SEPAYesterday, I attended a conference of EACHA, the European Association of Automatic Clearing Houses (in SEPA parlance CSM’s: Clearing and Settlement Mechanisms) in Berlin. This is a group of payments processors that in pre SEPA days served their respective national bank communities to clear and settle giro payments. Their backgrounds differ: their role in payments processing and their role in settlement is not uniform. And some of them are involved in cards processing or started to have a more European presence. But they have been established within the confines of their respective national (closed) communities and share the same DNA. These parties have teamed up to create interoperability for GIRO payments processors in SEPA.

As I was involved in the conception of the network and the creation of the interoperability framework and then the establishment of the inter-csm connections, which started almost 10 years ago, it was a good opportunity to catch up with former taskforce members and learn about the status of the EACHA network and related SEPA interoperability issues. Also it is a life case to better understand the dynamics (and pitfalls) of standardisation in the real world. A first hand experience that can help me better articulate my efforts on Red Planet Dust around Human collaboration.

As a standardisations effort the EACHA interoperability framework is a success in my opinion, technically aligning 20 parties with all their constrains form 20 different countries in the EU. In these 10 years much has been achieved. EACHA has put interoperability firmly on the SEPA agenda.

It achieved 15 operational inter-CSM processing arrangements and is now starting to think to enhance the network with other services. Influential people at the conference even proclaimed the EACHA network as finished.

To me the SEPA network is not finished at all:

  • 1) the aim is to create an efficient European network that will include many if not all of the CSMs (including banks acting as such!). EACHA is only to lead the way on technical interoperability and leading by example but it should not be the end goal for it holds no volumetric/economic merits over other structures to “win” by it self. Nor do the individual parties involved have the power or stamina to win by themselves.
  • 2) To me 15 inter-CSM links operational in 2013 are a bit of a disappointment. 4 years ago 12 links where already in place operationally, and with 20 members it means multiple parties have not been able to link even once. As an operational network it is only making a marginal impact on efficiently routing payments through Europe today.

For SEPA to deliver on its multiple goals it is important that true interoperability (hence standardisation) will be achieved based on a distributed network approach. EACHA has led the way but has not been able to create the momentum needed or the acceptance of other payments processors to really start influencing the network structure for bank-to-bank SEPA payments yet. I think EACHA should be applauded for the effort and for what they did achieve, but it has to work from within their possibilities (being bank controlled and with national assignments) and is facing considerable resistance from a competing network.

One of the biggest hurdles is the closed star based set-up of EBA Clearing. Despite the ECB and EU demanding interoperability EBA Clearing intentionally does not allow other CSMs to link while their own direct participants are acting in exactly the same role within the EBA network based on Target2 Settlement. In former days when this settlement was done differently, maybe there could have been made an argument for this but not any more. EBA in this sense is just obstructing the creation of a distributed network. As long as this divide is not taken away interoperability within a decentralised and eventually a distributed network for payments will not take off. Who is going to take up the mantle of opening up this closed structure? ECB? EU? This should remain one of the major issues on the EACHA agenda. The SEPA is not a level playing field yet, it is not seeing sufficient standardisation and parts of its conception are tilted into the banks interest favour

The conceptions on which EACHA interoperability are based will be better for all stakeholders in SEPA (which is pretty much all companies and citizens) and are superior to the star network advocated by the EBA banks. Many, even within the EACHA, will find this a presumptuous claim, but while EBA’s network is a reality it should not be accepted as being the dominant cross border payments network. They can easily keep their network operating to the same principles today by adapting to interoperability. By not allowing this it is shutting out the creation of possible competition on their home turf. It is in that sense exerting monopolistic powers to cuttle the competition before it can emerge.

This is a pity for the SEPA as a whole: SEPA needs a highly efficient (in cost, in safety, in throughput time) and resilient network. A system based on a one party centralised structure is not the way to go as the ECB and the EU have expressed several times before.

EACHA has been aiming to create a decentralised network of payments processors at first – inviting others to join – while creating a Technical interoperability framework that could be the basis for a distributed network. (NB In this network all payments processors should be able to reach the others, while the various business models remained available if wanted by them.)

EACHA has to move on to stay relevant; it has to move on for several of the parties involved to remain relevant in this domain. Proclaiming the network finished is not the way to go forward in my opinion. It will need to create new and faster functionalities and services building on their interoperable network abilities but they will need to keep the pressure on the kettle to help change the network structure of the SEPA itself. That will be the main contribution of the standardisation effort undertaken by EACHA. Based on the success of this effort in achieving an open environment for all, individual firms can then find their way and compete.

But the banks need to move on as well. If the (business) network of banks does not evolve while the rest of the world is changing rapidly and adapting new technologies and concepts it will become a hindrance for development. And many of these technologies and concepts are based on other network structures/topologies then now used in the (Giro) banking environment. It is not in the interest of banks in the long run (what is long nowadays?) to be stuck with a legacy network (even though now supporting SEPA payments) that in comparison to other ways will become less competitive and adaptable in time. Business model and technology are going hand in hand in this respect. But it is also creating an externality for all the companies and citizens in Europe for they could have had a better service from their banks.

For further reading on SEPA at Red Planet Dust:

the RPD Sepa Files