Title: Have Banks Lost the War on Regulation
1Have Banks Lost the War on Regulation?
- Essentis Euronet Software Executive Conference
- 14th May 2008
- Paddington Hilton
- Peter Jones, Managing Director, PSE Consulting
2- The quickest way to end a war is to lose it
- George Orwell, Shooting the Elephant, 1950
Evidence banks have lost the war against
regulation
3Topics for Today
- The Growth of Regulatory Interventions
- EU Interchange Outcomes and Impacts
- EU Payment Services Directive (PSD) Harmonisation
of Legal Frameworks - How Banks may Succeed or Fail
Banks are struggling to adjust to the
transparency needs of customers and citizens
4Why the Regulators Do Not Like Banks!
- Public antipathy and unease reflected by
regulators - Banks perceived to operate in clubs/cartels,
exclude outsiders, operate without consultation,
impose fees - Long history (12 years) of European Commission
pressure for openness and improved service cross
border no result - Listen to strong anti-bank consumer, merchant,
corporate lobbies - Recognition that banking fees very high in
several EU markets
Banks to blame, complacency, lack of listening,
slow moving
5The Regulators Key Targets!
- Common EU credit and debit card interchange (MIF)
fees and resulting MSCs - Cross border intra-EU transfer fees and service
levels - Bank account and annual card fees pricing and
transparency of charges (bundled fees), Dynamic
Currency Conversion (DCC) - Membership and access to card schemes and ACHs
- Penalty fees and fines often combined with free
banking - Terms and conditions accounts, cards and
information - Liability, consent, authorisation, unauthorised
use - Service levels, clearing and settlement periods,
security
and more to follow!
6Some Important Worldwide Regulatory Events
- EU Regulation 2650/2001 (cross border payment
fees) clear statement harmonisation imposed
pricing by European Commission - Resulting SEPA project has created more change in
EU - EC harmonisation of payments legal framework
the Payment Services Directive (PSD) - MasterCard and Visa MIF both under investigation
within EU - Spanish banks obliged to significantly reduce
interchange - Australian regulatory action significantly
reduced interchange - Interventions in Latin America (Mexico) -
interchange - In US many group merchant legal actions against
card schemes
7USA Recent (April) ProposedRegulation of Credit
Cards
- Prevent interest rate increases on existing
balances - Outlaw fees for account opening
- Outlaw spend allocation to high rate balances
- Outlaw interest charges on late/over limit fees
- 45 days notice of an interest rate change
- Interchange set by great and good panel
Clear evidence of poor US practice also seen in
EU
8EU Regulatory Interventions Since 1999
30 interventions excluding mandated voluntary
change of SEPA and card schemes
9Why Banks are Concerned
- Worldwide growth of intervention
- In Europe SEPA and PCI - need to implement
voluntary mandates - Banks, card schemes and interbank processors
concerned over future shape of cards business - Lack of consistency and certainty of regulation
damaging - Declining revenues and increasing costs during a
period of falling profits and rising risks - IT/project resources (up to 70) committed to
regulatory change stifles innovation
Banks weak at communicating and defending their
position!
10Does Regulation Work?
- Many populist regulators leverage bank
regulation for political reasons many
mis-statements - But
- Law often fails to understand card frameworks
- Harmonisation often an end in itself
- Efficiency and displacement of cash/cheques not
primary objective - Consumers seldom benefit from forced reductions
in fees - Result
- Few successful attempts to fit complex market
into competition straightjacket Australian
regulators semi-withdrawal - Many anomalies, inconsistencies and unintended
consequences - SEPA for Cards although voluntary, now
increasingly perceived as unsuccessful
Some evidence that when challenged regulators
change opinions
11Regulatory Over Kill in EU
Main Players at European and National Levels
European Level
European Central Bank
Lobbies BEUC Eurocommerce
European Commission
Banking Associations EBA EBF EFMA ESBG
Schemes Visa MasterCard Amex Diners Club
DG Competition
DG Internal Market
Retail Banking Enquiry
Payment Services Directive
National Level
Local Consumer and Retailer/Merchant lobbies
National Central Bank ECBS FSA
NCAs
Local ICS Schemes National Debit Schemes
Issuers
Acquirers
Local Bankers Association
National Processors and TPPs
A growing regulatory governance structure
12DG Competition on MasterCard/Visa Intra MIF
Likely Impact
- Intra European MIF outlawed from mid 2008
- MasterCards confrontational approach EU less
amenable - Concept of 3 to 5 party model may be perceived as
a work around - Visa has potential first mover position agree 5
year deal with stepped reductions as in 2002 - Credit to fall to 0.5 and debit to lt0.10 per
transaction PSE speculation - EAPS excluded scheme of scheme bilateral
arrangements - Monnet unknown
EC appears to have recognised the damaging impact
of implementing common MIF
13Painful Impact of Reduced MIF
- Issuer Impact
-
- Reduces bank account revenues, increase in
consumer fees public issue France particularly - Damages growth in credit card revolving and usage
- Damages loyalty reward schemes
- Damages growth of cards in developing markets
- Reduces revenues for investment in new product
features and innovation - Pressure to move to higher interchange based
schemes
- Acquirer Impact
- Lower MIFs reduces MIF to acquirer fee ratio
thus reducing basis of charge - Increased acceptance of cards by merchants in
markets where MSC rates fall - Damages on us revenues so on us discounting
reduced - Drives acquirers to unbundle fees and charge
separately for all service components - Very damaging impact on three party scheme MSCs
(Amex/Diners)
14The PSD Regulatory Nightmare!
- PSD - the first attempt to implement a harmonised
legal payments framework for 29 nations - Major change to the way payments transacted -
impacting 450m people and 25m corporates - but many banks have yet to start planning
- few have examined legislation in detail
- interbank and bank associations slow to lobby
for local variations
Are banks once again heading for an
implementation nightmare?
15PSD Scope
- EU law December 2008 implement by 1st November
2009 6-7 year gestation - Impacts banks, mutuals, e-money issuers, post
offices, giros - Common EU legal framework for payments - maximum
harmonisation directive - All EU payments, all currencies except cash and
cheques - Focus on customer protection the relationship
between providers and users of payment services - End to end payer and payee relationship -
Conduct of Business Rules - Exclusions for large corporate users but may
encompass SMEs and micro business
Improved customer protection and transparency,
opens up markets, creates level playing fields,
improves efficiency
16Why the PSD Will Keep You Awake at Night!
- Payments Institutions new non-bank, lightly
regulated competitor - Burden of Proof/Liability Shift on proof of
transaction authorisation and completion moves
from the consumer to the bank - Extended Cancellation Banks must retain data on
payment and consent for at least 13 months
increase in liability and have ten days to refund - Information requirements impact Terms
Conditions for all payments to and from current
accounts, savings accounts, mortgage accounts, as
well as all debit and credit card products - Unbundling The aggregation of charges/fees etc
into a single fee is prohibited - One Day Settlement Timeframe with a maximum of
three days up to 2012
Additional data, improved service, shorter
timeframes significantly increase bank costs
17Lowering the PSD Stress LevelsNeed a standard
methodology
- Strategy Overview
- Competitors positioning, interbank initiatives
early or late mover new non bank competitors - Model impact on pricing and costs revenue
losses - Build competitive edge, assess increased risks,
liabilities, regulation - Impact Assessment
- Review PSD clause by clause with departments and
legal - Assess end to end payment instrument set but also
product - Impact on corporates, SMEs/micro businesses
- Documentation and customer communications
- Data retrieval, faster access, new redress
procedures, changes to security - Standard Implementation Framework and Resources
Extent, scope and cost of work should not be
under estimated less than SEPA but still
significant
18How to Minimise the Damage for Banks
- Understand the long term challenges posed by
continued regulatory action - Accept transparency and redress and build into
offers - Be ahead of the regulator and implement best
practice now - Campaign to displace cash to offset revenue
losses - Consider outsourcing or consolidation to cut
costs - Review merchant relationships and pricing menus
Of most importance is growing volume, displacing
cash to offset revenue reductions
19Can Bankers Fight Back?
- Winning Strategy
-
- Nations with strong banking associations lobby
government - Dialogue with EC-DG Competition understand each
other - Fully implement the PSD
- Campaigns to change key opinion formers views
- Change and simplify governance structures
- Deliver consistent message via one organisation
- Losing Strategy
- Do nothing accept interventions as inevitable
- Communicate by press release
- Reluctant implementation of PSD
- Continue passive reactive approach
- Continue fragmented multi institutional approach
- Continue to allow communications free for all
Largest EU banks opportunity to have
significant impact
20Final Conclusions
- Future many unknowns and challenges clash of
visions banks, regulators, public opinion - Regulation here to stay and becoming more
demanding - Negative view on MIF - significant reductions but
not abolished no common - MIF outcome a five year deal lead by Visa
- Issuer, Acquirer, banking revenues damaged -
costs reduced to maintain profits - No silver bullet solutions
- EU a regulatory test bed big, unanswered
question is the speed of change largely
dependent on PSD and SEPA for Cards outcomes
Banks have lost the way issue now to comply
21- Distrust all in whom the impulse to punish is
powerful - Nietzsche, 1883
Regulators have talked tough in past and appear
determined to act tough in the future!
22Peter Jones 44 (0) 20 8891
6244info_at_pseconsulting.com