SEPA: Is the ECB stifling competition with its latest move?

Ten years ago the European Commission (EC) and the European Central Bank (ECB) announced a common vision for the Single Euro Payments Area (SEPA), which they described as an “integrated market for payment services which is subject to effective competition…” and described their role as “creating open and common standards that overcome technical and commercial barriers and by fostering effective competition”.

You will notice the repeated use of the word “competition”, and indeed SEPA has been implemented by several payment clearing companies across Europe who compete for the payments business of banks. The market is working and there is no need for intervention by state or super-state actors – writes Tom Hay, Head of Payments at Icon Solutions, and Mark Burlison, Senior Consultant at Icon Solutions.

So what is the ECB up to? They recently published the Target Instant Payments (TIPS) Settlement User Requirements. The rather dull title conceals – perhaps deliberately – an apparent attempt by the ECB to offer Instant Payment services that directly compete with commercial clearing and settlement operators. Such a competition can’t be fair, because “TIPS shall operate on a full cost-recovery and not-for-profit basis.” Why would the ECB make such a move?

SEPA as a free market

The crux of the matter is that two EU agencies, the European Commission (EC) and The European Central Bank (ECB), are at odds over the new SEPA Credit Transfer Instant (SCT Inst) scheme. The scheme is designed to bring SEPA in-line with the wider market shift toward instant payments, such as the UK’s Faster Payments scheme and similar initiatives that are now happening across the globe.

According to the EC, SEPA exists to make: “all electronic payments in the euro area as easy as cash payments. You can make fast and secure transfers between bank accounts anywhere in the euro area.” This is a laudable goal of course, but in a free market there is a danger of the dead hand of the state writing regulations that increase costs for end consumers. The commission is quick to reassure that won’t be the case:

“On the contrary, SEPA will mean lower costs. SEPA aims to increase efficiency and reduce prices by making the euro area banking market more competitive. Opening the whole of this market to competition should force down prices and enable you to shop around for the best deal.”

“While the EU does not control market prices for payments, its competition authorities will be closely following market developments and will be swift to intervene if banks use SEPA as an excuse to increase prices.”

And because it’s central to my argument, here’s the EC’s take on state owned enterprises:

“Recent experience has shown that State-Owned Enterprises (SOEs) can be an important source of concerns in at least three areas: market functioning, public finances and financial stability.”

So to be clear, the EC’s position is as follows:

• Opening the whole of the Euro payments market to competition should force prices down.
• The EU does not control market prices for Euro payments.
• State-owned enterprises can be an important source of concern in market function.

ECB mission creep

Now onto the ECB, which (via National Central Banks) is a state-owned enterprise that receives its mandate from and is held accountable by the European Parliament. The new project – TIPS – focuses specifically on the settlement of instant payments:

“TIPS is a service for the settlement of instant payments. TIPS will offer instant settlement services to its Participants when an originator instructs the transfer of funds to a beneficiary.”

Other instant payment implementations (such as Faster Payments in the UK and G3 in Singapore) settle using existing central bank mechanisms and do not settle per individual payment. Instead they accrue settlement positions for many transactions over a period.

This does mean that on days when the central bank settlement mechanism is not available (the four day Easter weekend being an extreme example) positions accrue over a longer period and there is a chance that mechanisms put in place to address settlement risk will lead to payments being rejected. The obvious solution to this is simply to extend the operating hours of its existing settlement mechanism, as the Bank of England is contemplating. But the ECB has decided that it wants to create a new settlement mechanism that can handle the transaction volumes of all euro denominated instant payments setting individually.

This clearly indicates the ECB’s intention to step outside of the traditional settlement role of Central Banks, and enter the hitherto commercial area of payments clearing. Despite the ECB’s principle of not providing clearing services, TIPS positions the ECB as a clearing house, targeting the same business as Stet, Equens, SIBS and the other commercial for-profit clearing houses.

The death of the SEPA spirit?

Existing providers of Euro clearing services must be wondering what the EC will do about a state-owned enterprise entering and undercutting a competitive marketplace by operating as a non-profit organisation that sets the price for Euro denominated instant payments. No doubt they are nervously eyeing the amount they have invested thus far in implementing SCT Inst. They must also be questioning whether they should continue to invest in SEPA payment initiatives going forward, if those investments could be jeopardised at a bureaucratic stroke.

The ECB seems to be sending a message that payments are better provided by a state-supported infrastructure than by the operation of the market. This confusion can only damage business confidence, and may mark the death of the spirit of SEPA – instead of opening the market to competition and innovation, state intervention will stifle it.