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Payment Matters No 11 - Europe and beyond

  • United Kingdom
  • Financial services - Payment services


SEPA landmark reached

A landmark was reached on 1 August 2014 for the Single Euro Payments Area (SEPA), when it became fully operational in Europe.  Marking a significant step in the aim to achieve financial harmonisation across Europe, SEPA stands out globally as one of the largest financial integration projects.  Individuals and businesses can now use a single bank account for all euro credit transfers and direct debits, with payments across Europe being made as easy as those within national borders.  The key benefits to businesses include the fact that only one account will be needed for all euro payments, which should result in cost reductions.    

What this means for you

The deadline for migration to SEPA was originally set for 1 February 2014 but was extended to provide an additional six-month transitional period for those affected to get ready for the changes to payment transactions. 

Those collecting direct debits in eurozone countries must now be able to collect SEPA direct debits and all credit transfers must meet SEPA requirements.  As of 1 August 2014, banks are no longer able to process non-compliant SEPA transactions making it imperative that individuals and businesses ensure their payment systems are compliant if they wish to transact in euro countries.  It is anticipated all remaining payment services in the euro area will be migrated to SEPA by 2016

A step closer to basic payment services for all

The Council of the European Union (Council) adopted a directive on 23 July 2014, which is designed to guarantee access to basic payment services and improve information on fees related to payment accounts.  Irrespective of their financial situation or country of residence, any individual legally residing in a member state of the EU will be entitled to open a payment account to enable them to access basic banking services.  A fee information document must also be provided to improve transparency in terms of fees related to payment accounts.  

What this means for you

Bank accounts are considered to be a vital necessity in modern life.  The Council’s acceptance of the Payment Account Directive (PAD), and publication of a revised text, follows the adoption of PAD by the European Commission and the European Parliament on 8 May 2013 and 15 April 2014 respectively.  It brings us one step closer to achieving basic payment services for all.  Members will have two years to transpose PAD into national law.

US playing catch up on Chip and PIN

Since the roll out of Chip and PIN in the UK in 2004, ‘Card Present’ fraud has decreased year on year, with that type of fraud migrating to non-EMV countries.  The issue with the US has always been the economics of mass migration to EMV.  However, MasterCard and Visa are forcing players in the US card industry to catch up and ‘belt up’ by introducing Chip and PIN technology (and setting a ‘switch’ deadline of October 2015). Unlike the UK experience, the implementation is not being mandated by Government and is leading to a raft of variations within the US which are both confusing and unclear.

One of the key points in the ‘switch’ journey is the liability shift – this is the process by which a decision is made as to who is liable for the costs of the fraud.  After the ‘switch’, liability will broadly sit as follows for ‘Card Present’ transactions:

  • Transaction processed via ‘swipe and sign’ using Chip and PIN card: merchant liable for the costs.
  • Transaction processed via ‘swipe and sign’ using non-Chip and PIN card: card issuing bank liable for the costs.

The aim of the liability shift seems to be to encourage the players in the market to use the enhanced technology and therefore reduce the likelihood of fraud for ‘Card Present’ transactions.  Whoever does not have the technology will be liable.

What this means for you

Card Issuers: options for issuing new Chip and PIN cards to customers should be assessed, including the cost of implementing the technology alongside the savings. For non-US issuers, the issue of the liability shift will need to be carefully monitored.

Merchants: reviewing the Point of Sale devices on offer and the costs of upgrading or replacing their current technology, including the ability to add functionality for new payment methods.

If Chip and PIN technology is deployed, the US card industry will have the opportunity to utilise a lot of functionality of the chip technology, enabling more targeted and better lending practices, safer authorisation and reducing 'Card Present' fraud.

Should Chip and PIN divert fraudsters’ attention away from ‘Card Present’ transactions, it is likely there will be renewed focus on ‘Card Not Present’ transactions.  Chip and PIN has no impact here and this method of fraud remains a key risk area for the card industry across the globe.  Investment in fraud screening, identification software and security software will be key in the ongoing fight against fraud, but merchant take-up remains patchy.

ECB’s opinion supports PSD2

The European Central Bank’s (ECB) opinion on proposals for a new directive on payment services in the internal market, which would incorporate and repeal the Payments Services Directive (PSD), was published in the Official Journal on 15 July 2014.  The proposed directive, PSD2, is intended to update the existing legal and regulatory framework for payment services in the EEA.  PSD2 was published by the European Commission in July 2013. 

The ECB “strongly supports the objective and content of the proposed directive”, in particular the proposal in PSD2 to introduce two new payment services (payment initiation services and account information services) within the list of payment services.  Improvements suggested by the ECB include the possibility of extending safeguarding requirements to payment institutions regardless of whether they are engaged in payment services or not. 

What this means for you

PSD2 is continuing to progress through the ordinary legislative procedure of the Parliament and the Council of the EU.  If approved, PSD2 must be transposed into national law within two years of its adoption.  It is difficult for institutions to plan effectively when the PSD2 landscape is continually altered, and some certainty as to what is going to be implemented will be most welcome.

Alliance calls for urgent action on card fees

On 4 July 2014, the European Payment Users Alliance issued a press release for the attention of politicians in Europe, calling for the regulation of interchange fees to ensure adoption by the end of 2014.  The Alliance consider that the lack of legislation is holding Europe back from entering a new payments world and that high fees are standing in the way of market development.  The Alliance say “EU Regulation is the only way to tackle the MIF and associated restrictive contractual rules in a coherent way and provide a true Single Euro Payments Area (SEPA)”.  The European Parliament is urged to act swiftly to implement and enforce the draft legislation.

What this means for you

The timeframes in relation to the implementation of the MIF regulations remain relatively unknown.  Current opinion suggests that implementation prior to the end of 2014 is unlikely.  However, statements such as the one released by the Alliance indicate dissatisfaction with the pace of progress.  The Schemes are addressing this in different ways (at the moment) and the current solutions remain unsatisfactory.

EPC invites participation in new poll

The European Payments Council (EPC) has launched a poll inviting responses from payment audiences to cast a vote on which initiative they believe is going to have the most impact going forward.  The key initiatives highlighted are as follows:

  • European Commission proposal for a revised Payment Services Directive (PSD2).
  • European Commission proposal for a new Regulation on interchange fees for card-based payment transactions.
  • Work programme of the Euro Retail Payments Board, chaired by the European Central Bank.
  • SecuRe Pay Forum recommendations for the security of internet payments; for the security of payment account access services; and for the security of mobile payments.
  • Guidelines and technical standards issued by the European Banking Authority pursuant to the mandate provided by PSD2 (Articles 86, 87).

What this means for you

The EPC is the decision-making body of the European banking industry.  Its purpose is to promote the Single Euro Payments Area (SEPA), and it develops schemes and frameworks which are designed to achieve euro integration.  Should you wish to cast a vote on which initiative you consider will have the most impact, please click here to access the poll.  The poll will be open until the end of September 2014, with the results to be published thereafter. 

EPC publishes guidance on reason codes for SDD R-transactions

The European Payments Council (EPC) has published guidance on ‘reason codes’ for SEPA Direct Debit (SDD) ‘R-transactions’ to clarify which reason codes should be used and when, as it appears confusion still remains among payment service providers.

A normal direct debit collection may fail for any of the following reasons: refunds, returns, rejects, refusals and reversals (hence the name ‘R-transactions’).  The possible causes of an R-transaction are set out in the SDD Core and SDD Business to Business Rulebooks, which detail the data required to be provided to the payee.  That data, known as ‘reason codes’, identifies the type of the R-transaction, the initiator of the R-transaction and the reason for the R-transaction.

The guidance details that it is imperative for the bank of the payer to advise the bank of the biller (creditor bank) of the failed transaction and the reason code for the failure.  This will enable the creditor bank to advise the biller in relation to the situation. 

What this means for you

The guidance serves as a reminder to all payment service providers who have signed up to the SDD Schemes that specific R-transaction reason codes must be provided when reporting on a failed transaction.  It also recaps on the relevant timelines.  Use of the correct reason codes streamlines the process for handling rejections.  A working knowledge of the principles contained in the guidance is therefore essential when dealing with returned direct debit transactions to ensure that current practices are compliant.