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THE EUROSYSTEM'S VIEW OF A …
Tags: cash withdrawal, circulation, complement, compliant, current situation, europe, european citizens, eurosystem, executive summary, implementation, issuance, merchants, obstacle, payment cards, segmentation, sepa project, visa,Pages: 14
Language: english
Created: Mon Nov 20 09:48:14 2006
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THE EUROSYSTEM'S VIEW OF A
"SEPA FOR CARDS"
EXECUTIVE SUMMARY formerly resulted in the national
segmentation of the euro area have been
There are currently more than 350 million cards eliminated. In particular, there is no obstacle
in circulation in the euro area, which are used for merchants to accept any payment cards
to make more than 12 billion payment compliant with the SEPA Cards Framework
transactions and 6 billion cash withdrawal (SCF).
transactions per year. The Single Euro Payments
Area (SEPA) project will have a tremendous THE SEPA CARDS FRAMEWORK
impact on the card payment industry, and the
Eurosystem's stance will be critical in helping The SCF has been adopted by the European
the market to move in a direction which Payments Council (EPC). While acknowledging
maximises the benefits for Europe's citizens. the usefulness of this document, the Eurosystem
however considers that the SCF is rather general
THE CURRENT SITUATION IN THE EURO AREA and leaves too much room for interpretation
concerning practical implementation. Moreover,
Currently, there is at least one national card the Eurosystem is concerned that the
scheme operating in each euro area country. To implementation of a SEPA for cards may lead
allow cards to be used outside the country of to increases in card fees and could thus be
issuance, national cards are often "co-branded" paradoxically detrimental to European citizens
with Visa or MasterCard. When the card is used and merchants. In response, this report seeks to
within the country of issuance, it is usually the complement the SCF by clarifying a number of
national brand which is activated, whereas public policy provisions.
outside the country of issuance (within the euro
area or beyond), the international brand is used. Ideally, citizens should be able to use their
In Europe, national card schemes are generally cards anywhere in the euro area. For cardholders
very efficient and relatively inexpensive for and merchants in particular, conditions should
both cardholders and merchants. not differ within and between euro area
countries. The SCF defines three options that a
THE EUROSYSTEM'S VIEW OF A SEPA FOR CARDS card scheme can follow in order to offer SCF-
compliant products (these options may also be
A SEPA for cards will have the following combined):
characteristics:
1) replace the national scheme by an
1) consumers can choose among a diversity of international scheme (provided the latter is
competing payment card schemes that do SCF-compliant). In this case, co-branding is
not have a pre-assigned priority in use at no longer needed, as cross-border and
point-of-sale (POS) terminals; national transactions are automatically
covered by the same schemes;
2) there is a competitive, reliable and cost-
efficient card market, including service and 2) evolve through alliances with other card
infrastructure providers; schemes or through expansion to the entire
euro area. In the case of card scheme
3) all technical and contractual provisions, alliances, the participants could agree, for
business practices and standards which had example, on mutually accepted relevant
ECB
The Eurosystem's view of a "SEPA for cards"
EN November 2006 1
brands. Should a scheme be expanded to the schemes have functioned with very similar
euro area, the cards in the scheme could be business models, with relatively high cost
issued and acquired by banks and accepted structures and high interchange fees, which
by merchants located anywhere in the euro leads the Eurosystem to fear that competition
area; limited to these two systems would be
insufficient to maintain the present low level of
3) co-brand with an international card scheme fees in Europe. Additional worries are triggered
(as is already the case in most countries by uncertainties about the governance of the
today), provided that both schemes in two systems. For reasons external to Europe,
question are SCF-compliant. MasterCard has abandoned the user-driven
model in favour of a shareholder-driven
The Eurosystem expects national card schemes solution, and Visa has recently announced
to define their strategy as soon as possible, similar intentions. In a market with insufficient
either by elaborating a business plan to become competition, such a decision would lead to
SEPA-compliant, or by joining an alliance upward pressure on fees. However, Visa has not
which will elaborate such a plan. replaced its user-driven model in Europe and
this may stimulate competition, since the
A SEPA FOR CARDS: ISSUES AND CHALLENGES governance of the two international schemes
will henceforth follow two different models.
Option 1, i.e. the replacement of a national However, Visa Europe's decision is too recent
scheme by an international one, requires that to be thoroughly assessed.
the international card schemes define and
implement a new unified card service for the Co-branding, i.e. Option 3, is already widely
entire euro area. used today by national schemes. Co-branding
offers banks the possibility of providing a
Several banking communities envisage sooner single service to cardholders and merchants
or later abandoning their national schemes and throughout the euro area. However, co-branding
moving their business to the international card as a solution would merely perpetuate the
schemes. The decision to close national card present situation, whereby a multiplicity of
schemes and replace them with an international schemes are protected from competition by
one may be driven by the following two national borders. If most schemes were to opt
considerations: 1) this represents a quick and for co-branding and if this situation were to
easy way to adapt to the SCF, and 2) this is an become permanent, SEPA would neither benefit
attractive solution to banks as international from economies of scale nor from competition,
card schemes typically apply higher interchange as national schemes would most probably retain
fees than national schemes (and the latter tend national business, and only cross-border
to be partly retained by the banking system). transactions would be routed through
The Eurosystem is however concerned about international card schemes. Therefore, even if
such an evolution, as this could lead to an all participating schemes are SEPA-compliant,
increase in the fees paid, in particular by co-branding cannot represent the only or even
merchants, which directly contradicts the the main long-term solution for SEPA (although
objectives of SEPA. While the Eurosystem it could help banks to fulfil their SEPA
welcomes the willingness of Visa and objectives for 2008 and 2010).
MasterCard to offer domestic card services for
the euro area, it is deeply concerned about a THE NEED FOR A EUROPEAN CARD SCHEME
possible evolution whereby the two international
card schemes progressively become the only Option 2 of the SCF envisages two sub-options
providers of card payment services offered by whereby the emergence of a European card
banks in the euro area. Up to now, the two scheme could be encouraged: 1) expansion to
ECB
The Eurosystem's view of a "SEPA for cards"
2 November 2006
the euro area, which implies making significant consistent stance should be adopted across the
efforts to publicise the brand and get it accepted euro area. In case the Commission's policy
by merchants outside its country of origin, and substantially differs from today's situation,
2) alliances, which require agreements between appropriate adaptation times would have to be
schemes that continue to function provided in order to avoid market disruption.
independently.
There is no reason why full transparency should
These two solutions would allow the valuable not be ensured in the field of interchange fees.
experience of national card schemes in Europe Therefore, they should be publicly available on
to be retained, and would also create more the internet, and the calculation method used to
competition in the European card market. For determine them should, if possible, be approved
these reasons, the Eurosystem expects at least by the competent authorities.
one European card scheme to emerge in the
coming years. It will be up to the banks to FOSTERING COMPETITION
decide whether this scheme (or schemes) has
international reach or will simply be co-branded The move to SEPA should improve the quality
with the international card schemes to offer of payment services and reduce their cost to
payment services outside the euro area; in both society. Competition pressures would contribute
cases, such (a) scheme(s) would be a key factor to reaching these objectives. Competition
in enhancing diversity and competition in the should take place at three levels: 1) between
market. With regard to co-branding, Visa and issuing and acquiring banks, 2) between card
MasterCard should not prevent European banks schemes, and 3) in the processing of card
from co-branding their European card schemes payments.
with them, regardless of whether this co-
branding is designed to obtain full euro area or · ACQUIRING AND ACCEPTANCE PRACTICES
international-wide reach. In order to ensure a level playing-field at the
European level, the Commission is invited to
THE INTERCHANGE FEE ISSUE clarify its position with respect to the following
acquiring and acceptance practices:
Interchange fees, which are paid by the acquirers
(and ultimately by the merchants) to the issuing fee-related restrictions to cross-border
banks, have been an efficient instrument in acquiring in the euro area;
promoting the adoption of cards by European
citizens. However, interchange fees can also be fee "blending" practices applied by acquirers
an obstacle to competition as they reduce the to merchants (which hides fee differentiations
ability of merchants to negotiate the fees they between schemes and thus hampers
pay to their acquirers. The Commission has competition between them);
issued the Sector Inquiry Report on cards,
which dealt mainly with interchange fees, and the prohibition on merchants to surcharge
left the general impression that an abolition of card payments if these are more costly than
interchange fees could be envisaged. The other instruments;
Eurosystem invites the Commission to announce
as soon as possible its policy with regard to the application of an "honour all cards" rule
interchange fees, as such an announcement concerning merchants (obliging them to
would give clear guidance for banks and accept all schemes of a given brand).
schemes seeking to develop sustainable business
models for SEPA. For level playing-field · PROCESSING
reasons, the decisions of European and national In line with the provisions of the SCF, banks
competition authorities should be aligned and a should be able to choose between different
ECB
The Eurosystem's view of a "SEPA for cards"
November 2006 3
possibilities to process card payments. The outside the EU is organised have to be clarified.
separation between scheme management and The transfer of non-aggregated data outside the
processing must be effective and not just on EU for statistical purposes or for marketing
paper. For example, contractual obligations purposes should be avoided under any
between banks and card schemes requesting the circumstances.
use of a particular processing channel should be
eliminated, and cross-subsidisation between FRAUD
card schemes and their processing units must
also be avoided. Combating fraud is an important aspect of
SEPA. Fraud increases card payment fees and
STANDARDISATION may even threaten the acceptability of the
instrument. Apart from the agreement to
To ensure that cardholders can use their SEPA implement EMV, the EPC is invited to define a
cards across the euro area, it is important to clear strategy for combating fraud, placing
ensure that merchants can accept all SEPA cards special focus on the objective of bringing cross-
as long as this makes economic sense for them border levels of fraudulent incidents down to
of course. To secure this objective, there should national ones.
be no technical barriers to competition.
Standards are the basis for open and fair MONITORING OF CARD PAYMENT FEES
competition. They should cover every phase of
the transaction chain (cardholder-to-terminal, As explained above, there is a genuine risk that
terminal-to-acquirer and acquirer-to-issuer), the solutions chosen by banks to comply with
the security evaluation and the certification of SEPA could lead to price increases. Moreover,
devices. Concerning terminals in particular, in the absence of any appropriate statistical
standardisation and the definition of an adequate framework, bank customers and public
and independent certification body is essential authorities could experience increases in some
to ensure that any card can be accepted at any countries, while fees could decline elsewhere.
terminal. The EPC should investigate how the As a result, the Eurosystem will investigate
objectives of the SCF, especially interoperability, with the relevant stakeholders the possibility of
could be ensured by the card standards which establishing a framework to monitor card fees
are currently under development. Participation in the coming years.
in the definition of standards should be open to
all stakeholders. The outcome must be SEPA COMPLIANCE
mandatory for the entire market, without any
opt-out possibilities and with clear In view of the above, a SEPA-compliant card
implementation deadlines. scheme is one that complies with the provisions
of the SCF and takes into consideration the
In addition to technical standards, additional following needs:
requirements in terms of business rules and
practices are needed to ensure that cardholders to offer the same service to merchants and
have access to many POS terminals. This will cardholders, wherever the scheme operates
also contribute to creating a level playing-field in the euro area the various add-ons should
for inter-scheme competition. not hamper interoperability;
DATA PROTECTION to have a single interchange fee (if any) for
the whole euro area within a given brand;
Card payments contain personal data, something
which is extensively protected in the EU. The to define and publicly disclose a medium to
conditions under which the transfer of data long-term strategy which is consistent with
ECB
The Eurosystem's view of a "SEPA for cards"
4 November 2006
the long-term objectives of the SEPA approaches in view of SEPA compliance;
project; Section 4 develops the Eurosystem's view of a
SEPA for cards; Section 5 identifies some of the
to disclose interchange fees and their risks that could stem from SEPA migration; and
calculation methodology, and submit them, Section 6 concludes with a list of public policy
if possible, to the relevant authorities; provisions.
to be compliant with the future European
Commission position about acquiring and 1 CURRENT SETTING OF THE EURO AREA CARD
acceptance practices in order to enhance MARKET
competition and transparency;
Currently, the card market in Europe is
to separate effectively card scheme characterised by a high degree of national
management and processing services fragmentation. There are a series of national
without any possibility for cross- four-party and three-party schemes. Four-party
subsidisation or other practices that could schemes comprise banks that issue cards for
give an advantage to own processing cardholders, banks that acquire card transactions
services; for merchants, and the cardholders and
merchants themselves (there are also
to contribute to the design of consensus- possibilities of indirect participation which are
based selection of standards with a clear not described here). This differs from a three-
commitment for implementation on time; party scheme, where cardholders and merchants
are joined by a company that both issues cards
to avoid any transfer of personal data in a and acquires card payments.
non-aggregated form to countries that are
not compliant with the EU rules; Four-party card schemes can be subdivided into
two types: national and international:
to put in place a strategy on how to reduce
fraud, especially cross-border fraud. national four-party card schemes serve
national markets. In the euro area, there is
at least one national card scheme operating
INTRODUCTION per country (e.g. Cartes Bancaires in France,
Electronic cash in Germany, and COGEBAN
There are currently more than 350 million cards in Italy; Spain however is a special case as
in the euro area, which are used to make more there are three national card schemes in
than 12 billion payment transactions and 6 operation). National card schemes are
billion cash withdrawal transactions per year. mainly owned, directly or indirectly, by
The SEPA project will have a tremendous banks. Cards issued under national schemes
impact on this industry. In this regard, the can only be used within the country of
Eurosystem's position will be critical in steering issuance, with a very limited number of
the market in the right direction, ensuring future exceptions. In relatively few countries,
growth and innovation and maximising benefits national debit cards are issued under Visa
for Europe's citizens. (Visa Electron or V-Pay) and MasterCard
(Maestro), but this is much more the case
This report is structured as follows. Section 1 for credit cards. For this reason, the
explains the current situation in the card market; fragmentation of the card market into
Section 2 presents the work carried out so far national schemes is more of an issue for the
by the EPC; Section 3 describes the main debit than for the credit card market;
current trends concerning schemes and banks'
ECB
The Eurosystem's view of a "SEPA for cards"
November 2006 5
international four-party card schemes, i.e. 2 EPC'S WORK IN THE FIELD OF A SEPA FOR
Visa and MasterCard, are used for cross- CARDS
border payments, either within or outside
the euro area. In such cases, national card The EPC has adopted the SCF which banks, as
schemes and international card schemes are members of card schemes, have committed
co-branded, meaning that cards bear both themselves to implementing. The SCF defines
brands; when the cardholder makes a a series of high-level principles and rules which
payment in the country of issuance of the "will enable banks, schemes and other
card, the brand that gets activated is the stakeholders to move towards SEPA" and which
national one; whereas when the cardholder banks and card schemes need to apply in order
makes a payment in another country than to pursue card business activity within SEPA.
the country of issuance, the brand activated
is the international one. Until recently Visa The SCF defines the following three options
and MasterCard used to be membership among which card schemes should choose in
associations owned by banks; MasterCard order to position themselves in the SEPA card
has however since converted into a publicly- market (combinations of these are also
listed company, while Visa has also possible):
announced similar intentions (although Visa
Europe will maintain its membership Option 1: To replace the national scheme by an
association structure). international card scheme, provided the latter is
SCF-compliant. In this case, Visa or MasterCard
There are several national three-party schemes cards would be issued and acquired in the
as well as the international ones (American country, meaning that there is no need to co-
Express, Diners and JCB) in most countries, brand as cross-border transactions would
whose cards can be used for transactions within automatically be covered by the same
and between countries. There is no co-branding schemes.
as in the case of four-party schemes.
Option 2: To evolve through alliances with
The national fragmentation of card schemes other schemes (as is the case with the Euro
goes hand in hand with fragmentation in terms Alliance of Payment Schemes (EAPS), for
of standards and business practices in use. The example) or through expansion to the entire
situation is similarly fragmented for technical euro area. In the case of an alliance of SEPA-
infrastructure providers such as payment compliant card schemes, the participants would
processors, authorisation platforms and follow an open interconnectivity approach (e.g.
providers of cards and POS terminals. by mutually agreeing to accept brands). Should
a SEPA-compliant card scheme be expanded in
Nevertheless, most national card schemes have the euro area, its cards would be used and
managed to offer a very efficient service at low accepted by cardholders and merchants located
cost; their business model, expanded to the anywhere in the euro area.
whole euro area, should in principle, allow a
further reduction in costs because of economies Option 3: To co-brand a national scheme with
of scale. The challenge for SEPA implementation an international scheme (provided that both are
is to combine the transition to a more integrated SCF-compliant).
market with the preservation of high efficiency
and low cost levels.
ECB
The Eurosystem's view of a "SEPA for cards"
6 November 2006
3 CURRENT DECISION TRENDS OF MARKET (the UK's ATM switch), Euro 6000 (Spain) and
PARTICIPANTS REGARDING A SEPA FOR Multibanco (Portugal). Three more members
CARDS Interpay (Netherlands), Laser (an Irish POS
system) and Activa (another POS system in
Through a series of meetings with national and Slovenia) are also expected to join.
international card schemes, as well as with Implementation projects have already been set
banking communities, the Eurosystem has up by processors in Germany, Italy and the
gathered information on the main decision Netherlands.
trends in view of SEPA migration, on the issues
at stake and on some aspects for which banks/ Those card schemes that support the EAPS
schemes requested the guidance/assistance of justify their decision on the grounds that they
the Eurosystem. incur higher costs within international card
schemes, and lack control over their governance.
Many card schemes and banks expressed their They also claim that the EAPS approach offers
preference for co-branding. There is also some the possibility to enhance pan-European reach
support for the second option, which is currently at lower costs, since it relies on existing
represented by only one initiative, EAPS. For infrastructures and national market acceptance,
the moment, the banks in two countries simply enabling interconnectivity. EAPS may
(Belgium and Finland) have decided to replace therefore offer a way to maintain the efficiency
their national card schemes by international of existing national card payment systems
ones. within SEPA.
REPLACEMENT BY INTERNATIONAL BRAND However, some national card schemes have so
far declined the invitation to join EAPS because
Card schemes/banks which have opted to they consider that the cost and level of
replace the national brand by an international complexity of establishing bilateral
one were motivated by time and easiness arrangements are too high, in conjunction with
considerations. However, another factor might the perceived lack of a business case.
have been interchange fees, which are typically
higher in international schemes than in national CO-BRANDING
ones. In principle, interchange flows should be
neutral for the banking sector, but they are too Those card schemes/banks that have opted for
often seen as a source of guaranteed revenues co-branding were motivated by the following
for the banks participating in the scheme considerations:
(especially issuers, of course).
most cards are already co-branded and this
THE EURO ALLIANCE OF PAYMENT SCHEMES is a factor of ease; this option requires less
(EAPS) investment in terms of adapting;
Several card schemes/banks have recognised there is (near) universal acceptance of cards
the political importance of building a euro area issued under international card schemes;
scheme. For the moment, the only existing
initiative under Option 2 is EAPS, which co-branding allows schemes and banks to
comprises as its founding members Electronic retain some degree of "internal governance"
Cash and Deutsches Geldautomaten-System or local autonomy;
(Germany), the Convenzione per la Gestione
del marchio Bancomat (COGEBAN, Italy), it is possible to meet specif ic local
Eufiserv (a European supplier of processing requirements without any deterioration in
services for ATMs, based in Brussels), Link the service level;
ECB
The Eurosystem's view of a "SEPA for cards"
November 2006 7
it is relatively easy to declare SEPA- Actual acceptance should only depend on the
compliant. perceived business case for the merchants. It is
up to each merchant to decide which brands/
types of cards to accept. However, in a
4 THE EUROSYSTEM'S VIEW OF A SEPA FOR competitive, integrated and mature market, it
CARDS will be in the commercial interest of merchants
to accept most euro area brands as is currently
In a SEPA for cards, card schemes will operate the case for national brands in national markets.
as if in a single country. A SEPA for cards will Therefore, acceptance will not be compulsory,
have the following characteristics: but it is expected that it will gradually reach its
development potential.
1) consumers can choose among various
competing payment card schemes which do SEPA compliance for card schemes does not
not have a pre-assigned priority in use at entail that their cards have to be issued and/or
POS terminals; acquired in all euro area countries. The degree
of expansion is a business decision. However,
2) there is a competitive, reliable and cost- schemes should lay down fair and open access
efficient card market, including service and criteria for potential member banks located
infrastructure providers; anywhere in the euro area, under the same
conditions as national commercial banks. It is
3) all the technical and contractual provisions, also seen as a natural long-term development
business practices and standards which had that in a competitive, integrated and mature
resulted in a national segmentation of the market, the remaining schemes will broadly
euro area have been eliminated. In particular, cover the entire euro area, in the same way that
there is no obstacle for merchants to accept national schemes are currently largely accepted
any SCF-compliant payment cards. in their national markets.
Three-party schemes such as American Express COMPETITION
and Diners are also expected to abide by the
SEPA compliance principles. The rules and The conditions which lay the ground for SEPA
conditions for the same card cannot differ for should be in place and should address technical,
reasons of geographical location. legal and commercial aspects:
When SEPA becomes a truly integrated card Technical conditions
market, the two key characteristics will be card
acceptance and competition. Uniform standards will ensure a technical level
playing-field for all euro area card schemes and
CARD ACCEPTANCE infrastructure/service providers. Standards
should cover every phase of the transaction
Within SEPA, there should not be any technical chain (cardholder-to-terminal, terminal-to-
hurdle (or any other kind of obstacle) for any acquirer, acquirer-to-issuer) and the security
card to be used at any terminal. The technical evaluation and certification of technical devices
acquiring conditions of competing schemes in (in particular concerning terminals whereas
SEPA should be such that merchants are standards and an adequate and independent
indifferent to what brand of card they accept. certification body need to be set up in order to
Schemes should ensure that the necessary ensure that different payment applications
technical standards are in place for this. coexist) and also focus on preventing fraud.
ECB
The Eurosystem's view of a "SEPA for cards"
8 November 2006
It is important that all stakeholders are free to 5 RISKS RELATED TO SEPA MIGRATION
participate in the definition of standards, which
should be neutral, future-oriented and not Concerning the feasibility of the options:
nationally biased, with the aim of guaranteeing
universal adoption and avoiding placing the replacement of a national scheme by an
particular infrastructure/service providers in a international one, i.e. Option 1, is relatively
better starting position. Standardisation will easier and quicker to implement from the
empower competition forces (which up to now point of view of banks, since most of them
have been limited within national borders), and are already cooperating with Visa/
will encourage efficiency, innovation, and MasterCard within the current co-branding
better services and prices. The EPC is currently framework;
working on such standards, which the
Eurosystem expects will be compulsory for all expansion or alliances, i.e. Option 2, need to
stakeholders. overcome some difficult challenges such as
explaining to cardholders the use/acceptance
Legal conditions of such cards in other countries (e.g. the
establishment of a brand) or designing
Current regulatory differences across the euro agreements between schemes that partly
area create legal uncertainty for cross-border function in different ways. Furthermore, the
operations and function as barriers. The success of such initiatives depends on
Payment Services Directive will fill the current participation: in the case of expansion, the
void and provide the necessary legal certainty number of foreign banks issuing and
for the expansion of operations across the euro acquiring the cards and of merchants
area. Even if the transposition of the Directive accepting them is critical for success. In the
into national law is not completed by 1 January case of alliances, the number of participating
2008, the Directive itself will provide sufficient schemes is crucial;
legal certainty to the parties concerned. In
addition, the Commission needs to define co-branding, i.e. Option 3, seems to be a
interchange fee principles that apply to the relatively easy option to follow as this is
entire euro area as soon as possible. The currently the case in most countries;
decisions of national and European authorities however, SEPA should allow international
on specific interchange fee cases need to be schemes to compete with national ones for
aligned and coherent. national transactions.
Commercial conditions Concerning the degree of SEPA compliance of
the options:
The elimination of commercial barriers such as
diverging national business rules and practices the replacement of a national scheme by an
is also intrinsic to the emergence of a SEPA international one, i.e. Option 1, is fully
for cards; these barriers should therefore be SEPA-compliant, provided that transactions
eliminated by 1 January 2008. Diverging within the country and between different
national commercial practices obstruct the euro area countries are not subject to
development of SEPA-wide business proposals. different conditions for the same card. There
The EPC has addressed this problem by agreeing has to be a euro area service that is fully
on the SCF, although this is rather general when adjusted to the SEPA requirements (of
it comes to practical implementation. course, the scheme is free to adapt its service
outside SEPA to the SEPA requirements in
order to simplify its operations);
ECB
The Eurosystem's view of a "SEPA for cards"
November 2006 9
expansion or alliances, i.e. Option 2, are though Visa Europe will preserve its membership
fully SEPA-compliant, provided that the association structure. The Eurosystem is not
SEPA requirements are met and that national opposed per se to any shareholder-driven
markets are open to competition; solutions, but it does consider that these could
lead to excessive price increases if the number
co-branding, i.e. Option 3, is in principle of competitors is insufficient. The existence of
SEPA-compliant, provided that the SEPA at least one more European bank-owned scheme
requirements are met by all national card would lessen the risk of price increases.
payment schemes and that national markets
are open to competition. Finally, Option 3 could crystallise national
fragmentation. If the card industry massively
However, even if Options 1 and 3 can clearly opts in favour of co-branding and this situation
help banks and card schemes to be SEPA- becomes permanent, economies of scale would
compliant by 1 January 2008, they nevertheless not materialise in the euro area, and competition
give rise to concerns in the long run. between national schemes would remain
limited. Therefore, co-branding cannot be the
Concerning Option 1, the Eurosystem welcomes only, or even the main, solution in the long
the willingness of Visa and MasterCard to offer term. Rather, it should mostly be seen as a
a domestic service for the euro area. However, short-term solution designed to facilitate SEPA
the Eurosystem is concerned about the compliance by 2008 and 2010.
emergence of a situation whereby the two
international card schemes would progressively
become the only providers of card payment 6 PUBLIC POLICY PROVISIONS
services offered by banks in the euro area.
Given the risk that SEPA migration could
Indeed, interchange fees are higher with Visa translate into a deterioration of conditions for
and MasterCard than with national schemes. both cardholders and merchants, which would
Therefore the extension of the use of these two in turn also affect banks and could give SEPA a
schemes at the domestic level creates the risk very negative image, the Eurosystem deems it
that merchants could have to pay higher fees. necessary to clarify a series of policy provisions
For this reason, merchants have expressed that need to be taken into consideration by
significant concerns about the side-effects of schemes/banks, in addition to the requirements
SEPA migration. In Belgium, for example, it of the EPC's SCF, in order to operate within
was decided that Bancontact/MisterCash, a SEPA.
very efficient and low-cost scheme without
interchange fees, will be replaced by Maestro. EMERGENCE OF A EUROPEAN CARD SCHEME
Belgian merchants have expressed fears that
this may lead to the introduction of interchange National card schemes generally offer efficient
fees, thus raising merchants' service charges. and inexpensive card payment services in the
national markets. A SEPA for cards could
As a result, the Eurosystem fears that capitalise on this in order to ensure an equally
competition limited to the two systems would efficient and inexpensive service for the entire
be insufficient to maintain the present low level euro area market.
of fees in Europe. Concerns about competition
conditions have been exacerbated by governance As a result, the Eurosystem expects at least one
aspects. MasterCard recently changed its European card scheme to emerge in the coming
ownership structure from a membership user- years. It will of course be up to the banks to
driven model to a shareholder-driven solution. decide whether this scheme should have
Visa has also announced similar intentions, international reach, or whether the scheme will
ECB
The Eurosystem's view of a "SEPA for cards"
10 November 2006
co-brand with international card schemes to adaptation times, in order to avoid market
offer payment services outside the euro area. disruption. The decisions of European and
national competition authorities also urgently
For such a scheme or schemes to emerge, the need to be aligned, especially in terms of
SCF provides two sub-options as examples: 1) adopting a coherent stance across the euro area.
expansion to the euro area, which implies This would greatly facilitate new market
important efforts to make the brand known and initiatives in particular.
accepted by merchants outside its country of
origin, and 2) alliances, which require The policy principles that apply to interchange
agreements between schemes that typically do fees should also contribute to a level playing-
not function the same way. Both strategies are field for all card schemes. Furthermore,
certainly highly challenging, as a series of transparency needs to be enhanced: interchange
elements will have to be put in place that are fees should be made publicly available on the
taken for granted in existing business proposals. internet. The calculation method which led to
The Eurosystem is well aware of the degree of their determination should, if possible, be
complexity and the risks of such an undertaking submitted to the competition authorities for
in terms of governance, decision-making and approval.
the creation of a brand. Nevertheless, the
Eurosystem expects that the respective national FOSTERING COMPETITION
card schemes should define their strategies as
soon as possible, despite the clearly complex The move to SEPA should not consist just in
nature of the issue. making current national payment services
accessible throughout the euro area. SEPA,
THE INTERCHANGE FEE ISSUE given its user-oriented nature, should be seen as
an opportunity to improve the quality and
Interchange fees, which are paid by the acquirers efficiency of payment services by reducing
(and ultimately by the merchants) to the issuing costs. To ensure the dynamism of the European
banks, have been an efficient instrument in card market, European payments need to retain
terms of promoting the adoption of cards by their competitive edge, and a forward-looking
European citizens. However, such fees can also approach must be adopted. Competition would
be an obstacle to competition as they reduce the contribute in terms of reaching these objectives,
ability of merchants to negotiate the fees they and would take place at three levels: between
pay to their acquirers. card schemes; between issuing and acquiring
banks; and in processing card payments.
The current uncertainty with respect to how
interchange fees will evolve in the future is · ACQUIRING AND ACCEPTANCE PRACTICES
considered by banks and schemes to be one of To ensure a level playing-field for all at the
the main factors delaying SEPA-related European level, the Commission is invited to
decisions and hampering the completion of clarify its position with respect to the following
business proposals. The Commission issued the acquiring and acceptance practices which are
Sector Inquiry Report on cards, which dealt linked to competition and transparency:
mainly with interchange fees, and gave the
general impression that an abolition of any fee-related restrictions to cross-border
interchange fees could be envisaged. The acquiring in the euro area; any rules that
Eurosystem would like to invite the Commission reduce the benefits and thus the incentives
to announce as soon as possible its policy with for cross-border acquiring need to be
regard to interchange fees. In case this policy removed;
substantially differs from current conditions,
the Commission is invited to provide appropriate
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The Eurosystem's view of a "SEPA for cards"
November 2006 11
the "blending" of card scheme fees applied well as the security evaluation and certification
by acquirers to merchants (meaning the of technical devices. Interoperability standards
offer to acquire transactions under different should be mandatory, and should be finalised
brands/schemes against a single (package) swiftly in order to facilitate migration to SEPA.
merchant service commission). This measure The EPC should investigate how the objectives
conceals fee differentiations between of the SCF, especially interoperability, could be
schemes, and thus hampers competition; ensured by the card standards which are
currently being developed.
the prohibition on merchants to surcharge
payments by cards if the latter are more Concerning terminals in particular, standards
costly than other instruments; plus an adequate and independent certification
body should be set up to ensure the coexistence
the application of an "honour all cards" rule of different payment applications, so that there
to merchants (making it compulsory to is no technical hurdle for any card to be accepted
accept all schemes of a given card brand). at any terminal. Harmonised and adequate
security requirements are needed for a common
· PROCESSING evaluation process. Two general problems
In line with the general policy of the Eurosystem facing a new European card scheme and the
in the field of market infrastructures, banks current national schemes in the SEPA
should have different possibilities to process environment are euro area-wide reachability
card payments. Contractual obligations between and the establishment of a transaction-
banks and card schemes that request the use of processing network. The industry could also
a particular channel should be eliminated. study the possibility of using the current
Vertical integration needs to be replaced by payment infrastructures, in particular the direct
more open and flexible market structures, debit ones for the processing of new SEPA card
fostering competition and allowing economies products/schemes.
of scale to be realised. The separation of scheme
management and processing services, as The payment function needs to be clearly
required in the SCF, needs to be actual and not defined, and the various add-ons such as loyalty
just on paper. For example, cross-subsidisation programmes should not hamper interoperability.
between card schemes and their processing Participation in the definition/choice of
units or offers of bundled services are not standards must be open and the outcome
acceptable. mandatory for all parties in order to ensure that
standards, especially in the terminal-to-acquirer
STANDARDISATION domain, adequately satisfy the needs of all
stakeholders, particularly merchants and
To ensure cardholders can use their SEPA cards cardholders. There cannot be any opt-out
across SEPA, it is important to ensure that options, and a clear implementation deadline
merchants are able and willing to accept all needs to be defined. Technical standards alone
SEPA cards, or at least all the cards that are cannot ensure that the aim of making it possible
relevant for them. To secure this objective, for every cardholder to use his or her card
work on standardisation is of the utmost throughout SEPA is realised. Additional
importance. Technology should not be a barrier requirements might be needed, for example in
to competition. Uniform standards will entail a the field of business rules and practices, to
technical level playing-field for all euro area ensure that cardholders can use their card at
card schemes and infrastructure/service every terminal. This will also contribute to
providers. Standards should cover every phase creating a level playing-field for inter-scheme
of the transaction chain (cardholder-to-terminal, competition.
terminal-to-acquirer, acquirer-to-issuer), as
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The Eurosystem's view of a "SEPA for cards"
12 November 2006
DATA PROTECTION addition, the EPC should clarify the need to
develop a card fraud database.
Card payments contain personal data, a topic
that is extensively protected by EU legislation. At the same time, other fraud prevention
The EU has set up a legal framework enabling measures need to be pursued in a centrally
both the protection of personal data and the free coordinated way, targeting other types of fraud
circulation of such data among Member States, than those tackled by EMV (such as fraud on
by means of the adoption of Directives 95/46/ card-not-present transactions).
EC and 2002/58/EC. With regard to data flowing
outside the EU, the European framework in MONITORING CARD PAYMENT PRICES
principle only allows transfers to third countries
that guarantee an adequate level of protection As explained above, there is a non-negligible
which corresponds to the standards applicable risk that the solutions chosen by banks to
within the EU. Transfers to third countries that comply with SEPA could lead to price increases.
cannot guarantee an adequate level of protection This risk is more acute for merchant fees, but it
may nevertheless be possible by way of a also concerns scheme membership fees and
contract or via the adoption of a binding code possibly cardholder fees too. Merchants have
of conduct (e.g. binding corporate rules). alerted the ECB and the Commission to such a
However, the transfer outside the EU of non- development, as there have already been cases
aggregated data for statistical purposes or for of interchange fee increases following the shift
marketing purposes should be avoided. of some national card scheme markets to
Reputational risks linked to data transfers international card schemes. Such a development
outside the EU should also be taken into would certainly stigmatise the SEPA project in
account, as these could jeopardise the confidence the eyes of the public. SEPA should not present
of users in card payments. The conditions under an opportunity for price increases, nor should
which the transfer of data outside the EU is the quality of service deteriorate.
organised have to be clarified.
Statistics on card fees could also help banks to
FRAUD respond to a possible asymmetry in users'
perception of the evolution of card fees (i.e.
Combating fraud is crucial for the building of they are more likely to detect price increases
SEPA; in particular, differences in fraud levels than price decreases). The Eurosystem will
between transactions within and between euro investigate with stakeholders the feasibility of
area countries need to disappear. Fraud increases computing such figures in the future.
card payment fees and may even threaten the
acceptability of the instrument; therefore, SEPA COMPLIANCE
combating fraud is linked to the reliability of
cards as payment instruments. In view of the above, a SEPA-compliant card
scheme is one that complies with the provisions
The EPC has agreed to implement EMV and the of the SCF and takes into consideration the
migration procedure has been streamlined. following needs:
However, it needs to be ensured that EMV is
applied in a uniform way and that add-ons and to offer the same service to merchants and
updates operated at national level do not distort cardholders, wherever the scheme operates
interoperability. In addition to the agreement to in the euro area the various add-ons should
implement EMV, the EPC is invited to define a not hamper interoperability;
clear strategy for combating fraud, with special
focus on bringing cross-border levels of to have a single interchange fee (if any) for
fraudulent incidents down to national ones. In the whole euro area within a given brand;
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The Eurosystem's view of a "SEPA for cards"
November 2006 13
to define and publicly disclose a medium to to contribute to the design of consensus-
long-term strategy which is consistent with based standards, with a clear commitment
the long-term objectives of the SEPA for implementation on time;
project;
to avoid any transfer of personal data in a
to disclose interchange fees and their non-aggregated form to countries that are
calculation methodology, and to submit not compliant with the EU rules;
them, if possible, to the relevant
authorities; to put in place a strategy on how to reduce
fraud, especially cross-border fraud.
to be compliant with the future European
Commission position about acquiring and All card schemes are invited to define their
acceptance practices in order to enhance SEPA compliance plans by mid-2007 and to
competition and transparency; explain whether these plans require additional
action (e.g. standardisation, development of
to separate effectively card scheme harmonised business practices) in order to
management and processing services, ensure a level playing-field.
without any possibility for cross-
subsidisation or other practices that would
give an advantage to own processing
services;
© European Central Bank 2006
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ECB
The Eurosystem's view of a "SEPA for cards"
14 November 2006