The Single European Payments Area (SEPA): Implementation Delays and Implications for the United States

The Single European Payments Area (SEPA):
Implementation Delays and Implications for the
United States
Updated May 2, 2008
Walter W. Eubanks
Specialist in Financial Economic
Government and Finance Division

The Single European Payments Area (SEPA):
Implementation Delays and Implications for the
United States
The Single European Payments Area (SEPA) is a planned electronic payments
system that upon completion in 2010 would allow individuals, small- and medium-
sized businesses, and corporations to make electronic payments throughout the
European Union as efficiently and safely as such payments are being made on the
national level today. The major piece of legislation to create SEPA, the Payment
Services Directive was proposed in 2005, but has been tied up in the European
Commission. Disagreements among member states about the capital requirements
of financial services firms offering cross-border credits and payments services and
limiting the antitrust powers of EU member states governing financial services were
two of the major reasons for the protracted legislative debates. However, on March
27, 2007, the Council of Economic and Finance Ministers agreed on a compromise
on these two issues that still needs the European Parliament’s approval.
Congress is interested in SEPA because it has been monitoring the European
Union’s effort to unify its 27 member countries’ financial markets. Congress
recognizes that upon implementation of these efforts, such as the EU Financial
Services Action Plan (FSAP), the Financial Conglomerate Directive (FCD), and now
the Payment Services Directive (PSD), could significantly impact American firms.
The European payments systems are extremely fragmented. There are 31
national systems including Norway, Switzerland, Iceland, and Liechtenstein that are
governed by national and local laws and practices. On average, the cost of making
payments in the EU remains relatively expensive, even though more less-expensive
electronic payments are being made, replacing the more costly cash and paper-check
payments. European payment services costs include the inefficiencies caused by the
use of non-standard customer interface, incompatible formats between foreign and
domestic banks, and less automated internal banking systems. By one measure, these
inefficiencies and others are estimated to cost the EU between 2% and 3% of its
gross domestic product (GDP) (the IMF estimated EU GDP will be $17.6 trillion in

2008 which would mean between $352 and $528 billion).

This report presents a brief background on the efforts to create SEPA by the
European government and the banking industry. It assesses the current electronic
payments systems from the wholesale (large value) level and the retail (small value)
level of payments. The report then examines the attempts to develop the pan-
European automated clearinghouse system (PEACH). It summarizes the provisions
of the Payment Services Directive that establishes the legal and regulatory basis for
SEPA. The last two sections examine the implications of SEPA for U.S.
international banks and conclude with an outline of the potential advantages and
disadvantages of SEPA for European and American financial services providers.
This report will be updated as developments warrant.

In troduction ......................................................1
SEPA Background.................................................2
The EU Payments System.......................................4
The Wholesale Electronic Payments System.........................6
The Retail Electronic Payments System............................7
Excess Profits in the Retail Electronic Payments Systems..........7
Provisions of the Payments Services Directive...........................9
SEPA’s Implications for the United States.............................10
Conclusion ......................................................12
List of Figures
Figure 1. Number of Non-Cash Payments in the EU (millions) .............5
Figure 2. Profit Ratio Differentials in Credit Card Issuing, 2004.............8

The Single European Payments Area
(SEPA): Implementation Delays and
Implications for the United States
The European Union (EU)1 is developing an electronic payments system to
allow national financial services providers to offer Eurozone-wide electronic
payment services. SEPA is expected to allow individuals, small- and medium-sized
enterprises (SMEs), and corporations to make electronic payments throughout the
Eurozone as efficiently and as safely as such payments are being made domestically
today. SEPA is to bring about similar economically unifying effects in electronic
payments as the Euro () banknotes and coins brought about since their January 2002
introduction. Because of that introduction, businesses and individuals in the
Eurozone are able to make cash payments within and across 15 countries using a
single purse of currency. The most recent plan is to include all 31 European Union
member states as well as Norway, Switzerland, Iceland, and Liechtenstein which
have agreed to participate in the Euro payment system.2 SEPA has been a work in
progress since its conception in 2002. Numerous delays and lack of legislative and
regulatory agreements have frustrated the European Commission in Brussel, its main
advocate,3 even though the private European banking industry is expected to pay for
SEPA. The lack of progress could be explained by the European bankers’
uncertainty about their ability to profitably recoup their costs once the system is
constructed in 2010.4

1 The European Union’s member countries have expanded to 27. Only 15 members are in
the Eurozone. Slovenia, Malta and Cyprus joined the Eurozone in the last 18 months.
Countries in the Eurozone are Austria, Belgium, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, and Spain. Denmark, Sweden, and the United
Kingdom have retained their national currencies. The extension included Bulgaria, Czech
Republic, Estonia, Hungary, Latvia, Lithuania,, Poland, Romania, Slovakia, and Slovenia
for a total membership of 27.
2 Joe Kirwin, “New EU bank Payments Network Unveiled; Transition to Take Years to
Complete,” BNA’s Banking Report, February 4, 2008, p. 2.
3 The European Commission is the executive body of the European Union. Its primary role
is to propose and implement legislation similar to the executive branch of most national
4 For more details about this explanation, see the Federal Reserve System, Staff Study 175,
The Future of Retail Electronic Payments Systems: Industry Interview and Analysis,
December 2002, p. 18.

SEPA is of interest to Congress because it continues to monitor the European
Union’s efforts to unify its financial services markets. Congress recognizes that,
upon completion of SEPA, American firms, customers, and investors could be
significantly impacted by such efforts as the financial services action plan (FSAP),
the Financial Conglomerate Directive (PSD), and the Payments Services Directive.
Congress is also committed to working with U.S. and EU financial regulators to
ensure U.S. financial services providers fair access to European and American
financial markets.
A major recent development in the European efforts to unify its markets was
that on March 27, 2007, the EU Council of Economic and Finance Ministers Agreed
to a compromise on two controversial issues: the capital requirements for financial
services firms offering cross-border credit and payments services, and limiting (or
preempting ) the antitrust powers of EU member states over financial services under
their jurisdiction. Because of these unresolved issues, the European Parliament failed
to take a scheduled December 12, 2006 vote on the Payment Services Directive
(PSD) that the European Commission published in 2005.5 The PSD is aimed at
removing most of the legal and regulatory barriers to market competition in the
European Union, particularly the Eurozone and overcoming the regulatory obstacles
to inter-Eurozone payments. The directive, for example, addresses fundamental
questions raised regarding liability and burden of proof in cases of credit card fraud,
execution time, and value date of transactions and treatment of nonmember
countries’ banks doing business in the Eurozone.
This report presents a brief background of the European Commission and the
European banking industry efforts to create a single European payments area. It
examines the current electronic payments system as it stands from both the wholesale
(large value) and retail (small value) levels transactions. The next part of the report
assesses the attempt to develop the pan-European automated clearinghouse system
(PEACH). Then, it outlines the provisions of the Payment Services Directive that
establish the legal and regulatory basis for SEPA. The final two sections of the
report examine some of the implications of SEPA for U.S. international banks and
outline some potential advantageous and disadvantageous effects of SEPA.
SEPA Background
To plan SEPA, the European Commission gave the preparatory work to the
European Payments Council (EPC), which is a coalition founded by 65 banks and
three European credit sector associations. The European Commission sees the
creation of an integrated payments system as a logical follow-up to the introduction
of the Euro and expects big savings and greater efficiencies for consumers and
businesses from SEPA. However, SEPA is likely to impose significant costs on the
European banking industry in the process of its development, including increased
spending on advanced technology in software and hardware infrastructure. As one

5 For an updated version of this legislation, visit [
s i p a d e 3 ? P U BRE F = -/ / E P / / NONS GM L +REPORT +A6-2006 -0298+0+DOC+PDF+V 0//

European Central Bank publication states, “This restructuring [for SEPA] will, in the
short term, generate considerable costs; however, in the medium to long term, the
European banking industry will benefit from cost savings regarding euro area
payments, and also from potential new revenue streams.”6 Besides the political
controversies, the European banking industry does not seem to be convinced about
the future benefits. Consequently, it has been tardy developing SEPA. The slowness
of the creation of SEPA has brought criticisms of the EPC and the banking industry,
including a threat of possible regulatory intervention unless efforts to create SEPA
are sped up.7 The EPC response was that SEPA is on schedule in accordance with
the revised December 2004 roadmap. The revisions clearly overlooked the
benchmarks set in the earlier roadmap of 2002-2010.8
On the government side, concerns were expressed by the European
Commission, and the European Central Bank because the EPC has missed critical
points on its own roadmap. One argument the European Commission put forth is that
EPC’s efforts so far would not remove the fragmentation of the Eurozone payments
system because the needed massive irreversible migration of users from the current
dominant national systems to SEPA may not come about. Some in the European
Central Bank argue that the banking industry should speed up the SEPA
implementation process.9 In defense of the EPC, Gerard Harsink, its chairman,
responded that the council was responsible only for drawing up the rules and
standards for the payment products and for implementing them.10 The
implementation is being held up by lack of approval of the PSD, which is aimed at
integrating the existing national payment systems into a pan-European system.
As mentioned above, the legal bases on which the SEPA framework is to stand
are a number of existing EU directives. A critical one is the Market in Financial
Instruments Directives (MiFID), approved by the European Parliament April 21,
2004. However, 24 member states did not pass the necessary member state
legislation to implement the MiFID. The MiFID was to establish the single passport
system, which would allow investment firms to operate throughout the EU under the
supervision of the financial services regulator of the member state where the firm is
based. On April 24, 2007, the European Commission took legal action against 24
European Union member states for failure to implement the necessary laws and

6 European Central Bank, The Single Euro Payments Area (SEPA): An Integrated Retail
Payments Market, November 2006, p. 8.
7 Tobias Buck, “Brussels accuses banking industry of stalling on single euro payments area,”
Financial Times, February 9, 2006, p. 1.
8 For more details, see the European Payments Council’s roadmap for the SEPA at
[ ht t p: / / www.eur opeanpayment s counci l .or g/ document s / Roadmap% 20publ i c % 20ver si o n%

204th%20April.pdf], 16 p.

9 “ECB Tells European Banks to Get Moving on Plans for Single European Payments
Areas,” BNA Banking Report, March 6, 2006, p. 1, at [
IP/BNA/bar.nsf/SearchAllV iew/52EA66EFFDFDCD6A85257127000E92DD?Open&h ig
10 Tobias Buck, “Brussels accuses banking industry of stalling on single euro payments
area,” p. 2.

regulations to break down national laws that prevent cross-border capital markets
from function efficiently. The Commission, the executive body of the EU, took legal
action because only three member states — the United Kingdom, Romania and
Ireland — met the January 31, 2006 deadline to implement the Markets in Financial
Instruments Directive (MiFID). According to the European Commission, “In this
situation there is a risk that member states can face legal action by private parties
who might claim damages for losses incurred because of late implementation of
national legislation.”11 The risk of such damage claims is because financial firms
throughout the EU have incurred major expenditures in preparation for the
implementation of the MiFID. The U.K. Financial Services Authority has estimated
the changes being made by financial firms in the UK could run up to $2 billion.
The Market in Financial Instruments Directives was implemented on November
1, 2007, on schedule, even though some member states had not finalized their
implementing legislation. The European Commission was criticized by
representatives from several European financial advisory bodies for implementing
the MiFID, which will impose huge administrative burdens on the EU securities
industry “without any apparent benefits to the industry.”12 These European securities
dealers and managers are concern there will not be consistency in the implementation
and enforcement of MiFID by the 27 member states. These concerns are raised
because they found the MiFID too vague in its definitions of such terms as
“competence” and “best execution,” which could lead to an uneven playing field
because of different interpretations.
The EU Payments System
When SEPA is developed, it will be one of the world’s largest electronic
payments system. In 2004, the most recent year for which we have data, the then 25-
member payments system made an estimated 231 billion transactions (cash and non-
cash) with a total value of 52 trillion or $63 trillion.13 But there was a relatively
small volume of cross-border transactions (97% of the payments were within member
states, with only seven billion cross-border transactions).14 Even so, seven billion is
a significant number of transactions. The process of switching from paper checks,
notes, and coins to electronic payments has already begun. Non-cash payment

11 For more information on developments the implementation of the MiFID, see
[] .
12 Daniel Pruzin, “Advisers Slam EU Financial Order, Indicate Implementation Concerns,”
BNA Banking Report, May 2, 2008, p. 2.
[ ].
13 While there are no official estimates of the number of cash transactions for the United
States, noncash transactions in 2004 were estimated to number around 100 billion. See
Table 2 in CRS Report RS22525, Electronic Banking: The Post-Check 21 Payments System,
by Walter W. Eubanks.
14 HM Treasury, Payment Services in the EU, Payment Services Directive: A Consultative
Document, July 2006, p. 2.1.

transactions in 2004 amounted to 65.3 billion transactions in the European Union.15
The number of electronic payments (card payments, credit transfers, and direct
debits) has been steadily climbing, replacing payments that were made with checks
and cash. Total check payments declined from 8.9 billion in 2000 to 7.5 billion in
2004. Figure 1 shows that the total number of electronic payments increased from
37.9 billion in 2000 to 57 billion in 2004. Using data from the Commission’s retail
banking study and the European Central Bank, there were an estimated 166 billion
cash transactions in the EU in 2004.16
Figure 1. Number of Non-Cash Payments in the EU (millions)

Source: Commission Services Retail Banking Sector Inquiry, 2005-2006
The estimated aggregate cost of the existing payments system ranges from 2%
to 3% of gross domestic product (GDP) (the IMF estimated EU GDP will be $17.617
trillion for 2008, which makes the estimated cost between $352 and $528 billion).
However, the cost of the payments systems of Belgium, the Netherlands and Sweden
are between 0.3-0.5% of GDP. Switching to more electronic payments would lower
these costs; the use of cash alone accounts for 60% to 70% of the total inefficiency18
of the system. A major reason for the high cost is that the European payments
systems are made up of many separate systems. There are 27 national systems
15 See ECB 2006 Blue Book: Payment and Securities Settlement Systems in the European
Union and in the Acceding Countries — Addendum Incorporating 2004 data, available at
[ ht t p: / / www.ecb.i nt / pub/ pdf / ot her / bl uebook2006addendem.pdf ] .
16 See HM Treasury, Payment Services in the EU, Payment Services Directive: A
Consultative Document, July 2006, p. 2.1; and European Commission, Report on the Retail
Banking Sector Inquiry, January 31, 2007, p. 81, at [
antitrust/others/sector_inquiries/financial_servi ces/sec_2007_106.pdf].
17 European Commission, Europe in Figures — Eurostat yearbook 2006-2007, February 20,
2007, p. 153; []; and
[ wi ki/Economy_of_t he_European_Union#Economic_variation].
18 HM Treasury, Payment Services in the EU, Payment Services Directive: A Consultative
Document, July 2006, p. 2.10.

governed by national and local laws and practices. Stakeholders who have profited
from the existing systems are not likely to readily change to SEPA. The prices for
payment services take into account the inefficiencies caused by the use of non-
standard customer interfaces, incompatible formats between foreign and domestic
banks, and a low degree of automation in banks’ internal systems.19 The EU’s main
argument for SEPA is that it would lead to a less fragmented payments system that
would benefit from economies of scale and reduced transaction costs.
The European banking industry’s concern about SEPA is partly that it will have
to restructure its currently profitable wholesale and retail payments system to
accommodate SEPA. SEPA is expected to have the greatest impact on retail
transactions (small value transactions). The wholesale (large value transactions)
electronic payments system, which handles most of the cross-border transactions, is
functioning well, but it too must be restructured. In support of the argument for
SEPA, the EU Commission found huge price differences in providing payment
services among member nations. The difference was as high as eight times. In
addition, in some countries, the standard execution time for cross-border payments
is one day, while in others it takes up to three days.20
The Wholesale Electronic Payments System
Most wholesale transactions are made through major banks with corresponding
banking relationships with local banks in most important foreign cities. At least 80%
of bank-to-bank cross-border payments are made through corresponding banking
arrangements or via intra-bank transactions (the same banks with offices in other
countries).21 In addition, there are governments and private wholesale payments
systems. Fedwire is Federal Reserve Wire Network for American bank transactions.
The European Union has TARGET, which is the Trans-European Automated Real-
time Gross Settlement Express Transfer, consisting of the European Central Bank
(ECB) and 16 member countries’ central banks systems. TARGET and TARGET
2 are also critical tools for the implementation of monetary policy for the EuroSystem
through the European System of Central Banks. Another EU-wide wholesale
electronic payment mechanism is the EURO1 system of the Euro banking
association. EURO1 processes interbank payments. There are also three other
smaller large-value systems located in France, Finland, and Spain.22

19 European Central Bank, Improving Cross-Border Retail Payment Services: The
Eurosystem’s View, September 1999, p. 10.
20 HM Treasury, Payment Services in the EU, Payment Services Directive: A Consultative
Document, July 2006, p. 2.7.
21 Yoon S. Park, The Inefficiencies of Cross-Border Payment: How Current Forces are
Shaping the Future, Visa International Service Association, January 17, 2007, p. 2.
22 Bank for International Settlements, Payment Systems in the Euro Area, the CPSS Red
Book 2003, p. 75, at [].

The Retail Electronic Payments System
On the retail side, the construction of SEPA began in February 2004, but soon
ran into difficulties. In assessing the different EU-infrastructures in place for
processing payments, the European banking industry opted for the creation of a pan-
European Automated Clearing House (PEACH). ACH systems are large volume
electronic payment processing systems. The system usually enables corporations and
consumers to make routine payments more efficiently than cash or checks. Payrolls,
recurring bill payments, and government payments to individuals and agencies such
as Social Security benefits are examples of typical ACH payments. ACHs are
broadcasters of payments to many payees or receivers of payments from many payees
for a single ACH customer.
PEACH would be able to make these payments throughout the Europan Union,
but would have required banks to either close their systems and move to another
infrastructure, or transform proven and efficient national ACHs into PEACHs. In
2005, a number of existing automated clearinghouses declared their intention to
become SEPA-compliant without necessarily transforming their systems into
PEACHs. Indications are that the EuroSystem would accept this approach. It
encourages both the migration of national to SEPA-compliant infrastructures and the
establishment of additional PEACH providers to encourage the necessary
competition in the market.23 The banking industry’s effort to minimize costs has
been a contributing factor in the slowness of implementing the PEACH process.24
Furthermore, there is little confidence among financial analysts that these
systems will work efficiently together. While the openness to a variety of SEPA-
compliant infrastructures facilitates agreements among the EU-member countries, it
undercuts capturing the cost savings from economies of scale. It is essential that a
critical mass of payment instruments is processed in the PEACH infrastructure,
including local volumes, in order to be competitive with the lower unit costs of the
large national ACHs. A major reason for the resistance to SEPA is that the bulk of
the costs of processing intra-EU payments lies within the financial institutions (client
order/reporting automation, back office automation). A critical mass of payments is
needed to significantly reduce the unit cost of this processing.
Excess Profits in the Retail Electronic Payments Systems. The
fragmentation in EU financial markets with 27 national regulators and local laws and
practices could lead to excess profits for lack of competition. Figure 2 shows the
profitability of credit cards issuing at the country level, using 2004 data (specific
countries were not identified). While there is some controversy about the way costs

23 European Central Bank, Towards a Single EURO Payments Areas — Objectives and
Deadlines, February 2006, pp. 16-20.
24 A network of automated clearing houses processes small-value electronic payments and
retail electronic transfers. Electronic payments are frequently facilitated by a private
electronic message transfer system. One of the largest and widely known electronic
messaging systems is the Society for Worldwide Interbank Financial Telecommunications

were calculated in these estimates,25 the data shows that the income generated from
issuing credit cards was higher than the associated cost of issuing credit cards in all
25 member states. The weighted average profit ratio varied from 3% to 147% with
an average of 65%, suggesting strongly that there are excess profits in the EU credit
card market.
Figure 2. Profit Ratio Differentials in Credit Card Issuing, 2004

Source: Commission services retail banking sector inquiry, 2005-2006
Furthermore, the fragmentation and the lack of competition were evident in the
variation in fees for ATM withdrawals and credit transfers (not shown) between
banks and across member states. For example, some banks charge a fixed amount
per transaction and others levy a percentage of the transaction amount. Others apply
a mixed structure, combining methods of determining the charges. In the European
Commission’s study from which this data was obtained, the weighted average fee for
a 100 ATM withdrawal on another bank with a debit card is 1.14. However, the
fee charged ranged from pennies to 8. Greater variability was found for credit
transfers. Credit transfers are payments that are made between bank accounts at the
instruction of the payer. For the same 100 credit transfer, the weighted average fee
in the 12 EU member states was 2. However, the weighted average fee ranged from
0 to 10. The study concludes that the characteristics of the retail banking industry
make it difficult to compare similar products. But, the pricing behavior of banks
provides some initial indications on the degree of competition in the market.26
25 European Commission, Report on the Retail Banking Sector Inquiry, January 31, 2007,
p. 169, at [
_servi ces/sec_2007_106.pdf].
26 European Commission, Report on the Retail Banking Sector Inquiry, January 31, 2007,
pp. 62-63.

Provisions of the Payments Services Directive
In September 2005, the European Payments Council adopted the SEPA Direct
Debit Rulebook for national consultation. What the member nations had to consider
in this Rulebook was a complete set of business rules, practices, and standards which
govern the direct debit scheme in SEPA. The Rulebook includes the roles and
responsibilities of the participants, business and operational rules, and legal and
contractual frameworks. A major unresolved issue for the EPC is the way debts are
issued, amended, and cancelled. But this could be overcome by the passage of the
Payment Services Directive. The Payment Services Directive could resolve issues
such as whether the debtors can give the mandates to debit their accounts directly to
the creditors, or whether the debtors should give the mandates to their banks, either
directly or through the creditors.27 Currently in some countries, debtors give the
mandates to the creditors; in other countries, the debtors give the mandates to their
The directive being considered for approval by the European Parliament
contains the regulatory provisions of the Rulebook. These provisions affect the
following institutions: credit institutions, e-money issuers, money transfer companies,
automated teller machine (ATM) providers, companies offering bill payment
services, mobile phone operators, digital payment service providers, credit unions,
and central banks in supervising proportioning of risk in four-party payment
schemes.28 Upon implementation these legal requirements would allow these
institutions to operate in SEPA.
The Payments Services Directive’s structure consists of six titles:
!Title I sets out the subject matter, scope, and definitions. It excludes
central banks and public authorities and specifies the financial
institutions and services that are covered by the directive. It covers
electronic payments in the EU and between EU and non-member
! Title II establishes the regulatory regime for payment institutions
covered by the directive. It provides the general rules that apply to
payment institutions. It also covers rules governing agents of
payment institutions.
!Title III establishes the transparency of conditions for payment
services. It provides the consumer protection provisions to be
carried out mainly through disclosure requirements for transparency.
It also covers disclosure requirements concerning currency

27 Ibid., p. 14.
28 An example of the four parties is the cardholder, the cardholder’s bank, the merchant, and
the merchant’s bank.

!Title IV sets out the rights and obligations of participants using the
payment system services. It covers the authorization of payments
including what constitutes authorization and what happens when an
unauthorized payment is being made and establishes the refunding
mechanisms for different types of payments.
!Title V establishes the payments committee and provides the
schedule of directive updates.
!Title VI contains the provisions specifying the transposition
requirements that member states would have to make to harmonize
the payments systems. Should the directive pass the European
Parliament with agreed-to national amendments, it would then go on
to the member states for implementation.29
The legislative status of the directive is that the President of the European
Council is re-drafting the directive. The European Parliament’s economic lead
committee expects to get the President’s re-draft on May 30, 2007. June 10, 2007 is
the deadline for amendments in the Economy Committee. On July 11, 2007, a vote
is to take place in the Economy Committee. Between July 12 and September 12,

2007, a vote should be taken in the Plenary Committee of the European Parliament.30

SEPA’s Implications for the United States
The single European payments area could have some significant implications
for U.S. international financial services providers. However, until the system is
operational, the actual extent of SEPA’s impact on the United States remains
speculation. SEPA is not likely to significantly change the wholesale-side electronic
payments, which rely heavily on corresponding banking relationships and
government-operated payments systems. Where the impact of SEPA is likely to be
felt is on the retail side of the payments business. Even if the system only partially
reaches its optimal efficiency goals in retail payments, there is no assurance that these
benefits will be fully shared with U.S. financial services providers. The main reason
is that common legal and regulatory standards that are being negotiated naturally
exclude the United States, which is mainly on the sidelines. It is possible that the
outcome of these negotiations could make it more difficult for U.S. institutions to
compete in Europe. For example, under SEPA, U.S. financial services providers
could be relatively disadvantaged by additional regulatory requirements or denied
benefits made possible by SEPA. In short, U.S. institutions’ customers may have to
pay additional fees or meet specific requirements to make electronic payments within
the Eurozone.

29 HM Treasury, Payment Services Directive: A Consultative Document, July 2006, pp. 3.11-

3.17, at [].

30 Shona Ferrier, APACS and the Payment Services Directive, APACS the UK Payments
association, available at [

U.S. financial institutions could be placed under special regulations under
SEPA, as the EU has done in the past. Such regulation could limit the type of
services U.S. providers offer and the price they charge for those services. The EU
2002 Visa Decision is an example. Interchange fees are interbank fees paid between
the card payer’s bank and the payee’s bank for the card issuance and the electronic
clearing and settlement of the card’s transactions. To lower the cost of credit cards
for European merchants, the European Commission pressured Visa Europe to apply
a fixed fee per transaction in determining its interchange fees. MasterCard, on the
other hand, was allowed to base its interchange fee on a percentage of the transaction
value. The Commission reported that the decision had the effect of reducing Visa
cross-border interchange fees, while MasterCard enjoyed higher revenues from its
cross-border interchange fees.
The European Commission complained to the European banking industry about
interchange fees. It argued that these fees are higher than they should be in the EU.
However, the Commission has not mandated how EU member states determine
interchange fees as it did for MasterCard and Visa. The most recent Commission
study shows that interchange fees remain excessive in many member countries that
are using one or both methods to determine their fees.31 Because U.S. financial
institutions are outside these negotiations but are subject to their decisions, member
states could gain an advantage on U.S. institutions by negotiating exemptions and/or
amendments in favor of their countries’ financial institutions.
A further possible concern is that the European Commission plans to build
SEPA using Europeans enterprises exclusively. Because SEPA is European built,
U.S. institutions’ access to SEPA doesn’t necessarily have to be a concern. However,
the lack of U.S. presence in the rules’ negotiations as well as the physical
construction could later create problems in terms of software and hardware
compatibility and protocol for U.S. institutions’ access. Visa Europe, the card
payment organization with vast experience in developing electronic payments
exchanges for credit and debit cards as well as other methods of electronic payments,
is expected to play a significant role in building SEPA.32 However, to get this
business Visa Europe had to separate from the Visa umbrella organization. Visa
Europe is now a not-for-profit enterprise owned by 6,000 European member banks.
The newly incorporated Visa Europe has the opportunity to bid for new business as
well as more flexibility to deal with the changing European payments system.33
The United States is excluded because the European banking association, whose
members make up the majority of the European Payments Council that are
responsible for planning SEPA, has made it clear that only European-owned and
controlled organizations can bid for non-card processing work in constructing the
pan-European Automated Clearing Houses (PEACHs) for debit and credit

31 European Commission, Report on the Retail Banking Sector Inquiry, January 31, 2007,
pp. 114-116.
32 Tobias Buck, “Visa to Focus on Developing Sepa Regime,” Financial Times, October 11,

2006, p. 1.

33 Ibid.

transactions.34 According to the chief executive of Visa Europe, “building this single
market, which we wholeheartedly support, is very unique and will require investment
in infrastructures and — most importantly — very close co-operation between
European banks. We believe the association’s structure is the best way to facilitate
On most fronts, SEPA’s potential impact is largely uncertain. The objectives
of the Payment Services Directive are critical and difficult hurdles for the European
Union to overcome. Like most government-led initiatives SEPA is focused on the
reduction of costs to end users — individuals, SMEs, and corporations. Initially,
however, the SEPA effort translates into higher cost for European financial services
providers that supply these electronic payment services domestically and across
borders. The European banking industry is resisting SEPA because they are reluctant
to invest in a more efficient payment system from which there is little or no assurance
that they will be able to profitably recover the cost of their investments. Despite the
heated debates in the European Parliament, it is very likely that the Payment Services
Directive will be approved. However, like other directives, it is likely to be loaded
with amendments, which could reduce SEPA’s effectiveness in lowering end users’
costs for payments transactions.
If U.S. financial services providers in the EU are forced to adapt to regulatory
modifications of each national system, U.S. financial services providers could lose
their competitive advantage. On the other hand, if the directive is effectively
implemented, harmonizing member states’ laws and regulations, and eliminating
regulatory fragmentation, U.S. international institutions could benefit from dealing
with one set of regulations instead of dealing with financial regulatory subtleties of
31 participating and member states. U.S. providers in many areas of financial
services are already technologically competitive in the European Union, which makes
them capable of exploiting the new opportunities that SEPA might create more
quickly than some of their European competitors.

34 Jane Croft, “Visa to Spin off European Division,” Financial Times, June 29, 2004, p. 1.
35 Peter Thai Larsen, “Visa to go public in radical shake-up,” Financial Times, October 11,

2006, p. 1.