Driving the SEPA Train How to Implement the SEPA Cards Framework

1. Driving the SEPA TrainHow to Implement the SEPA Cards Framework EBUG Seminar, Lisbon Wednesday 26th April 2006

2. SEPA - Opening up Europe’s Payments Markets The Story So Far… • Long delays – banks did not deliver on promises • National interest – not EU • Protectionism – not open market • Threats of regulation • Overdoses of politics • Monopolies and duopolies • Major infrastructural projects Lack of progress, not good enough!

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. Agenda • SEPA Background and Content • Overview of SEPA Cards Framework (SCF) • Analysis of Implementation Options • Summary and Conclusions

5. The ‘F’ Word - A Story of Failure… • Failure to achieve EC’s vision • Failure to think EU / euro-zone • Failure to standardise • Failure to inter-operate • Failure to consolidate Over 15 Years of Delay and Vacillation in Delivering an Open and Common Payments Infrastructure… But now we have SEPA

6. sepa At last the SEPA train has left the station 2006 You can be upfront with the driver, or sitting comfortably in First Class, or being thrown around hanging off the back… or left in the Station!

7. “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 SEPAland - The SEPA Vision SEPA will do for electronic payments and cards and what the euro has done for cash

8. European Central Bank – owns broad requirements and timing – responsible as for euro European Commission – owns harmonisation plan – 15 years pressure – legal framework European Payments Council – design/specification – self regulation Key Owners of the SEPA Concept Key stakeholders are merchants, corporates, consumers, government and representative associations

9. Today Tomorrow Euro-Area EEA EU-25 SEPA Scope & the vision for tomorrow

10. SEPA Infrastructure Impacts • SEPA is a major harmonisation project which will replace the fragmented national payment infrastructures • All payments will be carried out using common frameworks,rule books and the new Legal Structure (PSD) • Every citizen, bank, merchant and corporate enterprise will be impacted by the SEPA implementation • SEPA is not about cross border payments, it is about standardising each national market SEPA is the most significant change in EU’s payments in the past 20 years

11. SEPA - EPC Timeframe Feasible for ACH schemes – but realistic for cards?

12. €8-13bn* SEPA – the Size of the Change • Year 2000……… • The euro……….. • SEPA……………………… How do you eat an elephant?……… one piece at a time ….. and customers will be looking for solutions to help digest it * Tower Group estimate

13. Today - 2006 Tomorrow – 2010 ACH – Replace with ETS Schemes and Separate Processing New ETS Common SCT/ SDD Schemes Old ETS Schemes and Infrastructure Replace Old ETS Schemes and Infrastructure Old ACH Schemes and Processing Infrastructure 3 New CSM/ PEACH Separate New CSM/ PEACH 2 1 New CSM/ PEACH Infrastructures Cards - Adapt to SEPA Cards Framework and Separate Processing 3 New CSM/ PEACH New CSM/ PEACH 2 1 Modified Existing Schemes Adapt Old ETS Schemes and Infrastructure Old ETS Schemes and Infrastructure Old Card Schemes and Processing Infrastructure Separate 3 New CSM/ PEACH New CSM/ PEACH 2 1 Card Processing Infrastructure Comparison SEPA Schemes Design Features

14. SCF General Observations • Framework is a multi-national compromise – so is a great achievement • Applies to all general purpose euro payment cards - focus is on debit • Self regulatory framework – not a scheme, lower cost – schemes must “adapt” – banks follow • SCF does not substitute for card scheme rules/regulations • Principle is to foster competition at debit scheme level – but potential for ICS duopoly • Scheme brand/infrastructure unbundling has the greatest potential for change – particularly ICS

15. SCF Impact on Card Schemes

16. SCF Impact on Card Schemes – cont’d

17. SCF Impact on Acquirers

18. SEPA Impact on Debit Card Issuers

19. SCF Key Issues • SCF was the easy bit – how to implement and enforce? • Is scale and scope beyond banks/schemes/EPC? • Created by team of experts within ECB broad requirements • Pressing need for standards and guidelines – terminals POS/host, issuer, acquirer • Need to remove many national blockages and barriers • New operational model chargebacks, merchant accounting, PINS/HSMs Can current structure manage specification and delivery of Europe’s largest ever project – card share €7bn to €8bn

20. European Infrastructure ChangeWhat Does History Tell Us? What structures to use for implementation?

21. Four Strategic SCF Implementation Scenarios • Scenario 1 – Open Market Devolved Strategy (Current) • Scenario 2 – Separate Implementation Only Company (SEPACo) • Scenario 3 – New Infrastructure and Implementation Company • Scenario 4 – Regulated Implementation

22. Scenario 1 – Open Market Devolved Strategy(Current) Schemes sign up to concept and compete, banks make choices. Scheme/infrastructure separation stimulates processor sector. Implementation devolved to national associations, no central co-ordination body. Standards developed by consensus, networks evolve through market demand by processing sector. Current timelines retained. Conclusion – chances of success modest

23. Scenario 2 – Separate Implementation Only Company(SEPACo) Separate governance needed, professionally managed, fully funded SEPACo. Powerful mandate to co-ordinate, lead, plan, monitor, manage. 30-40 staff €20m-€30m per annum. Sets standards, best practice, network architecture, certification/compliance. Operates PMO, owns macro SEPA plan. Negotiates revised time scales - two years slippage. EPC allowed to fine non/slow participants. Conclusion – would work but who pays?

24. Scenario 3 – New Infrastructure and Implementation Company Follows traditional interbank model. NewCo created (includes SEPACo functions), permanent infrastructure to implement SEPA and operate network to link all national debit. Builds network equal to that of Visa/MasterCard, draws in Berlin Group. NewCo sets standards for all aspects. Conclusion – workable but cost/risk

25. Scenario 4 – Regulated Implementation Commission decides will only happen through legislation. SCF turned into a regulation. Highly prescriptive, mandates deliverables and timelines. Includes regulation of interchange and MSCs. Penalties if not achieved. PSD tightened up to strengthen legal framework. Conclusion – an interesting option!

26. Summary Assessment of Scenarios

27. Conclusions - SCF • SEPA Europe’s largest infrastructure project – will impact all • Timeframes highly ambitious, unlikely to be achieved for cards • Europe poor history of major EU wide change (euro excluded) • Current implementation plan suitable for ACH • SEPACo and NewCo unlikely to be funded • Some form of regulation highly likely That’s the way politics goes!

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

29. Peter JonesManaging Director+44 (0) 20 8891 6244peter.jones@pseconsulting.com