The Single Euro Payments Area and

payment innovation Johannes Priesemann

Head of Payment Systems Policy

Division

Magyar Nemzeti Bank, 19 November 2004

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Two topics:

1. Retail payments: Single Euro Payments Area and payment innovation

2. Large value payments: TARGET2

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1. Retail payments - 2 streams: integration and innovation

Single Euro Payments Area (SEPA) by 2010 fully established and SEPA services as option for citizens by 2008 In the euro area innovation shall be taken benefit of: pan-European payment solutions should be leading in terms of efficiency and safety

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1. SEPA: EC regulation

Message of EC Regulation 2560/2001

• All payments in euro are domestic payments: Single Euro Payment Area (SEPA)

• Regulation covers all payments in euro also in countries that have not adopted the euro as their currency

• No price difference anymore between national and cross-border payments for cards (since July 2002) and for STP credit transfers up to EUR 12,500 (since July 2003)

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“From Regulation to a real SEPA”

Efficientpan-Europeaninfrastructure

Profit margin

Processingcosts

Profit margin

Processingcosts

Loss

Processingcosts Profit margin

Processingcosts

Transparency &

Competition

Efficiency gain

1. Consequences of the EC regulation

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1. SEPA : Present state of payments integration

PEACH

All euro area banks

Bank Corporate customer

€ € €

€

€

€Payment initiation (no standard)

“Cross-border payments ”

“National payments ”

€

Euroareacountry:

X

YZ

Flows of money & information:

• 12 different files• 12 formats (incl. BBAN)

• 1file• 1 format (incl. IBAN)

ACH X

Z

YX

YZ

Payment initiation (national standard)

reconciliation (national standard)

reconciliation (no standard)

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1. SEPA Objective

• Citizens should be able to make payments throughout SEPA from a single bank account, using a single set of payment instruments, as easily and safely as in the national context today.

• The Eurosystem’s vision for the SEPA is that all euro area payments should become domestic, and reach a level of safety and efficiency at least at the level of the best performing national payment systems today.

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1. SEPA for citizens and corporates

euro area bank

euro area customer

PEACH

All euro area banks

€

Flow of money & information

€ €

€

€

€• 1 file• 1 format (incl. IBAN)• all payments

Automatic reconciliation

Payment initiation (ePI)

“in the euro area all payments are domestic ”

“Credeuro + PEDD”

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1. SEPA: Our expectations towards the banking industry

Reconfirm the white paper of May 2002 and present a convincing project plan with realistic milestones

Define pan-European schemes for credit transfers (Cred/Prieuro), direct debits (PEDD) and cards agree on and employ standards (IBAN)

Make national migration plans by mid-2005

Make pan-European instruments available also for national use from 2008 (SEPA for citizen)

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1. SEPA: Our expectations towards the banking industry

Complete SEPA by consolidating national infrastructures into a few remaining PEACHES by 2010 (SEPA for the infrastructure)

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1. SEPA: Central Banks’ contribution

Assist national banking communities in makingnational migration plans by mid-2005

Monitor progress of the national migrationto SEPA for the citizens 2008 and SEPA forthe infrastructure 2010

Contribute to the local implementation of SEPA objectives

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1. SEPA: List of relevant publications

The Eurosystem has pushed for SEPA since 1999

Improving cross-border retail payment services in the euro area -

the Eurosystem’s view, September 1999

Improving cross-border retail payment services -

Progress report September 2000

Towards an integrated infrastructure for credit transfers in euro,

November 2001 (ECOFIN report)

Towards a Single Euro Payments Area -

2nd Progress report, June 2003

and a 3rd Progress report expected to be published still in 2004

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1. Innovation leads to diversity of options

location & needs

Home Working placeTransport & travel

access devices /initiation

Interactive TVDesktop

OrganizerMobile Phone

Kiosk

Laptop

Magnetic card & reader

PrivatePrivateconsumerconsumer

counterparts

Retailers,merchants,

outlets

Banks/ financial services

Service providers

communication networks

World Wide Web

IDTV

ISDN

Other persons

WAPMobile networks

(GSM, GPRS, UMTS)

Wireless Local Area Network

ATM

Smart card & reader

Gastronomy

Fixed analogue line

E-Mail

Fixed high-speed line (xDSL)

Infrared(IrDA)

Bluetooth

Other digital devices

(flash, stick, cam, player, console …)

SMS, MMS

Data & digital goods providers

Sports, hobby, leisure

contactless chip

Biometric access

RFID

PE-ACH

Government

Shop

clearing & settlement

Home

Gross settlement Real time

Batch processing

Netting

SWIFT

PEDD

CREDEURO

CLS

Credit card processing

Debit card processing

Invoice & debit

Radio Frequency

Pre-funded Pay later

PKIcertificate

*******Username:

Password: ****

3D-Secure: *****

National ACH

National Direct Debit

National Credit Transfer

Means of payment(deposits, e-money,others)

PIN etc.

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1. Innovation raises questions of public interest

Level playing field for all EU countries?

Consumer protection?

Social exclusion?

Substitution effects?

Addressing changes in transaction needs?

Competition between different institution types?

Changing preferences / habits?

Cost-benefit / risk distribution?

Privacy?

Merchant interests?

Lisbon Agenda?

Externalities?

Core Principles Compliance?

Redeemability?Terrorist financing?

Money Laundering?

Shadow economy?

Safety?

Efficiency?

Monetary order?

Trust in currency? Network effects?

Availability?

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1. Observing payment innovation

Relative use of cashless payment instruments in EU-25, according to total number of

transactions (2002 figures)

Direct debits23%

Credit transfers30%

Credit/debit cards31%

Card-based e-money

1% Cheques15%

Blue Books addendum incorporating 2002 figures (2004)

Paper-based P2P, B2C, B2B;Truncation & substitution

B2C (e-commerce, cash substitution), new: P2P

P2P, B2B,new: integrated B2C

B2C, G2C… (trust/liability requirements)

B2C, new: P2P/server-based

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1. ECB activities as innovation-related catalyst

i.e. improve and facilitate co-ordination, provide analysis and information

• Articles, issues papers, events, newsletter “Payments and Settlements News” (P+S-N)”

• Re-launch of the electronic Payment Systems Observatory (ePSO, www.e-pso.info) in 2003

• Offering online databases, discussion forum• Work to improve statistics (beyond Blue Book),

first results envisaged next year • Facilitate the development and adoption of EU-

wide standards for the whole payment cycle• Single Euro Payments Area (SEPA)

- observer at the e and m payments task forces (EPC)

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• Users’ request for more harmonised service level

• Cost recovery problem

• Adaptability problem

• EU enlargement

• Credibility of the Eurosystem

AMPLIFIEAMPLIFIESS

2. The reasons for building TARGET2

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2. Current status and future milestones

2003 2007200620052004

Definition phase

General functional specifications (GFS)

Detailed functional specifications (DFS)

Development phase(technical implementation)

Testing phase

Customer Migration ProcessCustomer Migration ProcessCustomer Migration Process

= country window (wave)

Tests with users: - Credit institutions- Market infrastructures- Central banks

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What will remain?

• Direct business contacts between central banks and

their banks

• SWIFT-based messaging

• No upper or lower value limits

• Broad customer base

2. TARGET2 features and functionalities (I)

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What will be new?• “Single platform” system

• More robust and resilient system

• Harmonised interfaces for the connection of the users to TARGET2

• Same core service for all TARGET2 participants

• Single price structure

• Flexible liquidity management

2. TARGET2 features and functionalities (II)

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“Single platform” system• all central banks will use the same technical platform

• Central Banks remain responsible for the accounts of “their” banks and for the business relationship

• Cross-border transactions processed in same way as domestic transactions

• Availability of “TARGET-wide” liquidity saving features

2. TARGET2 features and functionalities (III)

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2. Oversight of TARGET2

Oversight of TARGET2• Project is being reviewed against the Core

Principles for systemically important payment systems (BIS “CP”)

• Initial assessment of the design of TARGET2 project against Core Principles is ongoing (CP III, IV, V, VI, VIII and IX)

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• TARGET brochure, October 2004• http://www.ecb.int/pub/pdf/other/target_brochure_update_2004en.pdf• Future developments in the TARGET system (ECB Monthly Bulletin April 2004)• http://www.ecb.int/paym/pdf/target/future/mb-target2-future.pdf• TARGET2 brochure, October 2004 • http://www.ecb.int/pub/pdf/other/target2_brochure_update_2004en.pdf• TARGET2 presentation – Sibos, October 2004• http://www.ecb.int/paym/html/sibos2004target2presentation.pdf• Article on TATGET2 – Sibos, October 2004• http://www.ecb.int/paym/pdf/target/future/sibos_article_en.pdf

2. Information on TARGET and TARGET2