The Single Euro Payments Area and payment innovation

The Single Euro Payments Area and payment innovation Johannes Priesemann Head of Payment Systems Policy Division Magyar Nemzeti Bank, 19 November 2004

Two topics: 1. Retail payments: Single Euro Payments Area and payment innovation 2. Large value payments: TARGET 2 2

1. Retail payments - 2 streams: integration and innovation Single Euro Payments Area (SEPA) by 2010 fully established and SEPA services as option for citizens by 2008 In the euro area innovation shall be taken benefit of: pan-European payment solutions should be leading in terms of efficiency and safety 3

1. SEPA: EC regulation Message of EC Regulation 2560/2001 • All payments in euro are domestic payments: Single Euro Payment Area (SEPA) • Regulation covers all payments in euro also in countries that have not adopted the euro as their currency • No price difference anymore between national and cross-border payments for cards (since July 2002) and for STP credit transfers up to EUR 12, 500 (since July 2003) 4

1. Consequences of the EC regulation “From Regulation to a real SEPA” Transparency & Competition Profit margin Loss Profit margin Processing costs Efficiency gain Profit margin Processing costs Efficient pan-European infrastructure 5

1. SEPA : Present state of payments integration Euroarea country: Y Z Z X Y • 12 formats (incl. BBAN) Payment initiation (national standard) reconciliation (national standard) ACH X € Corporate customer • 12 different files Y X € “National payments ” Z Bank € “Cross-border payments ” • 1 file PEACH • 1 format (incl. IBAN) Payment initiation (no standard) reconciliation (no standard) Flows of money & information: € € All euro area banks 6

1. SEPA Objective • Citizens should be able to make payments throughout SEPA from a single bank account, using a single set of payment instruments, as easily and safely as in the national context today. • The Eurosystem’s vision for the SEPA is that all euro area payments should become domestic, and reach a level of safety and efficiency at least at the level of the best performing national payment systems today. 7

1. SEPA for citizens and corporates euro area customer euro area bank Payment initiation (e. PI) € Automatic reconciliation “in the euro area all payments are domestic ” • 1 file • 1 format (incl. IBAN) • all payments Flow of money & information “Credeuro + PEDD” € PEACH € € All euro area banks 8

1. SEPA: Our expectations towards the banking industry Reconfirm the white paper of May 2002 and present a convincing project plan with realistic milestones Define pan-European schemes for credit transfers (Cred/Prieuro), direct debits (PEDD) and cards agree on and employ standards (IBAN) Make national migration plans by mid-2005 Make pan-European instruments available also for national use from 2008 (SEPA for citizen) 9

1. SEPA: Our expectations towards the banking industry Complete SEPA by consolidating national infrastructures into a few remaining PEACHES by 2010 (SEPA for the infrastructure) 10

1. SEPA: Central Banks’ contribution Assist national banking communities in making national migration plans by mid-2005 Contribute to the local implementation of SEPA objectives Monitor progress of the national migration to SEPA for the citizens 2008 and SEPA for the infrastructure 2010 11

1. SEPA: List of relevant publications The Eurosystem has pushed for SEPA since 1999 Improving cross-border retail payment services in the euro area the Eurosystem’s view, September 1999 Improving cross-border retail payment services Progress report September 2000 Towards an integrated infrastructure for credit transfers in euro, November 2001 (ECOFIN report) Towards a Single Euro Payments Area 2 nd Progress report, June 2003 and a 3 rd Progress report expected to be published still in 2004 12

1. Innovation leads to diversity of options location & needs Private consumer Sports, hobby, leisure Gastronomy Shop Working place Transport & travel Desktop IDTV Magnetic card & reader Laptop Mobile Phone Organizer Fixed analogue line ISDN Other digital devices (flash, stick, cam, player, contactless chip console …) E-Mail communication networks RFID Smart card & reader Infrared Radio Frequency (Ir. DA) Bluetooth Mobile networks (GSM, GPRS, UMTS) WAP World Wide Web ATM Kiosk PKI certificate Fixed high-speed line (x. DSL) Means of payment (deposits, e-money, others) Wireless Local Area Network clearing & settlement SMS, MMS CLS SWIFT PIN etc. Biometric access Home Interactive TV access devices / initiation Home National Direct Debit Credit card processing Pre-funded Debit card processing Gross settlement Invoice & debit Data & digital goods providers Netting National ACH PE-ACH Pay later Real time Batch processing PEDD CREDEURO National Credit Transfer counterparts Government Service providers Retailers, merchants, outlets Other persons Banks/ financial services 13

1. Innovation raises questions of public interest Cost-benefit / risk distribution? Consumer protection? Level playing field for all EU countries? Merchant interests? Addressing changes in transaction needs? Safety? Core Principles Compliance? Availability? Social exclusion? Privacy? Substitution effects? Competition between different institution types? Efficiency? Agenda? Lisbon Shadow economy? Changing preferences / habits? Redeemability? Externalities? Monetary order? Trust in currency? Terrorist financing? Money Laundering? Network effects? 14

1. Observing payment innovation Relative use of cashless payment instruments in EU-25, according to total number of transactions (2002 figures) B 2 C, ne Card-based e-money /server Cheques -based 1% 15% Paper-based P 2 P, B 2 C, B 2 B; Direct debits 23% Truncation & substitution w: P 2 P B 2 C, G 2 C… (trust/liability requirements) P 2 P, B 2 B, new: integrated B 2 C Credit transfers 30% Credit/debit cards 31% B 2 C (e-commerce, cash substitution), new: P 2 P Blue Books addendum incorporating 2002 figures (2004) 15

1. ECB activities as innovation-related catalyst i. e. improve and facilitate co-ordination, provide analysis and information • Articles, issues papers, events, newsletter “Payments and Settlements News” (P+S-N)” • Re-launch of the electronic Payment Systems Observatory (e. PSO, www. e-pso. info) in 2003 • Offering online databases, discussion forum • Work to improve statistics (beyond Blue Book), first results envisaged next year • Facilitate the development and adoption of EU-wide standards for the whole payment cycle • Single Euro Payments Area (SEPA) - observer at the e and m payments task forces (EPC) 16

2. The reasons for building TARGET 2 • Users’ request for more harmonised service level • Cost recovery problem • Adaptability problem • EU enlargement • AMPLIFIES Credibility of the Eurosystem 17

2. Current status and future milestones 2003 2004 2005 2006 2007 Definition phase General functional specifications (GFS) Detailed functional specifications (DFS) Development phase Testing phase (technical implementation) Customer Migration Process Tests with users: - Credit institutions - Market infrastructures - Central banks = country window (wave) 18

2. TARGET 2 features and functionalities (I) What will remain? • Direct business contacts between central banks and their banks • SWIFT-based messaging • No upper or lower value limits • Broad customer base 19

2. TARGET 2 features and functionalities (II) What will be new? • “Single platform” system • More robust and resilient system • Harmonised interfaces for the connection of the users to TARGET 2 • Same core service for all TARGET 2 participants • Single price structure • Flexible liquidity management 20

2. TARGET 2 features and functionalities (III) “Single platform” system • all central banks will use the same technical platform • Central Banks remain responsible for the accounts of “their” banks and for the business relationship • Cross-border transactions processed in same way as domestic transactions • Availability of “TARGET-wide” liquidity saving features 21

2. Oversight of TARGET 2 • Project is being reviewed against the Core Principles for systemically important payment systems (BIS “CP”) • Initial assessment of the design of TARGET 2 project against Core Principles is ongoing (CP III, IV, V, VIII and IX) 22

2. Information on TARGET and TARGET 2 • • • TARGET brochure, October 2004 http: //www. ecb. int/pub/pdf/other/target_brochure_update_2004 en. pdf Future developments in the TARGET system (ECB Monthly Bulletin April 2004) http: //www. ecb. int/paym/pdf/target/future/mb-target 2 -future. pdf TARGET 2 brochure, October 2004 http: //www. ecb. int/pub/pdf/other/target 2_brochure_update_2004 en. pdf TARGET 2 presentation – Sibos, October 2004 http: //www. ecb. int/paym/html/sibos 2004 target 2 presentation. pdf Article on TATGET 2 – Sibos, October 2004 http: //www. ecb. int/paym/pdf/target/future/sibos_article_en. pdf 23