Table of contents
1. The Single European Payment Area (SEPA)
2. The individual payment sector
3. The bulk payments sector
4. Why does harmonization take so long?
Appendix: slides of the presentation held on the 11th of May 2005 12
According to Art. 56 of the Treaty of the European Communities (EC Treaty) the Common European Market enjoys since its establishment in the year 1993 free movement of capital. Since 1999 the monetary union between 12 EU-states is in operation, since 2002 the euro exists as money.
This essay will for the sector of payment and settlement systems within the Common Market examine their situation and development towards the common goal of free movement and discover the obstacles. The situation and development assessment will be divided into the individual payments sector and the bulk payments sector with.
Finally the striking question is: Why does it take so long to integrate the payment sector?
1. The Single European Payment Area (SEPA)
The initiative for a “Single European Payment Area (SEPA)” was launched in 2002 by the European Banking Association (EBA), which was founded by European and other banks to establish all activities in connection with using the euro, especially in payment.
This initiative is designed to overcome the fragmentation of the payment cultures in Europe, to abolish the divide between domestic and cross-border payment between Member States and to help in designing a common infrastructure to achieve these goals. (Bundesverband Deutscher Banken: 2003, p. 12) The strategic goal is to make cross-border payments as efficient as domestic ones. (Karasu: 2002, p. 445) Since cross-border-payments are still much more expensive than domestic ones it is important for the banks competitiveness to cut costs. So far cross-border-payments only amount to a very low percentage, 2 % in 2001, but still contribute almost as much to the banks costs as domestic ones, 2001 with 49 %. (DZ Bank: 2001) At the same time they contribute a lot to the profit, e.g. in the bulk payments sector in the year 1999 with 35 % (Krupp: 2002). This contribution will naturally decrease with lower prices according to EU legislation.
Since the European Banks for individual cross-border payments already in the year 1999 had developed some efficient systems, the initiative is mostly focusing on the bulk payments sector.
The establishment of SEPA is supposed to take place in three phases. The first was completed until July 2003 with the introduction of straight-through-processing (STP) standards for all levels and actors in payment. This concept wants to establish a system in which manual corrections are almost unnecessary because electronic processing is far developed. Furthermore in this phase the EU regulation 2560/2001 on cross-border bank transfers needed to be implemented. Also the development of a common infrastructure and common standards was started. (Karasu: 2002, p. 448) One outcome is the Cred-Euro-Convention on rules for bank transfers. (Dosis: 2003, p. 966). With this convention banks voluntarily oblige themselves to process a transaction with 3 working days if it fulfils the STP-criteria IBAN and BIC. (Bundesverband Deutscher Banken: 2003, p. 62)
The second phase is to be finished until December 2005. Here the common infrastructure and standards need to be completed and implemented, so that a genuine European system can start operating in 2006, but still national systems are not to be abolished. One cornerstone is the establishment of a pan-European Clearing House. (Karasu: 2002, p. 448) With further details and implications of the first and second phase will be dealt in chapter 4.
The abolishment of national payment systems is the aim for the third phase. The end of this process is expected for 201x. Only after completing SEPA the Common Market in payment can be considered as realised. (Karasu: 2002, p. 449) For the whole process to establish SEPA a ten-years-period seems to be realistic. (Bundesverband Deutscher Banken: 2003, p. 7)
As an institutional background for establishing SEPA the European Payments Council (EPC), composed of about 50 banks and bank associations, was established in 2002. Its task is to develop concepts for establishing SEPA and to facilitate the co-operation with the European System of Central Banks (ESCB). Proposals are developed in seven working groups on customer/business requirements, infrastructure, STP, cards, cash, security and law. The EPC is in payment issues as well the main contact for the European institutions. (Dosis: 2003, p. 966 and Bundesverband Deutscher Banken: 2003, p. 11, 58)
2. The individual payment sector
This sector is characterised by typically large-value transfers, often by central banks for monetary reasons, but also by big companies. For this type of payments speed is the most decisive factor because of the greater demand for liquidity and the need to take immediate effect especially for monetary transactions. (Karasu: 2002, p. 442)
Already with the introduction of the common currency systems for processing payments of this type were established. This is why cross-border individual payments are already as fast and reliable as the respective domestic ones. (Bundesverband Deutscher Banken: 2003, p. 20) The respective major systems are TARGET and EURO1.
TARGET is based on the settlement systems of the national banks. These settlement systems belong all to the concept of RTGS, in which transactions, if they are covered, are processed individually in real-time and become immediately final and irrevocable. EURO1 works with a netting-system in which transactions are accumulated during the day and only the end-of-day-net-balance is settled by every participant. Transactions become final and irrevocable not until this end-of-day-settlement. While in TARGET the liquidity costs are higher, EURO1 implies the risk of a chain reaction because of participants missing ability to meet its obligations. (Angelini: 1994, p. 854)
As the first European cross-border system EURO1 was established by the EBA in 1998 on the basis of the ECU-settlement platform from 1987. It has currently 74 direct members and 38 connected to it as subsidiaries of member banks and is located in Paris. (Bundesverband Deutscher Banken. 2003, p. 31, 41, 42)
TARGET started operating in January 1999. TARGET is based on the national RTGS-systems and the European payment mechanism of the European Central Bank (ECB). It has currently 74 members and more then 9000 banks can be directly addressed. Moreover all monetary transactions of the ECB are processes through TARGET.
As a follow-up of TARGET from 2005 on TARGET2 will be operating as a common, centralised platform especially for the new members states which are not able to run their own RTGS-system. (Bundesverband Deutscher Banken: 2003, p. 32, 35, 40)
TARGET and EURO1 are both working with SWIFT services. SWIFT provides for every member bank a BIC, so that banks can be addressed unambiguously. (Gramlich, Ludwig: 2000, p. 1239) Another common feature is the fact that there is no need for correspondent banks anymore. In this systems banks needed to hold accounts with each other for settlement. (Danmarks National Bank: 1999, p. 41)
 The term “payment” refers to the relation between payee and receiver of a payment, while “settlement” refers to the clearing of the payment transfers between the respective banks. In the essay the difference will not be of some importance only in the retail sector.
 IBAN = Internation Bank Account Number is as standardised number which enables to identify clearly an account; BIC = Bank Identifier Code is as SWIFT service which enables to clearly identify a financial institution (Gamlich: 2000, p. 146, 727)
 Trans European Automated Real-Time Gross Settlement Express Transfer
 Real-Time Gross Settlement
 Society for Worldwide Interbank Financial Telecommunication