Developments in the European Payment Landscape

1
Developments in the European Payment Landscape

• BAFT Conference
• Singapore March 2007

Marcus Sehr
2
Some say

• European payment landscape is still fragmented
• and will remain complex
• and its all about IBAN
• The EURO success story is impressive
• Trade between Asia and Europe is steadily growing
• There are (too) many parties involved
• There are (too) many payment projects going on

3
Some say

• European payment landscape is still fragmented
• and will remain complex
• and its all about IBAN
• The EURO success story is impressive
• Trade between Asia and Europe is steadily growing
• There are (too) many players
• There are (too) many payment projects going on

4
Involved and interested parties in respect to
Payments
5
Some saythere are (too) many projects ongoing
PSD
SEPA
FATF SR VII
TARGET2
IBAN Usage EPC Regulation
EC 2560/2001
(Selected examples)
6
many projects but different focus and
importance
PSD
SEPA
FATF SR VII
TARGET2
IBAN Usage EPC Regulation
EC 2560/2001
Asian Banks
EU Banks
7
SEPA demystifying a buzzword
Intra EU/EEA tomorrow
Intra EU/EEA today
8
migration from national preferences to SEPA
formats
Status quo Diversity Non-cash payments in the
EU(bn transactions, 2004)
The future SEPA schemes

• SEPA credit transfer
• SEPA direct debit
• SEPA card framework
• domestic schemes the exception

Customers will increasingly be able and willing
to use foreign payment services providers
Sources ECB, DB Research
9
Number of payment providers will decrease

• Status quo
• Large number of payment services providers
• catering for domestic customers
• and for domestic payments transactions (gt 95
  of all transactions)
• will give way to ...
• Small number of payment service providers and
  clearing systems
• outsourcing by other banks
• and more SEPA payments

Number of payment service providers 2004
Source ECB DB Research
10
driven by the logic of (payment) markets
High investments
Commoditization
Economies of scale
Client
Sales/ Service
Distribution Bank
Clearing Services SEPA
Distribution- and Transaction- bank
Client
Sales/ Service
Product Management
Processing
Clearing
EU Commission 02/ 06 ..All Payment Service
Provider have to define their position and to
develop new Business models.
11
EPC Resolution on IBAN and BIC

• IBAN became popular with the EU regulation
  2560/2001
• European Payments Council (EPC) resolution
• Interim measures in advance of a future SEPA
  Electronic Credit Transfer scheme
• For intra EU/EEA Payments
• Major impact on the repair charging behavior of
  European Banks
• Often cited but also misinterpreted - purpose or
  lack of knowledge ?

UK Bank in accordance with Regulation
2560/2001EC of the European Payments Council.
UK Bank ALL COMMERCIAL (MT103) WILL ATTRACT AN
ADDITIONALFEE OF EUR 10.00 ....
Italian Bank will reserve itself the right to
reject .. instructions from Banks whose policy
will be not to settle the related claims of
charges
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EPC Resolution on IBAN and BIC IBAN Usage
- IBAN is not required BIC should be preferred
MT 202
1

• IBAN in F59 mandatory
• However, processing without IBAN as Value
  Added Service possible - Potential threat of
  rejects by some banks

MT103 EuroSender EU/EEA Bank F57 EU/EEA Bank
2

• Not in scope of the EPC Resolution, i.e. neither
  handling as Value Added Service nor reject
• IBAN in F59 recommended, but not mandatory
• Potential charging becomes business decision

MT103 EuroSender Out-EU Bank F57 EU/EEA Bank
3
MT103 Other currencySender Any Bank F57
EU/EEA Bank
4

• Not in scope of the EPC Resolution, i.e. neither
  handling as Value Added Service nor reject
• IBAN in F59 may be used if supported by the bank
  of the beneficiary
• Potential charging becomes business decision

• Not in scope of the EPC Resolution. IBAN is not
  used unless the bank of the beneficiary use
  the IBAN standard gt unlikely for e.g. US banks
• Some originator banks still insist wrongly on
  IBAN although the IBAN does not exist. Any use
  of Nostro IBANs instead is not recommended as it
  may lead to rejects/returns, delays, reporting
  reconciliation issues

MT103 All CurrencySender Any Bank IBK EU/EEA
Bank F57 US Bank
5
13
From TARGET1 to TARGET2

• 15 1 National RTGS Systems
• Domestic Cross-Border Traffic
• Interlinked Not Integrated

From TARGET1 To TARGET2

• Single Shared Platform
• Complete Retirement of national RTGS systems

14
its also about access to Central Bank Money
15
TARGET2 Migration Groups and Timeframe
) Bank of England decided to exit.
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EU Regulation1781/2006 (FATF SR VII)

• EU Regulation to implement FATF Special
  Recommendation VII, live since Jan 2007
• Ordering Banks to ensure valid and complete data
  on ordering party
• Intermediary Banks to ensure full delivery of
  ordering party details
• Beneficiary Banks to ask Ordering Bank for
  ordering party details if not provided by the
  ordering bank sufficiently
• Requirements on Ordering Party details differs
  for intra EU payments and payments from/to
  non-EU-countries
• Impact for banks from the Asia Pacific region
• Scope includes all payments to EU (EUR and CCY)
• Investigation fees expected from beneficiary
  banks if ordering party details are incomplete
• FATF and SWIFT field 50f
• Part of the SWIFT release 2007 (October)
• New structured option to fill the ordering party
  field in a SWIFT message
• Should be the best solution to fulfill FATF SR
  VII requirements on ordering party information
• Might become an STP criterion in medium term (in
  the same way like A-format is for bank parties)

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Conclusion

• Imperative for European Banks to focus on EU
  domestic topics
• Candidness for smart solutions
• Low investment appetite for International
  Payments
• Increased desire to establish side charges
• Only prepared and committed providers are not
  captured in that vicious circle
• Pressure for low volume providers to exit
  business before next Investment cycle

PSD
SEPA
FATF SR VII
TARGET2
IBAN
Usage
EC 2560/2001
Asian Banks
EU Banks
Driven by the logic of markets Consolidation of
Service Provider
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Developments in the European Payment Landscape

• BAFT Conference
• Singapore March 2007

Marcus Sehr
19
Backup
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EPC Resolution on IBAN and BIC - Quotes

• Commencing on 1 January 2006, IBAN and BIC will
  be recognized as the only beneficiary customer
  account identifier and bank routing designation
  accepted by banks domiciled in EU/EEA for any
  intra EU/EEA Euro cross-border customer credit
  transfers exchanged between customer accounts
  domiciled in the EU/EEA irrespective of the
  amount of such credit transfers.
• To allow for the complete adaptation of the
  market to these rules, there will be a transition
  period to the end of 2006 during which banks will
  handle credit transfers where the beneficiary
  customer account is identified in a different way
  than by IBAN on an exceptional basis, as a value
  added service.
• Following the transition period referred to
  above, banks sending euro intra-EU/EEA cross
  border customer credit transfers will exclusively
  use IBAN and BIC as beneficiarys account
  identifier and bank routing designation. Banks
  receiving euro intra-EU/EEA cross border customer
  credit transfers with other identification are
  entitled to reject or return them as a matter of
  normal practice. The latter does not apply to
  banks receiving such payments through their
  national clearing system.