SEPA: a Missed Opportunity for True Payments Standardisation

SEPAWith February 2014 looming around the corner and many companies scrambling to get their act together to implement SEPA in time it might be regarded as to early to start evaluating the SEPA endeavour. But lets give it a shot anyway: part 1.

When the European Community drafted the Lisbon Agenda years ago the end goals were only broadly described for what since then has come to be known as “SEPA”. The stated goals aligned with the idea of creating an inner market without country barriers to create a highly competitive economic block in a changing world. Where people, goods and services were expected to be flowing freely it was, in my eyes rightly seen, a necessity that money – as in a “single currency” – should be able to flow freely as well.

To make this vision work the legacy practices for money transfers (a.k.a. “payments” being the logistics to transfer money (value) from one to an other) which where limited by country borders consequently had to be replaced with a new methodology to be used by all in the EU; financial institutions, companies, institutions and citizens alike.

The EC ordered the banks (via the European Payments Council – EPC – as their branch representative) to “volunteer” to create a new payments standard for the Single Euro(pean) Payments Area. It was the EC’s strong intention that this would be shaped in the interest of all stakeholders while leaving it to the banks. This is not meant judgemental, just as a fact, but with the 2008 legacy still haunting us I doubt the banks would have been given this chance to control the process as it would had to be decided today.

Where ECB and EU created the legal and regulatory part of the standardisation needed among countries the EPC has created the technical frameworks we are implementing for Credit and Direct Debit transfers today.

The banks have started the SEPA challenge with three handicaps:

  • providing the precise end-goals, the technology to be used and the type of frameworks needed were mostly unknown terrain to the participants all kinds of sub-optimal architectural and standardization choices were made in the initial phase.
  • the implications of the idea that all existing services (both value added services and basic services) should be able to be catered for on a per bank or small community of banks basis and created the possibility to deviate from the standard (non-required yellow fields and descriptions that are multi interpretable)
  • contributing banks would often unconsciously, but also awarely, try to maintain the old order and the associated business models favouring banks as a privileged party.

These aspects have created a SEPA standard that is being implemented in so-called “mini-SEPA’s” and with message sets that are different per bank. (NB even though these variances are seemingly small they are specific enough to not be able to be used with other payment providers as well as payment processors.) These three factors have led to a number of barriers that have prevented a truly interoperable SEPA from happening as a prerequisite for the original purpose of an open, innovative and (therefore) competitive payments providing and payments processing market.

By their nature the banks, at European and national level have taken their own business interests into account. With the balance of power between banks and the rest of society not being distributed evenly this has resulted in a under-representation of these other interests. For banks interoperability or number portability were not high priorities, for all other stakeholders they were key to their interests. This hampers citizens and companies to move their accounts and payments to an other bank. (NB That this in the end is not to the benefit of the banks themselves I will discuss in a future post.)

Since the start of the creation of SEPA much has changed in payments, much more will change in the short to mid term. The playing field has changed dramatically, for payments and for the banks that are still channelling large parts of all the payment volumes in our economies.
The process to establish SEPA has been long and took a huge effort. Along the way we found that interoperability would be crucial to create an effective network where individual citizens, companies as well as financial institutions could find a competitive payments landscape. The EPC only started to recognise the need for interoperability when the ECB and the EC, alerted by signals from other market participants, started to press for it. In my eyes that was recognised to late and addressed to half-heartedly.

In combination with the mandatory elements of SEPA, this lack of interoperability – and the market and customer lock in this involves – makes it pretty difficult for other parties who want to do new things or existing things in an other way (a.k.a. innovation) if not aligned with the banking led business models.

In the interconnected world we are now seeing established true interoperability (which can only be based on real end-to-end standardisation) is key to create as little frictions as possible between the “nodes” in the network. In the dynamic and highly interconnected world payments are a prerequisite for a contribution by any individual person or company to the network (i.e. being the fabric of our society and economy). In hindsight SEPA has not been ambitious enough in creating a truly common standard or incorporate means to deviate in such a way that interoperability (*as proof of the effectiveness of the standards) was ensured.

Standardisation in general is a mightily effective way to scope our democratic society. This is also applicable for payments standardisation. But if standardisation is done inefficiently it is pretty hard to improve upon. Especially with payments for it is not a normal product but a social product embedded in our laws and regulations.

For further reading on SEPA at Red Planet Dust:

the RPD Sepa Files