Now that the voting on the PSD is done, the real work starts...

The second Payments Services Directive, also known as PSD2, will be officially established today. In the plenary session discussion yesterday all political groups backed the achieved consensus and highlighted the benefits to consumers, the increased security of payments, further innovation in the payments area and lower cost overall.

Some work ahead...
We should realize however, that with the promulgation the real work will start for a whole range of involved players. First and foremost, there is a lot more work ahead for regulators and supervisors in the transposition process, but in particular also for the European Banking Authority. The PSD2 that seeks to open up access to banks and customer bank accounts for new players, leaves quite a bit of work to be done by EBA.

EBA should:
- develop rules on level of guarantee/professional indemnity insurance for payment initiation service providers and account information service providers,
- set up standards for cooperation and data exchange between local supervisor and resolve disputes on different applications of the PSD2,
- set up a central register of payment institutions and agents licensed under the directive,
- develop regulatory standards that define when the appointment of a central local contact point can be demanded by local supervisors and what its functions should be,
- be informed immediately in the case of emergency situations (such as large scale fraud),
- coordinate requirements as to the security frameworks applied,
- specify the requirements of common and open standards of communication to be implemented by all account servicing payment service providers that allow for the provision of online payment services,
- develop guidelines on a harmonised set of information to be provided during the application for a payment institution license,
- publish local exemptions under article 3k and 3l in the public register,

Clarity for industry on EU-application of definitions and scope
When the first PSD was delivered, it turned out that quite some players in the market required timely insights as to the future scope of the directive and how it would impact them. The European Commission then published an FAQ that further outlined how definitions should be understood.

It seems to me that it would be worthwhile to perform a similar exercise right now as there are quite some areas that can give rise to questions. As an example: the recital on the agency exemption leaves open the existence of agents for both buyer and supplier as long as the agent does not enter into posession of the funds. Yet, the definition of acquiring appears to be purposefully wide, meaning that such commercial agents might after all be viewed as acquirers.

The sooner this clarity is provided, the better it is, as the lead time for setting up and getting a license as a payment institution is similar to the lead time that now exists for transposing the PSD2.

I therefore hope that, for the sake of a proper EU level playing field, the collective of regulatory players involved in the transposition and application of the PSD2, will seek to address those scoping and definitions issues early-on.

ECB provides outlook on retail payments in Europe at EPCA-conference

Pierre Petit, deputy director general (payments and market infrastructure) of the European Central Bank, has outlined the ECB’s  views on European retail payments. He made his remarks at the EPCA Summit 2014, where he defined the role of the European Retail Payments Board (ERPB) and the follow-up on the SecurePay recommendations on access to payment accounts.

New players to be part of drive towards integrated European payments market

The ERPB is to become a forum for driving the further development towards an integrated European payments market in the post-SEPA situation. Petit confirmed that the first meeting of this group is to take place in May, and new industries such as e-money providers and payment services institutions are to join in these discussions, along with other representatives of both consumers and providers.

The ERPB will aim to further stimulate the development of the European retail payments market by working together on topics such as innovation and integration.  The group will identify  and address strategic issues and work priorities, including business practices, requirements and standards. Issues could include the development of a single e-mandate solution or the improvement of interoperability between national e-payment schemes.

Security requirements for payment account access services

The ECB announced that it would this month publish the responses and the results of the consultations on security for payment access to the accounts. The publication would be for information only, given that the European Banking Authority will be providing guidelines on security measures under the revised Payment Services Directive.

Although the ECB does not want to impose formal requirements as there is a risk that the EBA could take a different position, it is likely that the two-factor authentication model of the SecurePay forum will remain the norm for retail payments account access services and mobile payments.

ING first to announce SEPA strategy for cards/terminals - all brands allowed

Yesterdays Telegraaf contained some interesting news. ING has announced that it will sell POS-terminals and contracts to retailers which accept V-Pay, Maestro and PIN, all for the low price of todays PIN-transaction. Only one condition applies: it should be an EMV compliant terminal.

Well, this is exactly what retailers wished: clarity on future prices and terms and conditions. So one would think that would now be happy.... but are they...?

Well, no of course. The instant that a retailer gets the prices and desires he wants, he assumes that he has insufficiently bargained and that there is more left to bargain for. And he will immediately start negotiating for another round of fee cuts or what have you.

Likewise in the Dutch situation. In their reply to the ING announcement the retailers didn't spend any second complimenting ING on their vision, their fee structure or on fulfilling their previous demand. The next complaint in line is now that they find it intolerable that on the issuing side (which is completely not their concern) the PIN technology is based on magstripe and the other brands on EMV. In their view PIN should move to chip-based PIN as well....

To be continued.... I would say... until banks decide to stop participating in this retailer bargaining game.

Paying cash more expensive than using the debit-card

Here's an interesting bit of research done in the Netherlands. All shops, banks and central bank have joined forces to evaluate the cost of payments with cash, when compared to debit-card. The results are that it has taken us in the Netherlands some 15 years to ensure that the full cost of debit-card payments are lower than cash-payments.

The research outlines that:
- full cost of payments in retail are down from 839 million euro in 2001 to 788 million in 2006,
- in 1992 a debit-card payment was triple as costly as a cash payment
- in 1998 the debit-card payment with PIN was roughly twice as costly as a cash payment
- in 2006 the debit-card payment is almost the same price as a cash payment (20-18 cents in retail-environment),
so that now, at the end of 2007 it's safe to state that the full cost of Dutch debit-card payments to merchants are lower than cash payments (on a per transaction basis).

As a consequence, the retailer representative organisations advise all merchants to use the debit-card rather than cash and to stop old habits that date from earlier days: the surcharging for use of the debit-card. Because other research by the central bank shows that still 20 % of the retailers surchagre an amount of approximately 23 cents for payment wit a debit-card.

So one landmark achievement is that over here in the Netherlands we have started to beat cash in terms of real cost.

Comes with it another interesting development. One fifth of the retailers surcharges 23 cents for a debit-card transaction that costs them 20 cents. Leading to a 3 cent per transaction profit. The bank-side of this equasion is that banks sell their debit-card transaction for 5 cents, while it effectively costs them 13 cents (see McKinsey reports in 2005). Meaning that debit-card payments have turned into a profit maker for retailers and a bleeder for banks.

This makes you wonder why it would make sense for banks to still subsidize debit-card payments to merchants with a one cent per transaction 'efficiency-stimulus' as agreed in the 2005 Covenant.

ABN Amro employees don't wish to be sold out to bidders...

See the RTL news that outlines that a huge ABN AMRO survey outlines that 55 % wishes ABN AMRO to be independent. And 39 % chooses Barclays over 6 % Fortis. So the labour unions will now ask the ABN AMRO Board of Directors to conduct an investigation into that independent scenario.

Again, we should recognize that even ABN AMRO employees may not have the full overview and details on the new situation and the mergers. They oppose to being split up. And I was just going to link to the ABN AMRO investor relations website to illustate that ABN AMRO has repeatedly split up and reorganised itself over the past years (without a lot of succes). And all the time the employees representatives did not ask their Board to self-reflect on the wisdom of such actions. But now they do oppose to outsiders that will do exactly the same.

Too bad that I can't make the whole argument right now, as the ABN AMRO investor relation website is completely down... ... which makes me wonder: would there be a silent take-over going on ... beginning as we speak with the website....?

How socialist save the capitalist ABN AMRO for Barclays...:

This week it appears as if everyone understands and has an opinion on mergers and takeovers in the financial markets. Members of provincial representative fora voiced their opinion that they thought ABN AMRO should not be sold to the consortium as that would incur too much risks. And similar tidings/thoughts come from the left-wing socialist party (former mao-ists) that even want to discuss the takeover stuff with the Minister of Finance (before the moment where he provides his statement of no-objection....).

While I myself know that the complexity of such a takeover is so huge, that one wouldn't want to consider meddling with it (let alone voice an opinion) it is intruiging to note in this analysis that left wing socialists now help out Mr Groenink in keeping an executive seat with the Barclays combination. Analyst Jeroen de Boer actually calls this a devils' pact.

It's a bit of media-logics here. A lot of people, representative organisations or politicians seek attention. So they choose a news topic (such as ABN AMRO) and then device an angle to ride-along on the news wave and be connected to the issue. One of the nicest examples in this respect: the organisation for the gay voiced their opinion on the merger and outlined that ABN AMRO should continue their gay-friendly policies. Completely off topic and highly irrelevant to the takeover debate, but absolutely brilliantly done.

Time for e-invoicing...?

This Planet - Multimedia column by Arjan Dasselaar outlines that it is e-invoicing time and states that direct debits and paper based bill payments should quickly move to the musea. With e-billing and the e-billing standard developed in the Netherlands, the bills and payment orders slide into the customers e-banking environment to be paid whenever you wish as a use. No more revocations of direct debit, no more typing 16 digit payment numbers when doing bill payments...

Indeed, one could question if the direct debit mechanisms (developed in the 1960s, when computer time was not abundantly available) would today be designed if we would not have it already. The answer is most likely negative. The direct debit comes with a lot of uncertainty for consumers (you never know exactly the date of the debit nor the precise amount), there is uncertainty for the companies (you never know if consumers refund the transaction) and there is a lot of work for banks (you never know when consumers/companies are going to call to ask for information/refunds).

Meanwhile one can see the European Payment Council still betting on the direct debit to be used as of 2010. Which, if this would indeed work, would become a typical case example of path dependency. This means that although rationally a technical standard does not make sense, the fact that so many people are used to it, will mean it won't be abolished.....

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...

Single Market Review.... where are the real barriers to Europe....?

In the next months, the European Commission will publish its Single Market Review. It will be a stock taking high-level assessment and announcement of plans, undoubtedly seeking to charm the citizens into Europe by taking easy one-liners and ideas. The FD reports some of the top issues (conveniently leaked by the commission):
- energy prices,
- prices for mobile phoning,
- pricing of bank services.

It is one thing to devote all this attention to price levels and the conception that by regulation those should be harmonised. But it would be another thing to acknowledge the real root cause of insufficient competition in Europe: uneven, nationally inspired implementation of Directives in combination with national supervisors that interpret their competencies in a domestic manner rather than with the European spirit and legislation in mind. This same commission knows this, as they ordered some academics to writethis contribution to the Single Market. Which contains amongst many others the observation:
The adoption and transposition into domestic law of EU Directives is a necessary but insufficient condition for the well-functioning of the Internal Market. Although the SMP and successive Internal Market strategies have been aimed at creating a level playing field by providing a set of rules to be applied across the Community territory, some provisions have lacked clarity and precision. The result is divergent, occasionally even conflicting interpretations by different Member States, which often result in the distortion of competition. Problems resulting from an uneven application and weak enforcement of EU regulation have been highlighted by many respondents of a recent public consultation carried out by the Commission on the future Single Market policy.

Suppose you have a house with a number of rooms and one central heating system and knobs on the individual radiators in the room. And you note that the temperature in the rooms is different, whereas you would prefer it to be equal in all rooms. Would it be smarter to adopt another extra regulation to align these temperatures, or would it be more intelligent to order the government officials in the individual rooms to back off from the radiator knobs and let the central heating do its work?

I hope the Single Market Review comes up with a structural suggestion other than the 'better regulation' mantra, to solve that problem. Because national sentiments and rules and interpretations of domestic regulators are at the heart of the non-existence of a real Single Market.

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 does not object to takeover of ABN AMRO by Barclays

An important formal step; a statement by the Ministry of Finance that they have no objections as to the Barlays takeover has today been taken. See the released statement (in Dutch) here and do note that this does'nt mean that the RBS consortium would not get a similar statement. I'm pretty sure RBS, Fortis and Santander will also get a statement of no-objection.

By the way, the statement comes with quite a wish-list of conditions for Barlays and it is countersigned by the central bank (on the request of the ministry of finance). Although the formal remark is 'notwithstanding the institutional responsibilities' it remains strange that the responsible Minister would want his advisor to sign his statement as well. So it does look a bit as if the Ministry of Finance is leaning quite a bit on the central bank expertise. Or, less poetic, in the case things might go wrong, it will also be the central bank that has to take part of the blame.....

Dutch SEPA website online

This week De Pers points to the Dutch SEPA.NL website, informing the public about SEPA. The site has got a bunch of material and backgrond information. Mostly in Dutch, but there's also a English page with info on the migration to SEPA in the Netherlands.

All on the Visa restructuring.. and the risks.....

This SEC filing contains all you want to know about Visa and its upcoming reforms. My personal favourite by the way is the risk section with main risks such as:
- Interchange fees are subject to significant legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenue, our prospects for future growth and our overall business
- If Visa U.S.A. or Visa International is found liable in the merchant interchange multidistrict litigation, we may be forced to pay substantial damages
- If Visa U.S.A. or Visa International is found liable in any of the cases brought by American Express or Discover, we may be forced to pay substantial damages.
- If the settlements of Visa U.S.A.’s and Visa International’s currency conversion cases are not ultimately approved and we are unsuccessful in any of the various lawsuits relating to Visa U.S.A.’s and Visa International’s currency conversion practices, our business may be materially and adversely affected.
- If Visa U.S.A. or Visa International is found liable in certain other lawsuits that have been brought against them or if we are found liable in other litigation to which we may become subject in the future, we may be forced to pay substantial damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our revenue and profitability.
- Limitations on our business and other penalties resulting from litigation or litigation settlements may materially and adversely affect our revenue and profitability
- The payments industry is the subject of increasing global regulatory focus, which may result in costly new compliance burdens being imposed on us and our customers and lead to increased costs and decreased payments volume and revenues.
- Existing and proposed regulation in the areas of consumer privacy and data use and security could decrease the number of payment cards issued, and could decrease our payments volume and revenues.
- Government actions may prevent us from competing effectively in the domestic payment markets of certain countries, which could impair our ability to maintain or increase our revenues.
- If government regulators determine that we are a systemically important payments system, we may have to change our settlement procedures or other operations, which could make it more costly to operate our business and reduce our operational flexibility.
- We face intense competitive pressure on the fees we charge our customers, which may materially and adversely affect our revenue and profitability.
- Our operating results may suffer because of intense competition worldwide in the global payments industry.
- Our operating revenue would decline significantly if we lose one or more of our largest customers, which could have a material adverse impact on our business.
- Consolidation of the banking industry could result in our losing business and may create pressure on the fees we charge our customers, which may materially and adversely affect our revenue and profitability.
- Merchants are pursuing litigation and supporting regulatory proceedings relating to the costs associated with payment card acceptance and are negotiating incentive arrangements, including pricing discounts, all of which may increase our costs and materially and adversely affect our profitability.
- Certain financial institutions have exclusive, or near exclusive, relationships with our competitors to issue payment cards and these relationships may adversely affect our ability to maintain or increase our revenues.
- We depend significantly on our relationships with our customers and other third parties to deliver services and manage our payments system. If we are unable to maintain those relationships, or if third parties on which we depend fail to deliver services on our behalf, our business may be materially and adversely affected.
- Global economic, political and other conditions may adversely affect trends in consumer spending and cross-border travel, which may materially and adversely impact our revenue and profitability.
- Visa Europe’s payments system operations are becoming increasingly independent from ours and if we are unable to maintain seamless interaction of our respective systems, our business and the global perception of the Visa brand could be impaired.
- As a guarantor of certain obligations of our members, we are exposed to risk of loss or insolvency if any of our members fail to fund their settlement obligations.
- If our transaction processing systems are disrupted or we are unable to process transactions efficiently, our revenue or profitability could be materially reduced.
- If we are not able to keep pace with the rapid technological developments in our industry to provide members, merchants and cardholders with new and innovative payment programs and services, the use of our cards could decline, which would reduce our revenue and income.
- Account data breaches involving card data stored by us or third parties could adversely affect our reputation and revenue.
- An increase in fraudulent and other illegal activity involving our cards could lead to reputational damage to our brands and could reduce the use and acceptance of our cards.
- Adverse currency fluctuations could decrease revenues and increase expenses
- Some of our financial incentives to customers are recorded using estimates of our customers’ performance. Material changes in our customers’ performance compared to our estimates could have a material adverse impact on our results of operations
- We have significant contingent liabilities for settlement payment of all issued and outstanding travelers cheques.
- Our brand and reputation are key assets of our business and may be affected by how we are perceived in the marketplace
- Our retrospective responsibility plan depends on several related mechanisms to address potential liabilities arising from the covered litigation, some of which are unique and complex, and if we are prevented from using one or more of these mechanisms, it may be difficult for us to fund the payment of a settlement or final judgment against us, which could have a material adverse effect on our financial condition.
- The shares of class B common stock that are held by members of Visa U.S.A. following the restructuring will be subject to dilution as a result of any follow-on offerings of our class A shares, the proceeds of which will be used to fund additional amounts into the escrow account necessary to resolve the covered litigation.
- Our governance structure after the restructuring could have a material adverse effect on our business relationships with our members.
- Following the restructuring, our relationship with Visa Europe will be governed by our framework agreement. This agreement gives Visa Europe very broad rights to operate the Visa business in Visa Europe’s region, and we have limited ability to control their operations and limited recourse in the event of a breach by Visa Europe.
- Our framework agreement with Visa Europe requires us to indemnify Visa Europe for losses resulting from any claims brought outside of Visa Europe’s region arising from either party’s activities that relate to our payments business or the payments business of Visa Europe, and this indemnification obligation could expose us to significant liabilities.
- We have granted to Visa Europe the right to require us to purchase all of the outstanding shares of Visa Europe’s capital stock. If Visa Europe exercises this option, we could incur a substantial financial liability and face operational challenges in integrating Visa Europe into our business.
- Our management team will be new and will not have had a history of working together.
- The restructuring is expensive and will require us to make significant changes to our culture and business operations and if we fail to make this transition successfully, our business could be materially and adversely affected.
- There is no existing market for our regional classes of common stock or for class B common stock and class C common stock into which the regional classes of common stock will be converted prior to our planned initial public offering, and thus we do not expect these shares to provide you with liquidity.
- The voting power represented by shares of our common stock may be limited because ownership of a significant percentage of our common stock will be concentrated in a few of our largest members.
- The U.S. Internal Revenue Service may treat a portion of our common stock received by a member of Visa International or Visa U.S.A. as taxable income.
- Members may incur tax liabilities in jurisdictions outside the United States, as well as in United States state and local jurisdictions, in connection with the restructuring and the true-up.
- The consideration that will initially be issued to members upon the closing of the restructuring is subject to reallocation and conversion.
- Anti-takeover provisions in our governing documents and Delaware law could delay or prevent entirely a takeover attempt or a change in control.
- U.S. federal and state banking regulations may impact our members’ ownership of our common stock.

Most interesting risk of course for us in Europe is to note the risk that Visa Europe becomes too independent. It's quite interesting that right now the fears that retailers try to increase among public policy makers, is that future Eu card schemes might become American owned.....

Fortis shareholders agree to share emission and ABN AMRO takeover

BNR Nieuwsradio reports that today the Fortis shareholders agreed to a share emission and to the ABN AMRO take-over. So ABN AMRO then published a statement that as of tomorrow there will be two competing bids on the table. One from Barclays and the other from the consortium with Banco Santander, Royal Bank of Scotland and Fortis.

And ABN AMRO also announced that it intends to hold an informative Extraordinary General Meeting of Shareholders on 20 September 2007 at 10:30 in 'de Doelen' in Rotterdam to discuss the offer by Barclays and by the Consortium of RBS, Santander and Fortis. The agenda items for that meeting will include a background to the public offers on all outstanding shares of ABN AMRO by Barclays and the Consortium, and the reasoned opinions of the Managing Board and Supervisory Board on those offers and the alternatives considered.

Quite an interesting meeting that will be.....

PS. Meanwhile today, the European Commission also cleared the merger between Barclays and ABN AMRO. So would the consortium get them to clear their initiative as well?

Brussels agrees on roaming regulation and closes competition investigations ....

Sometimes, the news comes in bits of pieces and only makes sense if you put the two together on a later date. Take for example the EU regulation to establish more modest roaming fees for mobile operators. At last the mobile industry stopped battling the initiative, understanding that it wouldn't make sense, given their pricing practices in the consumer domain.

And then a couple of weeks later, the Commission suddenly announces that it drops the competition investigation for mobile operators. Quite unusual as the FT notes:
The decision to draw a line under the high-profile cases is unusual because EU competition regulators rarely stop such inquiries without either securing a settlement or imposing a fine.

So where was the deal/settlement...?

My guess is that one and one makes two. The agreement between Commission and mobile operators clearly was that if they stopped resisting the roaming regulation, the Commission would stop the competition investigation in roaming.

Now, let's compare that deal to the situation in the banking sector. Already for 5 years there is the regulation that bank chargs should be equal (whether paying inside or to another euro-country). Which is effectively worse than the current roaming regulation (that allows for some higher prices in cross-border phoning). And at the same time there are still all kinds of threats and rulings to be expected with respect to interchange fees (the bank's equivalent of roaming agreements). With no one ever considering to drop those actions...

So why would it be that the Commisison continues to the debate on interchange rulings and interbank practices while completely dropping the roaming investigation?

My guess is that the Commission and EU Member States' governments, rationally distinguish between industries that are making them money and those that aren't. Any government would of course be more likely to be friendly to an industry that makes/has made you a lot of income (by buying some air/frequencies to do phoning) as opposed to an industry that is constantly ripping you of income (by killing cash seigniorage which is a nice source of government revenue).

Perhaps just another one of those cases of Schizophrenia?

Paypal Netherlands has 1 million customers

This article in BN/DeStem reveals that Paypal has 1 million Dutch customers. The article compares the features of the bank-based iDEAL payments system and Paypal. Essentially the main difference is that Paypal has international payment/acceptance features (with customers/merchants being able to both received and pay) while iDEAL serves mainly domestic Dutch transactions allowing customers to pay merchants but not to pay each other. Furthermore Paypal is fully webbased, with a lot of software controls to secure payments, whereas most banks secure the iDEAL payment with a bit of hardware or a separate sms-verification effort.

If the personell ads were something to go by the Paypal efforts should not be underestimated. They will be building a base here and will remain to have their international and peer-to-peer advantage, even if iDEAL would become a European standard. So there appears to be quite a sustainable advantage for them.

Central Banks and Payment Instruments: a Serious Case of Schizophrenia

There's an interesting article out there: published by IDATE, Institut de l'Audiovisuel et des Télécommunications en Europe. It's written by Leo van Hove from Belgium and concerns the dual role of central banks. I can only read the abstract, but it sounds quite interesting:

Central Banks and Payment Instruments: a Serious Case of Schizophrenia
This article analyses the competition between cash and payment cards against the backdrop of the dual role of central banks - as issuers of cash and as institutions with a mandate to foster the efficiency of payment systems in general. It is argued that this dual role results in a number of policy dilemmas, namely concerning pricing, traceability of banknotes and the choice of denominations of coins and banknotes. On a general level, the article argues that central banks should place greater emphasis on improving the efficiency of retail payments and less on protecting their self-interest. More concretely, the article repeats the suggestion - originally put forward in VAN HOVE & VUCHELEN (1996) - that the ECB should place the upper limit of its banknote series at EUR 50 instead of EUR 500. It is also argued that policy makers should explicitly foster the use of cost-based pricing and in particular create a legal environment that makes it possible for commercial banks to start using it.

ECBS 5th progress report on SEPA: from concept to reality (and right back again...)

Last Friday the European Euro central banks (ECBS) published their fifth progress report on SEPA: from concept to reality. My direct response after reading it was that the title suggest a realism that the report completely lacks. That's why I would redefine the title as: From concept to reality with the EPC and right back to the concepts with the Eurosystem.

The report contains many pages of statements, desires, objectives, recommendations that are mainly addressed to the payment industry: banks, EPC, national migration organisations, card schemes, processors, 'infrastructures' and can be summarized as 'please hurry up with the EPC-work and do include a lot of extra goodies while you're at it'. It also urges public authorities to ensure that regulation and legal clarity is quickly provided, so that the payment industry quickly knows the rules of the game (and whether or not there may be an interchange fee in the future).

The report claims to be based on a gap analysis between what banks and EPC deliver now vis a vis the requirements of a successful SEPA. As such the report is a 180 degree turn from good old central banking traditions. Usually, the central banks would do some solid analysis and explain that the market would work well and no intervention is necessary. And they would do without the political dimension. But not this time.

The reports is a above all a political document with a number of inconsistent and questionable statements. Of course there is the now well familiar statement on a third card scheme that ESCB considers necessary given the existing 'duopoly'. Quite misplaced one could argue, as the ESCB has nowhere near the competencies of a competition authority.

Also, suddenly the EPC (which does bank-bank standardisation) is required to do an end-to-end security threat analysis for credit-transfers, e-payments. And ACH's are required to abide with a newly developed set of criteria for sepa compliant infrastructures.

There should be a though and quick time schedule for moving to SEPA and those who don't wish to migrate should be forced. And the domestic debit-cards only (remember the Postbank announcement) are no longer allowed to exist after 2010. And while all this happens prices may not rise, which by the way may well be monitored by the central banks.

Another nice one. There is no formal position on interchange fees (Eurosystem is neutral) but the report does day that existing geographic interchange fee structure may only exist in a conversion period, not in the final SEPA-end game. And, by the way, all changes in the interchange fee arrangements may not have as a result that consumers suddenly choose more inefficient means of payments. Meaning that if banks would -hypothetically- eliminate the interchange fee and ask direct fees from both consumer and merchant, this would not be OK for the Eurosystem, because it would drive the customers to cash rather than to electronic payments.

So in sum: this doesn't make any sense any more other than political sense. the European central banks are no longer objectively analysing the world; they just join in the political game and produce papers that they think may get them a good press.

So, would this be the right time to remind the Eurosystem of its formal statute and of the difference between the goal and the means to achieve a goal?

As for the goal, we can read in article 2 of the ESCB statute that the primary objective of the ESCB is to maintain price stability. So that is all the stuff about keeping the interest rate and € exchange rate stable. In doing so, the ESCB shall support the general economic policies in the Community and it shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources....

Now article 3 states that in order to maintain this price stability, the actual tasks of the ESCB are:
- to define and implement the monetary policy of the Community;
- to conduct foreign-exchange operations consistent with the provisions of Article 111 of this Treaty;
- to hold and manage the official foreign reserves of the Member States;
- to promote the smooth operation of payment systems.

One could ask: why all the involvement in retail payments? Whether or not banks do SEPA will not imminently impact the interest rate nor price stability in Europe. So that would justify a bit of distance rather than the current involvement.

But then again, it is of course possible to reverse the order and state that the main objective of the ESCB is to promote smooth operation of payment systems and price stability also. Thus, by making the means an end in itself one could try to justify an ECBS role in retail payments. Still the tax payer may have a hard time understanding how one would really think that the objective to not have price rises in retail payments stems from the ESCB-task of price stability or fits the goal of preserving the value of the euro.

What the tax payer might understand is the concept of commercial expansion or institutional drift (where companies and regulators wish to dominate their respective markets and increase their market beyond original boundaries). And one could argue that the ESCB is now taking things a bit too far now with their continued and expanding involvement in retail payments. They are drifting out from their original territory into the domains of prudential supervisors, the European commission, local legislators and competition authorities. And while some of the involved policy makers at other institutions may raise the eyebrow, nobody is effectively stopping them.

What's also interesting? The ESCB don't apply their own one-SEPA-size fits all-reasoning to their own product: cash. In the cash area they go out of their way to explain that they are unable to harmonize cash rules in Europe:
At the same time, it was underlined that the Eurosystem does not envisage developing a “one size fits all” cash supply system. The different national economic and geographical environments need to be taken into account and the process of convergence will require some flexibility regarding customer requirements, cash infrastructure and transitional periods for implementation.

And finally, the Eurosystem leave the pricing of cash undiscussed. Shouldn't the ESCB be the first to ensure and announce that all over Europe all commercial banks should change their pricing for cash (under priced and free in most countries) in such a manner that we really have an efficient allocation of resources?

Well, I guess the old style ESCB would do so. Unfortunately the new style, politically sensitive ESCB hushes the subject under the carpet.

VEB-shareholders withdraws request to replace board/commissioners ABN AMRO

In the news at BNR Nieuwsradio is the news that the association of shareholders (VEB) withdrew its request to appoint three independent commissioners at ABN AMRO to ensure a proper bidding procedure. This comes after further discussions with ABN AMRO and after having received some further assurances as to the way in which ABN AMRO will judge the two bids.

The request to do a further investigation if there was no mismanagement still stands though, so the court stuff is not entirely over.

RBS-Fortis-trio raises bid for ABN Amro to 71,1 billion euro with 93 % in cash

See the article here where it is described that the Fortis trio will keep its bid at 38,40 euro per share, even when there's no more LaSalle. Analists generally appreciate the offer, the share price for ABN AMRO now rises. Yet there is the condition that ABN AMRO should not sell any more assets.

Of course ABN AMRO is now studying the offer. Which contains the condition that ABN AMRO should not liquidate any further major assets. But ABN AMRO may still also decide to sell Banco Real (no share-votes required, as we now know), thus making themselves unattractive to Banco Santander as well....

To be continued...