for direct debit, credit transfers – domestic and cross border – improved efficiency • M&A and consolidation in ACH/ processor / vendor sector – lower prices, increased competition Potentially high cost of change, but lower operational costs

16. SEPA - Supplier Sector • Few have SEPA strategies – many “vapourware” products • No business / technical specifications or standards yet - what has to be done? • Major opportunity for new software products and systems integration contracts • Lower cost common products – old multi country solutions become obsolete • Potential surge in demand for new switches, back office clearing / settlement platforms • Potential for interim interface adaptors / boxes • Increased M&A in supplier sector Of €10bn cost – significant share to supplier sector

17. SEPA - Consumer • Much improved domestic and cross border payments SLA’s and processes • Current account usable in any nation in SEPA zone – common redress processes • Ability to make payments anywhere across EU – direct debits / credits / transfers • Improved services for mobile workers, students, holiday makers/home owners • EMV Chip/Pin in all EU markets – common experience at the POS • Increased competitiveness, choice and longer term lower costs • Migration out of cash to electronic/cards Benefits will take time to be recognised by consumers

18. SEPA Impacts - Summary and Conclusions • Very substantial impact on all players – already happening – deadlines will slip for cards – ACH should meet dates • SEPA + PSD will create open, competitive market, new standards and processes • Bank winners – build new compelling propositions. Losers “sit on their hands” • Major benefits for large merchants, corporates – good benefits for consumers/SMEs • Schemes losers, ICS; domestic debit – ACH schemes disappear – very significant change • M&A will rapidly consolidate interbank and commercial processor sector – 25 to 7 • Processors, suppliers, vendors – many new and lower cost products/services Major change – much fall out – eventual outcome uncertain for many players

19. The Politics ContinueSome ECB and EC Statements “The Eurosystem urges the EPC to approve the rule books in March 2006. It is vital for the SEPA project that the present achievements be frozen and that they cannot be continuously changed” ECB Fourth Progress Report on EPC/SEPA – 17th February 2006 “There has been little discussion with regard to the international card schemes on the principle of separation between schemes and infrastructure – the question of how this will be enforced ….. has not been addressed by the EPC” EC Consultative Paper on SEPA Incentives - 13th February 2006 “The Commission and the ECB have both expressly reserved the right to propose legislation ….. (where/to): national migration to SEPA is unlikely where the performance of future SEPA products falls below those of existing national practices; ensure effective competition in network industry we need paper standard setting and governance arrangements? “ Commissioner McCreevy to French Banking Federation – 21st March 2006 EC – a paper tiger – unable to mandate standard

20. “Politics is not the art of the possible. It consists of choosing between the disastrous and the unpalatable” J K Galbraith, 1969

21. Peter JonesManaging Director+44 (0) 20 8891 6244info@pseconsulting.com