The introduction of the Single Euro Payment Area (SEPA) is a key objective for the European Commission and the European Central Bank. It has long been an anachronism that although the Eurozone nations share the same currency a payment in euros is treated as a foreign exchange payment when it crosses borders. The irony is that the border controls within the EU were long ago dispensed with so typically the payment will take longer to arrive than goods being driven from one country to the next. The analogy is that US$ payments from one US state to another are not treated as foreign payments so why should euros in Europe?

SEPA delivers centralised ACH clearing of credits and debits for Euro payments within the 31 countries signed up to SEPA along with a new payment card and cash handling framework. The scope of SEPA is pretty big. One of the most important strands of work to achieve its varied and complex objectives is the legal strand which attempts to introduce a common legal framework for Euro payments. The method of introduction is the Payment Services Directive (PSD) which is a European Commission directive which each EU state must enact into its own law by November 2009.

One problem with a Directive approach is that it needs interpretation by the national governments and any ambiguity usually ends up in a differences in interpretation between member states – local variations and interpretations are akin to acne in teenagers – an unfortunate side effect of the process that will eventually be cleared up. The EU will grind through its work load and eventually clarify and address glaring discrepancies in its own good time as part of the business (or should that be bureaucracy) as usual processes. It will take time, but the differences will end up being addressed – just don’t hold your breath.

The results are
1. The PSD will be interpreted more liberally by some legislations and regulators than others
2. The PSD will pass into law as it is currently drafted in all 31 countries
3. Revisions will take time to come through.

Some important features of the PSD are those relating to the introduction of a new category of authorised financial institution called a Payments Institution. The capability of a PI are restricted. No deposit taking though they can make payments on their own account on behalf of others. The initial capital adequacy requirements for a PI are surprisingly low although the ongoing requirements are quite high as a percentage of payment value processed. The power of the PI to demand to create connections to any card scheme in Europe is significant and the ability to offer centralised treasury settlement to Pan European businesses is mouth watering from an ACH product perspective.

E-money institutions are also recognised by the PSD and there were plans for a more liberal regulatory regime being introduced by a second E-money directive – but in the light of recent events I personally doubt that “introducing a lighter regulatory touch” is high on the European Commission’s New Years resolutions. It think E-money institutions will be left where they are the regulators have higher priorities.

Given we are going to see a period of regulatory and central bank angst and a general tightening of requirements placed on deposit taking institutions/banks then the opportunities for small fleet of foot new entrants to register as a PI and take a slice of the lucrative euro payment space may be considerable. Of course whether any new entrant can raise the capital to enter the market might actually be the most significant challenge. 🙂