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Make way for e-Sepa

26 July 2006  |  7754 views  |  0 Source: Gertrude Tumpel-Gugerell, European Central Bank PED cradle

A combination of Sepa and new developments in consumer electronics represent an opportunity for banks to ditch cash and paper-based payments once and for all, says Gertrude Tumpel-Gugerell, in a speech given in Brussels in late June.

The information and communication technology (ICT) is moving fast and consumers have learnt to adopt and implement new technologies in their daily lives. Technologies are therefore no longer a barrier for retail payment innovation and it is time to step out of the old fashioned paper and cash world and into the fully electronic retail payment environment. If we combine the forthcoming Sepa with the general appetite for innovative technologies in the society, there is an excellent opportunity to realize an advanced, paperless and innovative retail payment business. A retail payment business in which not only the payment itself, this is – the settlement of funds – is important, but the wide range of possible value-added services too. In my opinion these unlimited possibilities of value-added services will form strong business opportunities for you as service providers the next coming years.

The retail payment business has a lot of challenges ahead; the launch of the Single Euro Payment Area 1 January 2008 will have a huge impact on the way corporates, retailers and consumers do and will choose to do their payments in the near future. From this date and onwards it will be possible for customers to make payments throughout the whole euro area as efficient and safely as in the national context today.

The creation of the Sepa is a market led process with commercial banks in the driving seat. They have organized themselves in the European Payments Council and are committed to deliver pan European core schemes for Credit Transfer and Direct Debit and on top of that a framework for Cards. It is needless to say that the ECB and the Eurosystem are very supportive of this initiative:

Sepa will bring further European integration and market efficiency, and thus create a pan-European competitive environment for payment services. This will foster economies of scale and stimulate the development of innovation services. This is what Sepa is about and why we as the ECB and the Eurosystem are strongly committed in making Sepa happen.

This is why we already now must have the next step beyond Sepa in mind in order not to trap ourselves in an old fashioned technology environment. We must therefore focus on value-added services which is the area where huge benefits will evolve. A precondition for the development of efficient value-added services is common standards on which competitive solutions can be build. For this we need cooperation that involves all stakeholders from the banking- as well as the non-banking sector. As for this reason, I’m pleased to speak here today as this conference joins experts form all sectors.

My presentation today is divided into three steps: 1) The main objectives for innovation, 2) How to move from Sepa to e-Sepa or what we see as the advanced and innovative pan-European retail payment market, and 3) What should be the next steps in this process.

What are the main objectives for innovation?

According to the goals stated in the Lisbon Agenda, Europe must step up efforts and become more competitive by promoting productivity, growth and employment within Europe. Sepa will definitely contribute to this. As said before, Sepa will create a new pan-European competitive environment which will foster economies of scale by further European integration and thereby continuously stimulate the development of innovative payment services. To achieve this we must strengthen the cooperation between the banking and non-banking sector which will allow the latest technologies to be used fully.

Today, most Europeans carry a mobile telephone and use the internet on a regular basis. Furthermore, electronic payments are replacing manual paper‑based payments on the grounds of their convenience, security and efficiency. Sepa will bring a move towards more intensive use of electronic payment instruments and we must take full advantage of these facts and move the retail payment market to the next level where services and payments are combined in an electronic environment creating end‑to-end Straight-through Processing. This will generate large economic benefits for the European economy and thus enforce that the Sepa project becomes a success for all stakeholders.

The most efficient way to do this is by learning from the European regions which already use cutting edge technology to provide efficient electronic payments and services. Good examples are the Nordic and Baltic countries and for instance internet and mobile-banking applications, e-invoicing and e‑ticketing.

From Sepa to e-Sepa

Three Sepa payment instruments, credit transfer, direct debit and card payments will be offered with the fully implemented Sepa. Consumers will be able to use these instruments in paper as well as electronic format. The challenge for commercial banks and non-bank service providers is a Sepa world where all payments are done fully electronically and supported by value-added services. We call this ideal world the e-Sepa.

To identify the individual stakeholders’ main focus it is important to be clear on the difference between electronic payments and value‑added services.

E‑payments or electronic payment are initiated electronically and executed via existing payment instruments such as credit transfers, card payments, direct debit and e‑money instruments. In common with all other payments e-payments always involve settlement of funds, this means that they must be provided by companies with a banking or Electronic Money Institution – ELMI - licence. There is nothing new about electronic payments. The interesting, innovative and evolving part is value-added services (VAS).

These services are offered to customers before or after payment (prior or post-VAS) and can be provided by any provider from the banking or non-banking sector. The purpose of these services is to make the payment process easier for the customers as they eliminate the paper-based side of the payment process.

Mobile telephones are good tools for these services as they are portable and as mentioned earlier already widely used. As a consequence, it seems logical to me to use the mobile phone as an initiation and confirmation device for electronic payments. Banks, mobile operators and other stakeholders should thus find better ways to cooperate to ensure that customers are offered value-added services and electronic payments that can be combined.

Coming back to my introductory question “What is an m-payment?” I want to stress that so-called m-payments can be divided into three groups:
  • Value-added services using the mobile telephone as an access channel to the known payment instruments;
  • payments added to the consumers mobile telephone bill, thereby granting the consumers credit;
  • payments done on pre-paid value i.e. money pay in advance to the mobile company by the consumers.


To offer the first two services the telecommunication company does not need to hold a banking licence. This is not the case in the third situation where the company needs an ELMI licence to be able to accept deposits. In my speech I’ll concentrate on the first case, where the mobile phone is used as a device to provide the consumers with value-added services, as this is the area where I see large economic benefits.

When the mobile phone is used as an access channel to the consumer’s internet-banking application the settlement of funds is done by the bank. This means that the telecommunication provider provides a value-added service using the mobile phone as the electronic initiation device. The market has already developed a large range of these value-added services i.e. services not involving settlement of funds. These services are mainly prior-VAS, e.g. routing of bills, or sending SMSs or emails to consumers notifying them of waiting electronic bills. Growth can be expected for post‑VAS, e.g. e-ticketing and credit advice – an SMS confirming that a payment has been settled – as this group is now less represented in the market.

The settlement of payment between financial intermediaries is currently done using straight-through processing.

With a perfect e-Sepa, e-payments and value-added services are combined so end‑to‑end STP – or customers-to-bank-to-customers STP is achieved. This will create large potential savings for the economy, as the whole value chain becomes paper- and cash-free.

What are the next steps to achieve e-Sepa?

A well-functioning Sepa will provide the grounds for e-Sepa as the Sepa payment instruments and the Sepa infrastructure is in place. Your focus as market service providers should be on value-added services;

What type of services does the market want? and

How can these services be combined with e-payments offered by banks and possible future payment institutions?

The challenge is to use the technologies in place to offer customers convenient, secure and efficient services that combined with e-payments make customers lives easier and at the same time benefits the economy by securing end-to-end straight-through processing.

A well established example of such a combined product is e-invoicing, e-payment and e‑reconciliation.

The payee will distribute all invoices via his/her internet banking application. The e‑invoice is sent via the payee’s bank to the payer’s bank and onwards to the payer’s internet bank or his/her mobile telephone. This part is a prior VAS. The payer can then accept or reject the payment. If he/she accepts, the e‑invoice automatically creates a payment instruction containing all information about the payer and the payee, which is the e-payment part. When the payment is successfully settled information matching the payment and the invoice is returned to the payee. The payee’s records are then automatically updated, which is the post-VAS part.

This combination of products results in a paper- and cash-free process from bill presentation via settlement to settlement verification.

This is only one of many examples from an area with huge potential for further developments only limited by our imagination.

So how to proceed?

The success of Sepa will be based on common agreed and open standards. The new pan-European Credit Transfer and Direct Debit will be based on such standard, the Unifi ISO 20022 XML. This standard, together with Iban and BIC will secure continuous straight‑through processing between the financial intermediaries for all euro payments. However, the market for value‑added services is not standardised yet and to secure customer-to-bank-to-customer STP and thus the success of eSEPA further action is needed in this field.

For this reason it is important to focus on standards for value-added services.

To a certain extent the European Payment Council has taken up this work. They are in dialogue with e.g. the European Association of Corporate Treasurers to see how they can cooperate in fields like e-invoicing.

If the different market players can agree on a common standard for value‑added services the prerequisites to create a real competitive, innovative payment market in Europe is present. This will be a retail payment market where non-bank market players with good business proposals will have strong potential for success, and a market where the end users will profit from better services and better prices.

Summing up I’ll stress the following two points:

To make Europe more competitive the use of value-added services must be expanded, as this will bring substantial benefits to the economy. This is an unregulated area as these services do not involve settlement of the funds. The only limitation for further expansion, is our imagination, and let’s not make that a limitation?!

To be successful we must strengthen the cooperation between the different stakeholders. We must act now and agree on common standards that will ensure that any electronic device, mobile telephones, internet, PDAs (personal digital assistant) etc. can be used for value-added services and thereby guarantee that the whole value chain from customer-to-bank-to-customer is paper- and cash-free.

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