Ceci n'est pas une 'payment instrument': a reflection on fuel cards and the PSD2

In september this year, the FCA published its policy statement and approach document on the PSD2. I've been eagerly watching this document to find out what their final take would be on the understanding of the limited network exemption in relation to the specific nature of fuel cards. Because there is more than meets the eye here.

In essence, some fuel cards effectively function as a purchase button on a website. They don't initiate payment orders at all. They would thus fall outside of the PSD2-scope, as any other shopping-button on websites. Due to a twist of faith however, the bank supervisors seem to be keen to ignore this reality for fuel cards and bring those under the PSD2.

In this post I will highlight the flaws in this approach and conclude that the result is that if all regulators start re-writing the definitions themselves, we better label the PSD2 the Purchase Service Directive (see also the full  and more elaborate analysis on the subject here).

Background

In the original payment services directive article 3k provided for a proportional application of the PSD1. Instruments with a limited geographical reach and scope, such as store cards and fuel cards were not subject to its provisions. The exemption 3k) was thus called the limited network exemption.

3 (k) services based on instruments that can be used to acquiregoods or services only in the premises used by the issuer orunder a commercial agreement with the issuer either withina limited network of service providers or for a limited rangeof goods or services;

In its proposal for the new version of the PSD, the Commission claimed the existence of payments systems, waivered as “limited networks” with massive volumes, which imply greater risk and no legal protection for payment users as “feedback from the market”. However, this feedback was not really a result of the external impact analysis onthe economic impact of the PSD1. 

What could be seen though is that the interpretations of local supervisors ranged from strict to very lenient, which distorted the playing field in Europe. In addition, some observers noted that there was a strong desire by supervisors to have stricter rules for in particular the fuel cards market (see the mystery of unregulated massive payment volumes, as discussed in the Paysysreport of March 2014).

In the end, the net result was a very strict version of article 3k in the PSD2, to ensure that its future application would be for truly limited networks only. In addition, any organisation that uses this specific exemption has to notify the supervisor. But let's take a good look at the pre-amble and the exemption text.

The definitions

The pre-amble states that payment instruments covered by the limited network exclusion could include store cards and fuel cards, but it isn't conclusive. They could, but they could also not.

(14) Payment instruments covered by the limited network exclusion could include store cards, fuel cards, membership cards, public transport cards, parking ticketing, meal vouchers or vouchers for specific services, which are sometimes subject to a specific tax or labour legal framework designed to promote the use of such instruments to meet the objectives laid down in social legislation.

Where such a specific-purpose instrument develops into a general purpose instrument, the exclusion from the scope of this Directive should no longer apply. Instruments which can be used for purchases in stores of listed merchants should not be excluded from the scope of this Directive as such instruments are typically designed for a network of service providers which is continuously growing. The limited network exclusion should apply in combination with the obligation of potential payment service providers to notify activities falling within its scope.

Article 3k is actually more clear, certainly in comparison to the previous version. It now refers explicitly to services based on specific payment instruments. 

(k) services based on specific payment instruments that can be used only in a limitedway, that meet one of the following conditions:

• (i) instruments allowing the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a professional issue;

• (ii) instruments which can be used only to acquire a very limited range of goods or services;

• (iii) instruments valid only in a single Member State provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer; 

The legal conclusion is thus: first you need to have something that is a payment instrument and then it may fall under a limited network exemption. 

The FCA's approach: let's not be clear about the payment adjective

The above may not be how the FCA are looking at it. Both in their consultation and further guidance they seem to that 3k is written as pertaining to all instruments, not just payment instruments. I pointed this out in a response to the consultation (see this separate blog) and asked for further clarification.

Yet, their feedback document, doesn't mention anything on this definition question at all, which is a bit disappointing given the timely and good job efforts that the FCA usually put in with all their consultation work. So the ambiquity stays: while the notification forms clearly outline that applications must clarify the nature of the involved payment services and payment instruments, all the guidance does is steer towards an understanding of the 3k article as pertaining to all instrument (as under PSD1). 

This still leaves us with the question: when would a fuel card qualify as a a payment instrument. Or is it just as exempt from the PSD as a purchase button in an Internet-webstore? 

Fuel card as a payment instrument or purchase device?

Let’s have a closer look at the workings of a fuel card and what it does in terms of business processes. Generally speaking, fuel cards are delivered by oil companies to corporate fleet owners, sometimes distributed via resellers or co-branding arrangements. They effectively are a tool that validates the legal competency of its holder, to take out goods/services from service delivery stations.

The company to which the cards are provided takes full responsibility for all services/goods delivered to the users of the cards and receives a monthly overview of all purchases done with the cards. It can set usage levels per card, ensuring that no more than a certain amount of goods and services are to be delivered to the cardholder. It can also set the range of goods to be delivered from narrow (fuel only) to wide (fuel and shop goods).

Every month, the fleet owning company receives an invoice with an overview of all purchases made and the rebate applied (mostly volume based). This specifies the purchases made in the network of the oil company itself as well as those in other networks and by other service providers. These other networks of service stations may also deliver goods/services to the card holder. What happens in practice is that prior to the actual delivery, the cardholders’ oil-company buys the whole service/goods package that the card-holder wishes to take out at the selected other networks with whom the oil-company has struck delivery and service agreements.

This results in a chain sale of goods/services from:

-              the service station dealer to its country organisation,

-              the service station country organisation to the oil company national organisation

-              the oil company in a country to the corporate client that distributed its cards to the employees.

While technically there may be many variations to this flow, it does serve to achieve an important effect in VAT-terms. It allows the involved oil companies and networks to reclaim the relevant VAT from local authorities and thus lower the end-fee to the corporate fleet-owners.

What's the difference between purchase and payment?

In the table below, I've summarized the functional difference between the use of a payment card or a purchase card at an oil station.

Using a purchase tool	Using a payment instrument
Used to instruct the retailer or service station to deliver goods/services	Used to instruct the bank to make a payment to a third party bank account
The amount to be paid is unknown. At the end of the month, rebates are applied and the reconstruction of what the actual equivalent price at this moment of sale would have been, is always a mathematic reconstruction.	The amount to be paid is clear.
Authentication of the card holder equals the right to receive goods/services up to a certain threshold	Authentication of the card holder equals the digital signature of the payment transfer
Positive response by oil company equals the formal sale of the services/goods from service station to oil company and the mandate to provide the services/goods to the card holder	Positive response equals the proper processing of the payment instruction
Holder of purchase instrument is not (by definition) authorised to give payment orders that relate to the billing account of the fleet owner	Holder of instrument is by design authorised to give payment orders from that account to the payees account
Holder only receives proof of purchase / delivery but not proof of payment	Holder receives proof of payment and possibly also proof of purchase
No cash-back possible	Cash back might be possible under the rules of the cards-account
Oil company may design its own purchase, control and billing procedures, use its own set of purchase tools and may set its own acceptance and risk parameters. Intercompany delivery agreements will apply.	Card is a payment instrument and payment transactions with it fall under legislation (PSD) and payment brand regulation, with bank specific acceptance and risk parameters
VAT-recovered and rebate applied to purchases by all cardholders of the fleet-owner	VAT-recovery not included
Aggregated invoice for goods and services delivered, sent to the corporate treasurer of the fleet owner, and paid for using the direct debit instrument	Periodic account statement for payments made or (as in the case of credit cards): aggregated invoice for total value of payments made, followed by direct debit.

While the bank card ticks all the boxes, the fuel cards as outlined above, do not qualify as payment instruments under the current Payment Service Directive. There is no request being made to place, withdraw or transfer funds, hence there is no payment transaction, no payment order and no payment instrument. Hence, article 3k is nowhere close to being relevant. 

What will happen to the fuel cards niche?
As the editors of the Paysys report outlined earlier in March 2014, there may exist a hidden regulatory agenda in Europe to capture fuel cards under the 3k article of the PSD2.

This seems to be exactly the discussion right now for the relevant stakeholders around this subject in Europe. While technically the legal argument is straightforward, leading to fuel cards being out of scope, some lawyers point to the spirit of the article or the statements of regulators (in whichever respect being made) to claim that fuel cards do fall under article 3k and require notification.

As in many situations, it's not the final legal analysis that is relevant but the legal uncertainty. Arguing the above case with a regulator may take too much time and is not the preferred option for risk-averse large issuers of fuel cards. So we may well see some players in the oil industry ending up not arguing their legal case and abiding with a flawed regulator view that takes fuel cards into the exemption scope of PSD2.

The wider implications: Payment Service Directive becomes Purchase Services Directive

If the fuel card case is not being challenged in courts, it sets an interesting precedent. Because in essence, there is no analytical difference between the fuel card and PIN mentioned above and the user-id / password combination that is in use by retail customers that are shopping at websites, using purchase buttons. Both tools are and should be out of scope for a payment service regulator. Just arguing that the instrument looks to much like a payment instrument is just not enough. Ceci n'est pas une pipe 'payment instrument'.

Forgetting the adjective 'payments' in article 3k means that the second Payments Services Directive may well turn into a full swing Purchase Services Directive. And by the looks of it, this is what the FCA may be doing in the fuel cards niche right now. This leaves the rest of the market wondering if their niches may follow at some point in time. 

Supervisors should however not cross that Rubicon and avoid transforming the PSD2 into a Purchase Services Directive. They should stick to the legal definition and if they don't like the consequence should not take justice in their own hands by forgetting adjectives that stand in the way of their (hidden) agenda's.  

Let commerce be commerce and payments be payments. 

Where and how to look for innovation in payments ?

This week I had the pleasure of joining a panel on retail payments innovation as a part of a seminar by van Doorne and Innopay on the Payment Services Directive and the future changes for the payment industry. Panel chair Gijs Boudewijn challenged me to formulate some thoughts on the future direction of retail payments. I answered that the best place to look would be in places and via perspectives that we could be overlooking right now.

1. Is it access to the account or a traceable id that matters?
There is a lot of discussion on the text of the second Payment Services Directive and on the legal and technical mechanisms that are required to make access to the account work. Due to their origin, these discussions are quite bank centric and the implementation issues surrounding this topic will drain a lot of resources of many players involved.

While being busy with this PSD2 issue, we may overlook the fact that all one really needs is a simple chip-id. In the Netherlands for example, one could use the chip-id of public transport ticket issuer TLS as a basis for use in hip and new proprietary retailer/consumer applications. These would combine the chip-id with an intelligent voucher/billing/customer system that utilises SEPA-direct debits in the back-end. It would provide a smooth customer and retailer experience while the bank only sees regular transactions.

My proposition here is that if we're all looking towards access to the account as the hot spot for innovation, we may be looking in the wrong direction. It might be more about the traceable id.

2. The retailers have landed in an interesting position
In his tomorrows transactions blog Dave Birch referred to an analysis by Peter Jones from PSE on the impact of the interchange fee regulation, published in the Journal for Payments Strategy and Systems. The main conclusion of it was that financially the retailers are the winners by getting a cap on their fees. I agree with that and would be inclined to broaden this perspective.

By tradition banks were the players with the monopoly on payments technology and security knowledge. Even in the 1980s, the collective of retailers in the Netherlands had done a feasibility study to set up their own Point of Sale system. This showed they could set it up for € 5 million euro but they didn't want to take the risk of it failing. So they left it to the banks (to complain about high fees later).

Since that time, the knowledge on processing and payments has become available to a wide range of players, to the extend that banks are now lagging in expertise and capability (while being locked into old technology solutions). The consequence is that retailers will be well able to develop or use in-house apps, customer relation services and payment mechanisms that use the bank infrastructure, without being subject to the rules of the Payment Services Directive.

The main development is therefore that the obliged intermediary role of banks in providing payment mechanisms is gone and will erode. Retailers can regain their customer relationship by themselves or in cooperation with any other ICT-provider that allows them to identify the customer and provide a processing infrastructure. Some interesting innovations can therefore be expected at the outer boundaries of the PSD, as a consequence of the possible exemptions.

I expect both physical and e-retailers to use the non-bank, non-payment space that the PSD defines to achieve exactly what they're after: increased customer retention, increased conversion and a smooth payment experience. Bottom line: we might better be looking outside of the PSD to see innovation in action.

3. On ledgers and tokens
As a final thought I would encourage everyone to try a different mindset for the developments that we are witnessing. Because in essence, anything that happens (in payments/retail) boils down to either tokens (coins, notes, points) or ledgers (private or public). Now let's see what happens if we apply this framework.

We might then appreciate the bitcoin emergence as an innovation in the area of collective ledger provision with distributed trust. We could reposition Linked-In as a privately owned, open and self-administered ledger, that logs individuals achievements that are relevant in the work domain. The same would hold for Facebook and many other e-commerce companies. We would call banks the keepers of the trusted and well protected financial ledgers and would also note that in the public domain, a whole range of ledgers are being interconnected for the sake of security, anti-fraud measures etc.

We could also look at the world of tokens, in its many variations. Tokens of shopping behaviour (saving points), tokens of access (tickets), tokens from government (coins and banknotes), tokens of appreciations (awards, prizes) and tokens that prove identity or personal characteristics. Some of those tokens might be valuable and lead to a change of some of the ledgers, while others would have a role in their own right (voucher for a free coffee).

While it is clear that there are quite a few interesting new developments in the ledger-space, could it be that it is the token-domain where the true action is going to be ?

Payments as an afterthought
In sum: the non-bank, identity-based, non-regulated commercial domain might well be the area where we can see innovations that show us how today's technology can be made to work best so that payments become the afterthought that they are.

Lawsuit in the Netherlands on Bitcoin as 'money' or 'current money'

Since May this year, there is an interesting discussion here in the Netherlands on the legal status of Bitcoin as money.

First law suit on failed bitcoin delivery 
The discussion starts with a law suit of two people engaged in a bitcoin transaction. Party B failed to pay up the whole amount of bitcoins, although it had received all the money for it. Party A, after two weeks partially annulled the agreement (for the part of the bitcoins not delivered). However, this party later on decided to demand to be compensated for the financial loss that resulted due to the increase in price of bitcoins over the course of the year (after the moment of canceling the contract).

Party A based its reasoning on the fact that our law allows for something as 'current money' to be used in order to pay a sum of money. This terminology was explicitly chosen by our legislator (instead of the legal tender concept) to allow non-State forms of money to be condoned in our country in situations where it was commonly used and accepted by all the people.

Should this argument succeed and bitcoins be considered such 'current money' the consequence could have been that an additional compensation claim could be made under our civil law. The judge however outlined that Party A should be compensated for the price rise of Bitcoin between the moment of concluding the contract and of canceling it (some € 1700). No compensation was due however for the remainder of the time, as it was party A that had initiated the canceling of the contract.

In addition the judge outlined that Bitcoins cannot be considered current money that is condoned by the State. Our Ministry of Finance has outlined that it doesn't fit the definition of legal tender, nor that of electronic money and that it should be considered a means of exchange. The nature of bitcoin (tradeable) doesn't work as an argument as also silver and gold are tradeable but not considered to be current money.

New law suit on status of bitcoin as money
A number of players in the Dutch Bitcoin community have chosen to challenge the above verdict of the judge and has raised more than  € 15.000 to pay for expenses of a law suit. It challenges the first verdict in order to have the judge reconsider its position and outline that Bitcoin is money. As a consequence it feels that it must then also be treated as such by our administrative bodies, supervisors, tax authorities etc. This would mean that bitcoin operators could be payment institutions, supervised and exempt from VAT (which, as I understand, are the underlying goals).

While I am very sympathetic to the concept of challenging a status quo and laws, I fail to see how a verdict on civil contract law could spill over into:
- the definitions of payments, money and payment institutions under the Payment Services Directive (and Dutch law),
- the definitions of payments under the Sixth Tax Directive.

Having said that, it will surely be very interesting to see which approach will be taken by the law firm involved and see if they are able to convince the judge that at least in civil contracts bitcoins may act as money.


Last edit: October 1, to outline that it's not the whole Bitcoin community that seek to challenge the verdict.

FCA kicks the Securepay-can down the road...

In March 2014, the FCA, the prudential supervisor for UK based payment institutions and e-money providers, outlined that it would not be strictly assessing the compliance with the Securepay Recommendations on the security of Internet Payments. This announcement was quite interesting as in February 2014, the Forum also published an assessment guide that assists payment service providers with the implementation of these Recommendations by February 2015.

FCA Statement:
We have decided to await the publication of guidance from the European Banking Authority on measures for the security of internet payments and will begin to assess firms’ implementation of these security measures when the updated Payment Services Directive requirements take effect.

The updated Payment Service Directive will enter into effect at the earliest by mid 2016. It will assign the European Banking Authority with the task of further developing guidance for the security of retail payments. The FCA has chosen to wait for this guidance rather than pre-empt it.

Kicking the security-can down the road
It is interesting to note that the FCA seeks a pragmatic middle ground. It carefully states that it finds security an important issue while at the same time outlining that it will wait for a solid legal basis to assess the security of retail payments. In doing so it effectively kicks the tricky security can down the road.

I can well understand the FCA desire to kick this can. The Securepay recommendations on security lead to quite some questions in their practical application for different technologies (see the blog here). On top of that, the detailed prescriptions on the basis of the new Payment Services Directive may lead to further rules that limit the choices that market entities can make to achieve a certain level of security.

Rather than confuse the market with layering requirements which quickly follow each other, the FCA apparently chose to wait and see, hoping that the final rules on security for retail payments may become more balanced.

It will be interesting to see if other supervisors follow suit.

Bitcoin legal classification in Germany: much ado about ... ?

These days I noticed an interesting discussion in my Twitter time line and on the web on the fact that the German government has 'recognized' Bitcoins (even as legal tender, as cnbc reported for some time). There were many reports on the matter, outlining that Bitcoin is apparently gaining further acceptance among regulators. But as the reports were a bit confusing I felt it would be good to track the sources.

German MP Schäfflers enquired about tax-treatment for Bitcoins
It turns out that a German MP, Frank Schäfflers, has been asking his Ministry of Finance how the taxation rules applies in situations where people use Bitcoin as an instrument of trade/payment. And later on he asked a follow up question whether or not the use of Bitcoins as a payment mechanism would be exempt from VAT (as is the case with German legal tender). Here is the link to the source documents.

The German Ministry of Finance outlined in its response that:
- commercial transactions where bitcoins are being used for payment, have the tax regime on the basis of the transactions' commercial nature; so the use of bitcoins doesn't disturb the regular taxation rules,
- goverment agencies are still discussing how to tax the value increase of bitcoin holdings over a year,
- bitcoins are not legal tender, nor e-money, but a form of private currency which classify as 'Devisen oder Rechnungseinheiten': under the German supervision law (article 11, sub 7).

The Rechnungseinheiten can be translated as unit of accounts, but the explanation of the German Ministry of Finance is that this definition covers - amongst others- all private currencies or units of accounts which are not based on legal tender. Essentially is a catch-all definition to capture any sort of privately agreed payment mechanism that can be used in multilateral clearing or settlement.

The regulatory logic: classification rather than recognition
While to the observer it may appear that the German regulator is leapfrogging into the modern world by outlining the status of bitcoin, the reality may be less exciting. The German Ministry of Finance merely outlined how, given the existing rules on taxation and payments, bitcoins qualify under their supervision law. This is rather a technical exercise and it can be seen that only for income tax issue (what to do with bitcoin holdings that change in value), they haven't yet got an answer.

So yes, the bitcoin has a legal status, but then again: any new development, instrument or technology already is subject to the law book. The fact that the Ministry has now pinpointed the article of the law book where they think the object fits, may therefore not be so spectacular.

If we look at the Netherlands, a similar situation appears. Anyone is free to determine whether to exchange services by paying for them or by using other forms of payment. . I could buy a bread in exchange for washing a car. And if the bakery would accept bitcoin rather than washing their car, it would work as well. The use of bitcoin can be considered payment in kind. Given this regulatory payment mode, our legal system is already recognising alternative forms of payments.

The same holds for the taxation part. The VAT rules on services do not change if the payment leg of my transaction is different. And the income tax rules don not change either. The Dutch rules state that if you hold something which has value, it must be registered on the tax declaration. In this declaration, the bitcoins in a wallet thus show up as the money in my bank account does.

As for the legal tender part of the discussion: I view that as an overrated concept. While in earlier times, the concept of legal tender meant that the other entity in a transaction had to accept the notes and coins, this obligation has been struck out of our Dutch law book many years ago. But it still lingers in the mind of many people and may of course in some other countries still be more relevant.

Future developments
What I find most interesting about the news is the quick and fast coverage that new forms of payments and regulation get in the media and with the public. We can see that the developments are positioned as the story of the recognition of bitcoin by the regulator or as the coming of age for bitcoin. Regardless of the angle of these reports, it is clear that things are happening and moving in the area of private, digital, distributed currencies. And it will be interesting to see this area develop further.

Interesting paper on best practices for Payment Regulation

As I browsed through the programme and speakers of the E-MA conference on e-money I noticed that Rhys Bollen would present on regulatory issues. And upon googling I discovered his dissertation on best practices for Payment Regulation. Although I haven't finished reading it yet, I think it's quite a good read that deserves further attention.

E-money: an innovation revisited...

I think it is fair to say that technology and payment innovation occurs in several 'rounds'. It's sort of a boxing game where enterprises seek their niche in terms of consumer/company services but also in terms of regulatory niches. This holds true in particular for the domain of e-money.

Some fifteen years ago (I feel quite old when writing this) the buzz was all about Mondex and e-cash: two new e-money schemes. The development of these schemes coincided with the increased use of the Internet as well as the use of mobile phones. And there was a lot of debate on which rules to apply. Should e-money issues become banks or not. I remember setting up a specific branche-organisation (11a2: here's the old website) and conference on that specific issue.

While in this first round it appeared to be the case that anyone using digital coins for consumer payments needed to be regulated similarly, it turned out in a later round of regulation that some industries, notably telco's and transport companies, succeeded in convincing the regulator that their consumer money was not the same as the consumer money in banks. And this lead to a reshuffle of all kinds of regulations to allow for this.

The regulatory developments of 2011 essentially mark the conclusion of this second reshuffling round of regulation on e-money. And the industry has adapted in the meantime and is now looking forward to the new challenges, as we see the further development of mobile phone's, tablets and many other exciting new opportunities for e-money.

Should anyone be interested in the current state of affairs of the European e-money market or regulation I would warmly advise to sign up for the e-money conference of the Electronic Money Association (EMA). All players are there and all topics are on the table.

The Economic impact of the single euro area... ECB research

The fun thing of policy research is that it always gets you the desired result (as apposed to scientifc research where you seek out to dismiss a hypothesis. Last year the ECB set out to do some work on the economic impact of the single euro area. And now, the result is here.

The ECB has carried out in cooperation with the banking industry a SEPA impact study with the aim of enriching its understanding of the potential economic consequences of SEPA. Based on the quantitative and qualitative expectations of major pan-European banks, the study finds that a dual SEPA implementation phase should be as short as possible. In fact, a longer migration period would give rise to higher costs than a shorter period. It can furthermore be concluded that those institutions that embrace new technological developments, create new businesses and provide innovative services are likely to gain most from SEPA.

Well, that's of course the desired ECB answer (I guess deep inside they still stick to their former 2010 deadline for phasing out national payment products...). But it is by no means the whole picture. A lot more is happening then just a move to technological EPC-standards. Like the major impact of the Payment Services Directive. And the report outlines on that issue:
The scope and impact of the PSD goes far beyond SEPA, e.g. in terms of currencies, products and players. Overall, the banks shared the view that the PSD introduces rules with uncertain consequences on the payments business and their financial results. At the time of this analysis, the participating banks preferred not to commingle the pure SEPA impact analysis with a PSD analysis, as this might dilute the results and lead to unbalanced conclusions. The interviewed banks acknowledged that the main effects of the PSD stem from the extension of information obligations, shortening of transaction times, tightening of liability regulations for payment service providers, and more stringent processing of cancellations of transactions. However, at the current stage, the banks felt they were not yet well enough equipped to provide any precise estimate concerning the potential economic impact of the PSD.

Meaning: while the technical and migration stuff is already giving banks a headache, the implementation of new legal rules all across the board may be hitting the banks even harder. Thus undoubtedly raising the cost of doing payment business and thus raising the barriers for entrants even more...

SEPA: cost for the banks but income for others......

See the article in De Financiële Telegraaf that outlines that the boss of professional temp agency DPA Flex Group states that SEPA and MIFID are changes in the bank environment/regulation that will help boost income and profits for his organisation.

So if anyone thinks now is the time to do some stock picking and get ready for the rebound of the market.... that would be a sure bet or course.

Ministry of Finance answers to MP-questions on bank fees and duopoly in SEPA

As mentioned earlier on this blog, Dutch MPs asked our Ministry of Finance to comment on the retailer statements that payment with cards would become expensive due to a duopoly for Visa and Mastercard. Yesterday, the answers were published. In broad terminology the Minister seeks to appease both retailers and banks by outlining vaguely
- that he agrees with the conclusion of the competiton enquiry that competition and interchange fees are important elements of the future banking market,
- that he indeed has a concern with prices of banks and that those should remain as low as possible in a SEPA-world,
- that however the public should be aware that in a move to make pricing more transparent (the philosophy underlying the PSD), it may look to customers that bank prices rise, while effectively they get more control and insight into the cost of their payment behaviour, allowing them to influence and their own specific fee level to lower levels than under previous pricing regimes.

Payment Services Directive agreed in European Parliament

The EU-websites are sometimes incomprehensible to browse, but ALDE has some news detail to confirm that today the Payment Services Directive was approved in the first reading of European Parliament. With the ALDE comment:
This is not a price regulation directive, but it should make payments cheaper through greater competition and through greater transparency.

The official press announcement of EP can be found here and is a bit worrying:
MEPs have adopted a legal framework designed to make cashless payments – such as card transactions, bank transfers and direct debits – simpler and cheaper, paving the way for the creation a single Euro payments area. A deal with the Council means the legislation will enter force at this first reading stage, giving the banking industry the time it needs to meet its 2010 target.
...
The European payments industry – banks, clearing organisations and others – have committed themselves, with the EU’s support, to changing all of this by 2010. The single euro payment area project should mean that bank transfers, direct debits and similar payments will be made through a new European system, with domestic and cross-border transactions being made in the same way at the same speed. It will also mean payment card systems converging on a common standard, so that cards from all over Europe will be accepted all over Europe, without extra fees or technical barriers.

What worries me is the conception of a new European system. We may need quite some time explaining and educating that there is not going to be a new European system as such. In the old days banks used to build those 'systems' and clearing houses for domestic markets. But nowadayes banks agree on core standards and interoperability agreements, leaving the market to determine at which processor and through which technical system and clearing house the payments will go.

Another concern is timing. Banks will in the next years have to change systems to new European standards for credit-transfer and direct debit. But the PSD is supposed to be implemented in member states at the end of 2009. So the two efforts will coincide. With the implementation of PSD-changes taking precedence (as a firm legal obligation) over the self-planned gradual change-over to European products, we may expect the actual roll-out of panEuropean products to go less quickly than initially planned.

Which is in itself not a problem for the market. We should recognize that the 2010 deadline quoted by parliament was formulated somewhere in 2002 (most likely chosen on the basis of the assumption that in 2008 the PSD would already be implemented). So my guess is that we will have a wide panEuropean availability of new products, based on EPC-standards, by 2012.

EU becomes domestic reality: ABN AMRO and Barclays announce agreement on terms of take-over by Barclays

See the Press Release here to find out that:
- the Boards of ABN AMRO and Barclays jointly agreed on 'merging' their organisations, (eufemistic terminology for what constitutes a take-over by Barclays),
- Barclays will be the holding company for the combined group,
- ABN AMRO ordinary shareholders will receive 3.225 ordinary shares in Barclays ("New Barclays Shares") for each existing ABN AMRO ordinary share (the "Offer").
- the combined group (with its headquarters in Amsterdam) will have a UK corporate governance structure with a unitary Board,
- the UK Financial Services Authority ("FSA") and De Nederlandsche Bank ("DNB") have agreed that the FSA will be the lead supervisor of the combined group.
- Bank of America Corp has today agreed to acquire LaSalle Bank Corporation ("LaSalle") for USD21 billion and is expected to complete this acquisition before completion of the Offer.

This is quite a defining moment in time (at least for the Dutch and ABN AMRO). While policy-makers tuned in to 1992 as the starting date for an European marketplace, truth of the matter is that it took about 15 years for this ideal to become reality. But as of now it is quite clear that domestic markets no longer are the boundary for players in the market. Yet, I am afraid that the payment-policy elite of the Netherlands may be bound to continue reasoning from a domestic perspective.

As if to illustrate the above, today is also the day when members of Dutch parliament (quite obviously prompted by retailer-lobby organisations) started asking questions in parliament on the competition in payments and on the possibilities of price increase as a result of SEPA. This shows that retailers succeeded quite easily in (hijacking and) narrowing down complex policy discussions about European payments markets into an ordinary Dutch price-rebate discussion for merchants.

I hope that it's only a couples of years that we will have to live with a time-lag and perception lag between banks on the one hand (that already live in a competitive European market reality) and domestic policy makers, lobby groups and parliaments on the other hand (that persist in framing all issues back to old-style-domestic interventions and questions). And that the old-style domestic school may at one time start to understand that the only price-guarantuee that one can legitimatically ask for, in a democratic society, is the price-guarantee deliverd by true international competition.

EU council agrees on Payment Services Directive: start of the fee-blame-game

Today, the European council agreed on the Payment Services Directive. This means that if European Parliament also agrees on this text, we may have a payment services directive agreed before the summer. But... the disinformation and blame game has already begun.

First of all, all press players in the Netherlands mixed up the PSD as a directive with market developments in the domain of cards, suggesting that there were going to be a third kind of Eurowide-payments cards as a result of the directive. Which is nonsense ! The directive arranges for a legal framework for all kinds of payments, regardless of brand or type (cards or credit-transfer, direct debit etc). While this framework will help as a legal basis for the EU-internal market for payments, it does not stipulate a thing as to:
- future card payments,
- number portability (all over the Dutch news this afternoon, was the message that the directive would demand banks to introduce number portability of bank accounts).

Yet, the discussions are all about whether or not this regulation will lead to cost/price hikes or changes in payments. So it looks as if retailers have succeeded in colouring and simplifying the European discussion to the single issue that migration to more panEuropean card payment schemes might lead to higher fees for them. And also the Ministry of Finance is stating that is anxious not to see prices rise as a result of the European developments.

The thing is, prices will of course rise. And that has nothing to do with bank kartels or any market development for cards, but merely with the fact that all regulation comes at a price. This PSD is most likely going to be consumer friendly, meaning that banks will have to make a bunch of costs to achieve speedy and transparent payments with detailed contract agreements. And someone will have to pay for that.

The European Commissions was by the way, one of the first to outline how and by whom these costs should be borne: the customer. In the Commissions impact analysis (a sort of cost/benefit analysis) for this directive it is outlined that Europe may earn about 50-100 billion euro yearly as a result of more efficient payments. Their analysis is - briefly put on p 65 - that cash is a bleeder and that we need to make sure that cost-oriented fee-setting occurs in retail payments:

A more detailed breakdown reveals that cash, above all, is the main cost driver and accounts for as much as 60–70 % of the total cost of the payment system, or in other words 2 % of GDP. These studies estimate the cost per economic transaction when paid for in cash between EUR 0.30 to EUR 0.5562. Congruent with these findings, other studies confirm the cost of cash at about 1.36 % of sale value or 2.3 % of transaction value (EUR 0.32 for transaction value of EUR 14).

The overall social cost of using payment services could be reduced if consumers and business selected the means of payments in a more rational way. When prices paid by users reflect the real cost value of the service, they provide an incentive for users to select services that meet their needs at the lowest possible private and social cost. This promotes the efficiency of the payment system. It is well documented in studies that cost-based pricing of payment services triggers customer behaviour and the right price signals can drive customers to select more efficient payment services rather than less efficient ones.

So we can see that retailers, Ministry of Finance and European Commisison are now all beginning another round of the blame game, suggesting it is the banks who are keen to increase prices. While completely leaving out the message to the public that their projected financial benefits of this whole directive consist of direct pricing of cash (and retail payments in general) to the customer.

While I can understand the retailers position (use any argument as long as politicians buy it) I am a bit disappointed that both Ministry of Finance and European Commission and European Parliament so easily fall for their reasoning. Institutions, regulators and members of parliament should not suggest in any way that regulation will not cost money to society. Either they should aim at selling this directive and its benefits of 50-100 billion euro to the public and also include the complex message of cost-oriented pricing in retail payments (including cash). Alternatively, they should recognize that they themselves are too afraid to sell direct transaction pricing to the public. In that case they should be so polite not to poke the fire about banks rising prices (given that they out of fear for further Euroscepsis they don't wish the public to know that it's their regulation that is causing it).

If this is how we want the future of Europe be shaped... quo vadis...?

Sneak preview on PSD compromise in German web-article

See this article to conclude (if I understand correctly) what the political compromise is about the Payment Service Directive. Apparently some give and take occured for the issues strict speed for payments and strict regulation for non-banks.

And for those capable of reading German:
Für die beiden grössten Knackpunkte im Streit um einen SEPA-Kompromiss haben Vertreter der 27 EU-Staaten am gestrigen Mittwoch eine Einigung gefunden. Sie verläuft entlang der Kompromisslinie, die sich im Vorfeld abgezeichnet hat:
Die eine Partei (Deutschland et al.) akzeptiert die sogenannte T+1-Regelung, wenn auch in der mildesten Form. Transaktionen müssen demnach am Ende des nächsten Werktages ausgeführt sein. Denkbar wäre hier auch die scharfe Interpretation "am Anfang des nächsten Wochentages" gewesen.
Die andere Partei (Großbritannien et al.) lässt sich im Gegenzug auf eine schärfere Regulierung der Nicht-Banken ein. Von diesen wird insbesondere eine in der Höhe noch nicht festgelegte Sicherheitseinlage verlangt werden. Die deutsche Ratspräsidentschaft will diese Linie heute mit dem Europäischen Parlament abstimmen. Gelingt dies, könnte das Paket zur SEPA-Einigung beim Treffen der EU-Finanzminister in der nächsten Woche zusammengeschnürt werden.

Talks on Payment Services Directive enter their last stage

According to an annotated ECOFIN-agenda of our Ministry of Finance, the Council of Ministers of Finance will at the end of this month be involved in discussing the Eu-political orientation with respect to the Payment Services Directive. The published writing makes it clear that no final text exists. There is still no agreement on important parts of the Directive and the Ministry makes it clear that if innovation is stifled too much and if the regulatory barriers are too much, they will not support the proposal.

Then again, anyone who was entering negotiations at the end of the month would of course say they wouldn't be able to agree.

Payment Service Provider Ogone to go public

According to this Belgian website, the Belgian payment service provider Ogone (which processes nd routes Internet-payment related to e-commerce of 7000 web-merchants) may go public. It's founders and owners will earn a bit then. After which the Payment Service Directive will kick in and make their business model a bit of misery.

Public letter by EPC on progress: delay of direct debit

This week, we saw the publication of a public letter by the European Payment Council. While it contained a lot of text on technical progress, the main message was that, due to the delay of the authorities to draft the Payment Services Directive, the market roll out of direct debit products (based on the EPC-direct debit standard) will also be delayed.

Interestingly, there's no mention of a new provisionl start date. So we have to do te math outselves. Let's assume that this summer, the PSD will be finished. Then, we need translation in 2 languages, so that'll be October before the thing is all clear. And add another 18-24 months to that. Meaning that at the end of 2009, the PSD may be implemented in a series of Member States.

And now, let's step back at the timing and planning of both EPC and the Commission
- EPC started in 2002 and took 2008 as a firm starting date; goal achieved while in the meantime the cross-border infrastructure was transformed to a full IBAN/BIC processing on the basis of Credeuro-convention,
- the Commission started thinking about the PSD in 2003 and took 2008 as the date of envisaged PSD-transposition; they'll end up with 2 years delay (if not more).

So which of the two is really slowing European integration down ?

Partial evaluation of regulation 2560 reveals true (better?) regulation agenda of European Commission

See this link that brings you to a Commission Staff Working Document addressed to the European Parliament and to the Council on the impact of Regulation (EC) No 2560/2001 on bank charges for national payments. It concludes that generally charges for cross-border payments decreased considerably as a result of Regulation 2560. Furthermore the Regulation provided an incentive for the payments industry to modernise its EU-wide payment infrastructure.

The conclusion also states:
Whilst being a first significant step towards the achievement of SEPA, Regulation 2560 was followed by other measures, which are currently under way. These mainly include a proposal for a Payment Services Directive, whose objective is to establish a harmonised set of rules applicable to the provision of payment services in the EU.

Furthermore, one of the aims of the Payment Service Directive, which is currently before the Council and European Parliament for adoption, is to introduce new competition into the payments market. This should help to keep prices down and will have a range of practical consequences on the functioning of Regulation 2560.

As explained above, the Commission will issue this full review and evaluation of Regulation 2560 by mid-2007. Any follow-up for future modification of Regulation 2560 would be determined by this review, and by the final text of the Payment Service Directive, as well as by the outcomes of the industry–led initiatives to create SEPA.

Meaning:
- the Commission will not revoke regulation 2560 (although its direct price regulation is opposite to the principle of cost-based fees, which help achieve the 50 billion euro benefits of the Payment Service Directive),
- the Commission may sometime in the far future revoke or alter it if banks sufficiently do their best in creating SEPA and lowering prices in the retail payments market.

Interestingly, a similar idea is not being fully applied to mobile operators but allows the mobile operators a cost plus- based fee for international calls/data services. So all animals are equal, but apparently the banking animal requires a more stringent approach when it comes to creating a European market.

Now, let's have a look at how the European Commission deals with the better regulation principles in the domain of payment services. The intentions are clear: McCreevy outlines this in a million of speeches:
Ladies and Gentleman, this Commission is taking a more variable, more modern approach to regulation. Strict adherence to better regulation principles. Wide consultation. Full impact assessments to ensure that initiatives are fully thought through. Legislation only where clear benefits are apparent.
Yet practice shows a consequent delay in the evaluation of regulation, a delay in preparing it and effectively only pays lipservice to the better regulation principles. The money is not where the mouth is, as we can see from the following actions.

1-start a huge SEPA incentives consultation in march 2006, to find out more about the future of the European Payments Market (and how to proceed towards it) and then shelve the initiative without explanation,
2-ignore the better regulation principles, more particularly in the minimum standard E on consultations (page 21 in this document), and do not publish the responses to the SEPA-incentives exercise on a website, even if the ECOFIN calls for publication without delay of those responses (see p. 21 of the ECOFIN-paper),
3-perform an evaluation and consultation on VAT-treatment for pre-paid vouchers that acknowledges the existence of e-money payments by mobile phones (0900 and SMS/MMS/I-mode etc),
4-ignore the above facts on m-payments during the evaluation of the e-money Directive (and its application to mobile operators) and assume that telephones are hardly ever used for making payments (be it pre-paid or postpaid) ;
5-shelve the discussion and issue of a level playing field for e-money players and mobile operators for a number of years (until when the Payment Service Directive is drafted and ready),
6-ignore the inconsistencies between existing regulation (2560) and planned regulation (PSD, revision of VAT-regimes, e-money, SEPA-incentives) and continue a fear tactic towards banks by not revoking a regulation which can be revoked as it has served its purpose.

Anyone still wondering why Europe and the European Constitution is in crisis?

SEPA deadlines under threat...?

This Finextra article quotes the chair of the European Payments Council (EPC), Gerard Hartsink. He stated that banks will miss the first single euro payments area (Sepa) deadline for direct debits because of delays in passing a new Payment Services Directive (PSD). The news was picked up by the Financieele Dagblad with the Dutch Ministry of Finance commenting that indeed the PSD is delayed and outlining that they rather see a solid PSD than a quick and dirty one.

Reuters today also reported that Visa Europe stated today:
Scrapping retailers' credit card proceesing fees would jeopardise the European Union's plans to create a cheaper cross-border payments system for the bloc's consumers and companies.
The Visa-statement anticipates the outcome of the European Commissions card enquiry (of which the final results are due to be unveiled on Jan. 31). And it does hit the hammer on the head. For European business models to work, one needs a true European approach. And not one that bashes banks and/or card schemes but one that respects the necessary ingredients for payment systems: interchange fees for new products being one.

What I find interesting here is that the interchange fee issue is not mentioned by Mr Hartsink as an obstacle. Why is it that apparently only the players in the cards-market seems to be worried as to the outcome of the Competition Enquiry of the European Commission? Would not a competition authority inspired no-go for direct debit interchange also be a serious barrier to the whole SEPA-exercise?

Regulation by McCreevy: action would speak louder than words...

Interesting speech here with the following notes on how the Commission should regulate:
Those who know me well recognise that this is not a plea for regulatory action, rather for the most "appropriate and proportionate" response in each area. Appropriate can be to let the industry take the initiative, such as in the case of the Single European Payments Area. Appropriate can be not to legislate but to agree upon a set of principles, such as in the case of the Code of conduct for Clearing and Settlement, with industry agreeing to implement, subject to strict monitoring. . Appropriate can be to amend a directive to bring it up to date or to repeal it when it becomes redundant. There is no "one fits all" solution across financial services, nor should there be.

Before taking any decision, the Commission carries out impact assessments and consults extensively with stakeholders. Many of you have already been consulted or have expressed opinions, for which I am grateful. Indeed, the success of any measure - be it legislative or non-legislative- largely depends on the input it enjoys from regulators, supervisors and market participants.

All very well but action speaks louder than words. If all the above is true, why are the retail bankers still waiting for:
- the repeal of regulation 2560 as it is inconsistent with the cost-based fees in payments that the Commission deems necessary to promote more efficiency in EU-payments,
- publishing of the comments that the Commission received on the SEPA-incentives paper.
Apparently the Commissioner is not willing to put his money where his mouth is?