comments and suggestions by n2finance - circabc · of cards, consumer experience at the pos, ...),...

Network of Alliances, Outsourcing and Mergers Experts (NAOME) bvba Office : Leon Dhaene Neerrechemstraat 37 Tel. +32-473-642249 B – 9770 KRUISHOUTEM e-mail : [email protected] (Belgium) VAT/Corporate ID : BE-0870 440 386 RPR Oudenaarde

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EUROPEAN COMMISSION

GREEN PAPER

“Towards an integrated European market for card, internet and mobile payments” 1

Comments and suggestions by N2FINANCE Editor : Leon Dhaene – Chairman N2FINANCE Contact : [email protected] Telephone : +32-473-642 249 Release date : 5th April 2012

1 EUROPEAN COMMISSION. Green Paper. Towards an integrated European market for card, internet and mobile payments. Brussels, 11.1.2012, 25 p. Referred to as “EC Green Paper” in this document. The European Commission will be referred to as “EC” and the European Union as “EU” further in this document.

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EC Green Paper CIM Payments Comments N2FINANCE

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N2FINANCE N2FINANCE is a European network of seasoned experts in financial services, retail banking, payments, and cards; with each having at least 15 years of experience in the finance sector and their branch of expertise. N2FINANCE experts master the entire value chain of payments and cards, fuelled by many years of hands-on experience and having lead ground-breaking innovations to market. The experts of N2FINANCE have worked for the leading banks of Europe, for the national and European regulatory, for key suppliers to the finance sector, such as transaction processors, solution providers, etc… At their disposal, they have a complete register of skills : legal, organisational, commercial, technical, risk assessment, security, operational, product management, etc… Through a unique combination of innovation hunting and strategic insight, N2FINANCE experts are best equipped to face the future of finance. Since 2002, experts active in the N2FINANCE network have been advising their customers (international banking groups, interbank companies, payment services providers, network services providers, issuers and acquirers, financial services companies, mobile operators, internet companies, processing companies, established payment schemes, new payment schemes, payment institutions, retailers, consumer associations, corporations, suppliers to the financial services sector, regulators, ...) about the impact of and the opportunities arising from the Single Euro Payments Area (SEPA). N2FINANCE experts are active in all domains of payments, ranging from consumer payments to corporate and institutional payments, from traditional payment instruments (like credit transfers, direct debits, card payments, ...) to mobile payments and internet payments. Over the years, the N2FINANCE experts have decided to share information regarding the issues to create a level playing field in payments in Europe. As strategic advisors to existing market players, the N2FINANCE experts are faced with issues such as expansion into other intra-SEPA markets, competition issues, implementation issues of SEPA, etc... As advisors to new companies wanting to enter the market, the N2FINANCE experts are faced with issues such as market entrance obstruction, business case issues, lack of technical and operational standardisation, etc... These comments on the EC Green Paper integrate, where needed and requested, information gathered executing our projects, without referencing or disclosing any confidential information relative to those projects. To this purpose, references to customers are generalised.



DISCLAIMER This document gathers the opinion of the N2FINANCE experts and provides examples of issues encountered gathered in delivering projects to N2FINANCE customers since 2002. For confidentiality reasons, most of those examples have been generalised; therefore the reader should not assume that it consists of a generalised practice nor of cases which have been fully and objectively examined. The contributors and the editor recognises that in some cases further and detailed investigations need to be undertaken regarding certain statements made by market players or regarding issues discovered. Depending on the purpose of investigation (strategic, legal, business, technological, regulatory,...) a different approach and different methodology of investigation will be required. Any statement in this document is delivered for information only. Statement of facts were expressed by market players, not by N2FINANCE. None of the statements in this document can be legally held against any N2FINANCE expert nor against the editor. Applicability and restriction of usage This report is presented to the European Commission for information purposes only. This report cannot be considered exhaustive. Statements in this report are verbatim from the participants, which were not checked on their correctness or completeness. N2FINANCE as the organizer does not accept any liability for those statements. Breach of confidentiality and accidental breach of confidentiality This report is solely intended as comment to the EC Green Paper for the use of the EC individual or entity to whom it is addressed. This report does not contain any confidential information, but contains information which may be incomplete nor checked against various other sources. The purpose of disclosing this information is so that the EC can cross-check with other sources, independent from N2FINANCE; and eventually advise further and formal investigations. Negligent misstatement The N2FINANCE organization accepts no liability for the content of this report, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. BACKGROUND



N2FINANCE concludes, overviewing the work done over a period of more than ten years in particular regarding the Single Euro Payments Area (SEPA), in general that : 1. Most markets are still dominated by cash payments, still making 50-60% of

retailer payments in cash; but with electronic payments gaining momentum year on year;

2. Non-cash payments are still growing at a rate of 5%, with double digit growth for card payments;

3. The payment market is still very fragmented with few convergence of payment instruments, payment systems, and payment infrastructure;

4. The payment market is monopolised by a few payment instruments capturing the large majority of national transactions;

5. There are large local differences in the usage of the different payment instruments;

6. Consolidation is starting, but has still a long way to go; 7. Card payments are marked by large variances in terms of transaction costs

for consumers, merchants, payment schemes, and banks; 8. Internet payments are growing spectacularly; 9. Great interest is noticed in mobile payments, especially for low value

payments, remittances, and by the younger generation; 10. In most instances, most retailers have a cost of cash which is definitely

higher than the cost of debit card payments and closely to the cost of standard credit cards.

In terms of the main changes in the European retail payments market recently, we can conclude that : 1. SEPA had no significant impact on the proposition of new product and

services to the consumer, on the contrary some domestic payment instruments (c.q. domestic debit card schemes) are disappearing being replaced by existing global card schemes, and new initiatives are currently at a stand-still;

2. SEPA did not lead to major changes in fees for payment instruments or payment transactions, other than for the limited volume of international, intra-SEPA, euro-based transactions, because of the Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009;

3. SEPA did not significantly increased the number of international, intra-SEPA, euro-based transactions, i.e. SEPA was not necessarily requested by EU consumers;



4. SEPA speeded up the migration of cards and terminals to become EMV Chip and PIN compliant, within as outside the SEPA area, process started prior to the SEPA project;

5. SEPA added to the complexity of credit transfer and direct debit systems, requiring the consumer to adapt their systems and re-enter (extended) IBAN – BIC numbers, without generating any benefit to the consumer so far, other than being capable of performing electronic credit transfers within the Eurozone easier and cheaper (less than 2% of total volume);

6. SEPA was embraced by the banking sector, delivering a great job in agreeing upon standards and procedures between banks;

7. SEPA governance cannot be dominated by banks as any decision, even regarding operating standards or technical requirements (e.g. certification of cards, consumer experience at the POS, ...), have direct impact on acceptors and consumers;

8. SEPA did not make existing players in the payment business change their business model or open the market for more competition, on the contrary; nor that new players, such as mobile payment service providers or online payment service providers wanted to be subject to the same regulatory controls and constraints;

9. SEPA should reflect the dramatic change happened in the essential preconditions in the card payment business over the last twenty years, quadrupling the transaction volumes, reducing the risk dramatically (by reduced periods to present transactions for settlement from 6 weeks to just seconds in real-time clearing systems, by migrating a large portion of the volume to the less risky online debit cards), reducing the fraud by the implementation of technical innovation (online-to-issuer authorisation systems, implementation of EMV chip and PIN, ...), reducing the operating costs by estimated 75%, ..., changes which so far were not reflected in drastic price reductions to retailers or consumers, on the contrary over the same period more interchange systems were introduced and fees for services increased or were initiated;

10. SEPA is way behind schedule in terms of delivering on its original objectives.



COMMENTS ON THE EC GREEN PAPER 1. Under the same card scheme, MIFs can differ from one country to

another, and for cross-border payments. Can this create problems in an integrated market ? Do you think that differing terms and conditions in the card markets in different Member States reflect objective structural differences in these markets ? Do you think that the application of different fees for domestic and cross-border payments could be based on objective reasons ? MIF are the single largest barrier to new market entrants for payment services. One need to make a distinction between MIF as a mechanism, and MIF as a fee. As a fee, the MIF was supposed to cover for the cost of producing cards for consumers, operating the card system on the issuing side, associated to differed debit of the transaction, associated to the risk of bad credit, fraud, ... for the issuers (mostly banks or bank owned companies). As a mechanism, the traditional four party model payment schemes choose not to be transparent and level the fee on the acceptor of card payments (typically the retailer). The fear was real that, when being levelled on the consumer, the card payment system would never effectively take off. Since the breakthrough of electronic card payment systems (second half of the eighties) the traditional payment schemes have systematically increased the number of MIF and the level of the MIF; despite the fact that the cost of processing card transactions has been reduced by 75% between 1990-2010, the losses of fraud have been reduced because of investments to implement electronic point-of-sales systems (POS), to process online to issuer, and the implementation of chip and PIN at the POS. Automated, and later online, clearing systems have dramatically reduced the presentment time from 6-8 weeks to less than 1 minutes, reducing the credit risk considerably. All of those investments have major impacts on the cost of the electronic payment system at the retailer (new POS, telephone lines, integrated systems with cash registers, etc...), the network services provider (new protocols to support, like ISO 8583-version 1993 = support of online clearing), and the acquirer (online to issuer



systems, certification cost, ...) 2. As a fee, to compensate for the cost of operating and risk, no one can dispute the MIF. The issue is that there is no competition between banks regarding the MIF because 1) most MIF are decided on an interbank basis; 2) the retailers have to pay the fee and because of the concentration of the share of payment cards by just a couple of payment schemes, the retailer cannot refuse to accept payment cards; 3) the payment schemes have bundled payment instruments with various costs in the same package : retailers cannot accept the standard credit card and refuse the premium credit card despite at a higher cost; and 4) the fee is not visible to the consumer, who is in the impression not having to “...pay to pay...”. Should issuers of payment instruments be obliged to level fees to the consumer, than 1) the fee system would become transparent to the consumer; and 2) there is a high likelihood that fees to consumers would be dramatically lower (than the average of 0.80% of the transaction amount), if not be abolished. Consumers, in that case, could revert to the best services proposition. The mechanism of MIF creates a big competition issue in the integrated market because retailers will refuse to accept payment instruments for which they have to pay a high interchange fee and issuers will not support payment instruments for which they do not get a high interchange fee. It is our recommendation that the MIF, as a mechanism, should be abolished. In general, third party collection (whereby c.q. the retailer is obliged to collect the fee governing the relation between consumer and payment services provider) should be abolished. The fact that MIF’s differ from one country to another has largely to do with : 1) the development of the electronic payment systems in a country (e.g. Spain versus the Netherlands); 2) the competition in payment instruments between market players (e.g. the U.K. market following the implosion of the Access / MasterCard consortium); 3) the market penetration of domestic payment systems; 4) the consumer adoption of electronic payment instruments (e.g. consumers massively adopted the traditional payment schemes in Poland, hence high interchange levels); 5) the pressure of consumer and retailer associations to reduce prices (e.g.

2 DHAENE, Leon. Living in a world without interchange, 2010-2015. Berlin, European Card Acquiring Forum, 24 February 2010, 38 p.



the Netherlands, Belgium, ...). Different fee levels of MIF’s do, as such, not create an issue in the integrated market; however the fact that MIF levels are set by kartels represent an issue. Any MIF level set as a maximum level, will make the entire market converge towards that maximum level as issuers of payment instruments will want to have the highest revenue flow. Setting levels of MIF’s is therefore not an adequate regulatory measure to stimulate competition, on the contrary, it would institutionalise the interchange fee mechanism and level. To our knowledge, there are no “...objective structural differences...” that could argue in favour of different levels of interchange fees in the different EU member states. Some national payment schemes have chosen for higher levels of sophistication (like chip and PIN, online payment systems, or electronic wallets, etc...); but the costs associated with those higher levels of sophistication should be taken by the beneficiary, mostly the banks, and not be retrieved from the retailer or the consumer. In those countries, the higher level of sophistication of the payment services were not because of requirements or a choice of consumer or retailers; but as a standard imposed by the national payment scheme or in order to be compliant with a global payment scheme. There is definitely no objective reason which could explain that an interchange fee should be different between EU member states and domestic transactions. The fact that more intermediate networks are involved in processing the payment transaction, cannot be an element of discussion in favour of higher interchange fees. A payment instrument is only successful in the eyes of the consumer if there is a large acceptance network supporting this payment instrument; therefore there is no demonstrable difference in cost between transactions domestically and transactions internationally intra-SEPA. There could be a difference in cost between transactions on-us versus transactions requiring several network services providers in order to be completed.

2. Is there a need to increase legal clarity on interchange fees? If so, how and through which instrument do you think this could be achieved ? There is an urgent need to clarify interchange fees, not by setting a maximum level nor by interdicting issuers of payment instruments to collect a compensation for the services they offer; but by abolishing the



mechanism of interchange fees whereby a third party is obliged to collect the interchange fee on behalf of another party, governing a relationship where the third party is not an interested party. This should be done by a legislative instrument, and may refer to similar regulatory intervention regarding third party fee collections in other businesses.

3. If you think that action on interchange fees is necessary, which issues should be covered and in which form ? For example, lowering MIF levels, providing fee transparency and facilitating market access ? Should three-party schemes be covered ? Should a distinction be drawn between consumer and commercial cards ? Setting MIF levels by regulatory intervention is not helping the markets to open for competition, on the contrary. Markets will converge versus the maximum levels to protect the interests of the issuers of payment instruments. The regulatory should make full pricing transparency mandatory and take the necessary measures to facilitate the access to the market by various competitors. Market access is currently blocked for new payment instruments because providers of new payments instruments, unless banks or members of existing payment services providers, cannot access the entire suite of banking services (such as intercompany clearing and settlement, authorisation services and guaranteed payment, etc...). When adopting the Payment Institution (PI), as a new entity whereby for instance non banks could operate payment instruments; the EC should clarify that this means that PI’s could also make use of banking services and cannot be discarded from those by the banks or the interbank system(s). Three party payment services providers should definitely be covered by the current and future legislation; inclusive three party systems which have created a substantial volume of payment transactions (such as petrol cards, voucher systems, etc...). This should create a equal level of trust for the consumer wanting to use those payment instruments. At a retailer / acceptor level, there is definitely a substantial difference between consumer and commercial cards. In the case of a commercial card, the acceptor not only has to pay in average a substantially higher fee, but also has to deliver additional (up to line item level 3 information) information, creating a substantial increase in cost and effort.



Any payment instrument which is different in : - fee level (e.g. debit cards versus credit card, example : MasterCard debit versus MasterCard credit; or consumer versus commercial cards) - operational level (e.g. number of chargeback reasons allowed or retrieval requests) - security level (e.g. signature based versus PIN based, magnetic + PIN based versus chip and PIN, or chip and magnetic) - brand level (e.g. Visa Plus or Visa Electron versus Visa) - acceptance requirements (e.g. online clearing versus offline) - channels supported (e.g. internet, MOTO, etc...) should be considered a different product / services; and therefore acceptors should be entitled to accept or refuse acceptance.

4. Are there currently any obstacles to cross-border or central acquiring ? If so, what are the reasons ? Would substantial benefits arise from facilitating cross-border or central acquiring ? Obstacles to facilitate cross-border acquiring are : - Retailers have to continue to pay domestic interchange and follow domestic rule systems; requiring multiple sub-systems (one per domestic system) to be put in place. - Acquirers have to implement multiple domestic subsystems. - Certification by the established payment schemes required. - Acquirers need to pay a special fee. - Special central acquiring fees are sometimes applicable, taking partly the benefit of central acquiring away. Benefits of central acquiring would be : - One single interface, taking out the cost of having to develop, maintain, implement, certify, and operate multiple interfaces. - One single customer experience at the point-of-sales. - Quicker time to market cross-market.

5. How could cross-border acquiring be facilitated ? If you think that action is necessary, which form should it take and what aspects should it cover ? For instance, is mandatory prior authorisation by the payment card scheme for cross-border acquiring justifiable ? Should MIFs be calculated on the basis of the retailer’s country (at point of sale) ? Or, should a cross-border MIF be applicable to cross-border



acquiring ? Allowing retailers to choose their acquirer, wherever in the EU, for processing, clearing and settling their entire volume. European based retailers should also be allowed to process non-European transaction volumes through their European connection. The EC could proceed prohibiting restrictive practices in the payment services industry, via an interpretative explanatory note to the PSD, in particular to Article 28 – 1. Certification by the existing payment schemes is but just a procedure to ensure that the current operating modes remain in place. There is absolutely no rational argument to have to certify a central acquiring connection any other way than a (normal domestic) connection. About MIF : again if the mechanism of MIF is abolished, the issuer could charge the consumer of payment services accordingly. It is then up to the issuer to eventually charge more to the consumer for using the electronic payment instrument abroad or not. However, should a system of MIF remains in place, there should be no reason as to why a set of domestic interchange systems should be applied to central acquirers.

6. What are the potential benefits and/or drawbacks of co-badging ? Are there any potential restrictions to co-badging that are particularly problematic ? If you can, please quantify the magnitude of the problem. Should restrictions on co-badging by schemes be addressed and, if so, in which form ? In the ideal scenario, it should be up to the consumer to choose what payment services he / she wants to have. The issuer (whether bank or payment institution or any other) should be able to cater for their needs, independently of the payment instruments it offers standard. As and when all payment instruments are adopting the same technology and security standards, there would be no issue whatsoever for a bank to deliver services, such as authorisation, clearing, settlement, and transaction posting, for any one type of payment instrument. In today’s environment, where the consumer can only choose the payment instrument offered by the bank, there should be no issue for the bank as issuer to decide whether or not to co-badge. Payment schemes should



not be allowed to refuse the bank to put multiple brands, inclusive competing brands (such as MasterCard or Visa) on the card 3. According to the principles of unbundling, where the issuer (c.q. the bank or payment services provider) owns the product and is supposed to compete with other banks or PSP’s; the payment schemes lays out the rules of engagement for acceptance and provides the acceptance network and brand; and the processor level processes the transaction; all independently from each other; the issuer should be the sole one to take any decision about co-badging. To that purpose, card certification should not be in the hands of any payment scheme, but be provided by an independent (private or public) entity. Some claim that co-badging would allow new payment scheme providers to come into the market. This might be correct. However, we feel that, rather than making co-badging an issuer decision or even mandating the usage of two or more competing brands on a single card; new market entrants will be more served by the abolishment of the MIF mechanism and the access to banking services, like authorisation, clearing, settlement, and posting services. Restrictive practices, such as the mandatory certification of the cards by the existing Payment Schemes or not allowing co-badging by the issuer could be tackled by the EC via an interpretative explanatory note to the PSD, in particular to Article 28 – 1, by guidelines provided from an EC Competition point of view, or by additional legislative work.

7. When a co-badged payment instrument is used, who should take the decision on prioritisation of the instrument to be used first ? How could this be implemented in practice ? Much will depend upon the payment instruments accepted by the retailer or acceptor. Only in case where the acceptor accepts two or more brands on the card, it should be up the consumer to choose initially which payment instrument to use, and ultimately be an agreement between retailer and consumer. Electronic point of sales have routing facilities in any case routing different brands to different network services providers. In case the network services provider take all the brands accepted by the retailer, a field in the transaction message indicates the service used. One

3 It already happened in the early ‘90s where an original Visa credit card (4- BIN number) was co-badged with the Cirrus ATM card owned by MasterCard (in the USA) : there are no technical arguments to interdict co-badging, even of competing brands such as MasterCard and Visa on a single plastic card.



would need to check in the various markets whether this field is effectively enabled in most of the POS or not, prior to making such operational procedure part of the standard.

8. Do you think that bundling scheme and processing entities is problematic, and if so why ? What is the magnitude of the problem ? The bundling of scheme, processing, and product is a major barrier for new competition in the card payments market. The global card schemes are managing the product, by means of card certification, and can (did) block other payment schemes to be on the card. Card schemes try to tie banks into issuing agreements by offering rebates on processing fees. This is unfair competition versus the specialised processors, and locks the door to new entrants. Furthermore, processing is not the core business of the schemes, therefore the revenues earned by processing transactions can be used to develop the business.

9. Should any action be taken on this ? Are you in favour of legal separation (i.e. operational separation, although ownership would remain with the same holding company) or ‘full ownership unbundling’ ? Unless full ownership unbundling, practices such as combined offerings will remain. Schemes, issuers and acquirers of transactions should also commit to providing the same service levels to any new payment instrument, and not favour one instrument over another. In some markets, we have proof of evidence that the national processor, who also is the issuer processor of the national scheme, provides better service levels to retailers than the competition (other network services providers) can offer, whilst the latter are obliged to connect to them.

10. Is non-direct access to clearing and settlement systems problematic for payment institutions and e-money institutions and if so what is the magnitude of the problem ? Access to banking services in general, inclusive clearing and settlement systems, is critical for new market entrants in payment services. Without this access at a reasonable cost, new market entrants will not be in a position to develop their business. As advocated before, it should be the decision of the consumer to request their financial institution to support a new payment services and provide authorisation and guaranteed payment,



clearing, settlement, and posting services.

11. Should a common cards-processing framework laying down the rules for SEPA card processing (i.e. authorisation, clearing and settlement) be set up ? Should it lay out terms and fees for access to card processing infrastructures under transparent and non-discriminatory criteria ? Should it tackle the participation of Payment Institutions and E-money Institutions in designated settlement systems ? Should the SFD and/or the PSD be amended accordingly ? Common (format and message) standards and (operating) procedures for point-of-sales and transaction processing are a prerequisite should we want to achieve the (original SEPA) goal that any new card (following SEPA standards) should automatically work at any point-of-interaction. Without a set of common standards and operating procedures, each and every new payment services provider will have to convince issuers, acquirers, and acceptors to implement a specific interface prior to accepting the new payment instrument. This is a huge competitive disadvantage.

12. What is your opinion on the content and market impact (products, prices, terms and conditions) of the SCF ? Is the SCF sufficient to drive market integration at EU level ? Are there any areas that should be reviewed ? Should non-compliant schemes disappear after full SCF implementation, or is there a case for their survival ? By delivering the SCF, a great job has been done in the banking sector. However, most of the decisions taken impact retailer and consumer; whist those stakeholders did not have the same decision power in the process (only consultative). Therefore, we believe that the SCF is only partially sufficient to drive market integration, enabling the banking initiatives to go forward and eventually compete in different markets; but largely excluding new innovative payment services to be offered. The SCF should be governed by a new body, where the acceptor side (retailers, corporations, public services, etc...) and the consumer representatives are at equal terms of decision; and have combined the majority votes for decision of the framework. Each and every stakeholder (acceptors, consumers, banks, non-banks, existing and new payment schemes, financial services providers, suppliers to the financial sector, network services providers, payment institutions, payment services



providers, regulators, etc...) should be adequately represented in such body. Non-compliant payment schemes should be offered a reasonable period of time to fade out and migrate to SEPA compliant payment schemes. SEPA compliant payment schemes should at least have the ambition to become European schemes, and not just be limited to 1 up to 3 (mostly neighbouring) countries.

13. Is there a need to give non-banks access to information on the availability of funds in bank accounts, with the agreement of the customer, and if so what limits would need to be placed on such information ? Should action by public authorities be considered, and if so, what aspects should it cover and what form should it take ? It is critical to allow competition to fully play that the consumer can decide which payment instrument to use. Just like for direct debit, it should be the consumer to inform his/her financial institution to authorise, guarantee, clear, settle, and post transactions on his/her preferred payment instrument. Financial institutions should provide the same service to any payment instrument selected by the consumer, as they would do to the payment instruments they offer directly (provided these follow the operating and security standards as applicable in SEPA).

14. Given the increasing use of payment cards, do you think that there are companies whose activities depend on their ability to accept payments by card ? Please give concrete examples of companies and/or sectors. If so, is there a need to set objective rules addressing the behaviour of payment service providers and payment card schemes vis-à-vis dependent users ? Large chunks of the retail sector and the entire e-commerce and mobile services sector depend upon the availability of card payment instruments. In a near future, mobile payments might take over from card payments, in a face-to-face as well as in an online environment; but we are not there yet. It is therefore critical that both acceptors and consumers can trust all existing and new card payment systems, inclusive mobile payment and / or online payment systems. The legislator should ensure that there are adequately rules and minimum standards applicable for the operation of such payments and sufficient minimum security levels are reached to



ensure trust. Independent control bodies, both in certification as in end-to-end quality monitoring, whether private or public, should ensure the trust in the payment system remains.

15. Should merchants inform consumers about the fees they pay for the use of various payment instruments ? Should payment service providers be obliged to inform consumers of the Merchant Service Charge (MSC) charged / the MIF income received from customer transactions ? Is this information relevant for consumers and does it influence their payment choices ? As advocated earlier, we are not in favour of the mechanism of MIF, whereby a third party is called to collect fees governing the relation of two other parties. Each beneficiary should pay for the services rendered directly to the party concerned. This will help making fees become more transparent, and will reduce the cost in payment systems dramatically. In general, fees should be transparent at all levels. The consumer should have the right of knowing which fees are levelled to which beneficiary; and should have cost effective alternatives in place. Only when consumers need to pay the service fees directly to bank, we will see a changing consumer behaviour. Prerequisite to such a change is that the retail sectors is committed to reduce the price of goods and services with an equal percentage as the average MIF. At an early stage, this should be monitored by controlling bodies.

16. Is there a need to further harmonise rebates, surcharges and other steering practices across the European Union for card, internet and m-payments ? If so, in what direction should such harmonisation go ? Should, for instance : – certain methods (rebates, surcharging, etc.) be encouraged, and if so how ? - surcharging be generally authorised, provided that it is limited to the real cost of the payment instrument borne by the merchant ? – merchants be asked to accept one, widely used, cost-effective electronic payment instrument without surcharge ? - specific rules apply to micro-payments and, if applicable, to alternative digital currencies ?



Surcharging did not exist until early ‘90s when interchange systems and interchange fees started to skyrocket. The interchange rate categories went from 4 to 243 different ones between 1990-2010 ! The average interchange fee nearly doubled over the same period of time in the US 4. Unless one solves the issue of the MIF mechanism, retailers will continue to surcharge. One should make a distinction between : 1- charging : the acceptor charges the external cost paid to the service provider directly and separately to the consumer 2- surcharging : the acceptor charges both the external cost paid to the service provider and the internal cost to process the transaction directly and separately to the consumer 3- overcharging : the acceptor charges an amount higher than the combined external and internal cost paid to operate the service directly and separately to the consumer The latter one should be illegal. The second one should be monitored upon consumer complaint. Charging and surcharging should only be allowed if a cost effective alternative is available to the consumer.

17. Could changes in the card scheme and acquirer rules improve the transparency and facilitate cost-effective pricing of payment services ? Would such measures be effective on their own or would they require additional flanking measures ? Would such changes require additional checks and balances or new measures in the merchant-consumer relations, so that consumer rights are not affected ? Should three-party schemes be covered ? Should a distinction be drawn between consumer and commercial cards ? Are there specific requirements and implications for micro-payments ? As mentioned before (see question 3), acceptors should be able to accept or refuse any payment instrument which is different in : - fee level (e.g. debit cards versus credit card, example : MasterCard debit versus MasterCard credit; or consumer versus commercial cards) - operational level (e.g. number of chargeback reasons allowed or retrieval requests) - security level (e.g. signature based versus PIN based, magnetic + PIN

4 DHAENE, Leon. The Mask of Zorro. Dialysis of future cost and revenue components in card payment systems, 2010-2015. Brussels, Next Generation Cards and Payments, 26 November 2010, 26 p. See also : UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE. Report to Congressional Addressees. CREDIT CARDS. Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges. Washington, November 2009, pp. 17.



based versus chip and PIN, or chip and magnetic) - brand level (e.g. Visa Plus or Visa Electron versus Visa) - acceptance requirements (e.g. online clearing versus offline) - channels supported (e.g. internet, MOTO, etc...) should be considered a different product / services; and therefore acceptor should be entitled to accept or refuse acceptance Both merchants and consumers should subscribe to a “Bill of Rights and Obligations” 5, clearly spelling out what to be done by whom. Any sizable payment systems, whether four party or three party systems, whether general purpose cards or specific payment instruments (like petrol cards or vouchers), should be subject to the same rules and requirements, and to the same supervision.

18. Do you agree that the use of common standards for card payments would be beneficial? What are the main gaps, if any ? Are there other specific aspects of card payments, other than the three mentioned above (A2I, T2A, certification), which would benefit from more standardisation ? Standardisation is key to achieve the objective that any payment instrument should work at any terminal immediately. The whole value chain should be standardised in terms of processing and operations. Card certification as well as interface certification should be done by independent (private or public) organisations; and should be valid for all payment schemes. Regular controls (audits) should be performed to guarantee the quality of the payment system.

19. Are the current governance arrangements sufficient to coordinate, drive and ensure the adoption and implementation of common standards for card payments within a reasonable timeframe ? Are all stakeholder groups properly represented ? Are there specific ways by which conflict resolution could be improved and consensus finding accelerated ? As mentioned before, all stakeholders should be represented in the decision making bodies; where acceptors (retailers, companies, public

5 See the “Merchant Bill of Rights” in the USA. Reference : website http://merchantbillofrights.org/

http://merchantbillofrights.org/

http://merchantbillofrights.org/



services...) and consumer representatives should hold a majority vote. Other stakeholders are existing and new payment schemes (inclusive mobile and online payment service providers), payment services providers, payment institutions, financial institutions, financial services providers (like processors of transactions), suppliers to the financial sector (solution providers), regulators, etc... The banking sector is already adequately organised, having created the European Payments Council (EPC); however the various other stakeholders, in particular the acceptors and the consumers, should also be called to provide delegates adequately representing the different sectors and tendencies. Conflict resolution between the various parties could best first be organised on a amiable basis, by decision of an independent body (preferably a public body : could be a new task to the national central banks, for instance); but ultimately could be addressed to the courts of justice (for applicable law).

20. Should European standardisation bodies, such as the European Committee for Standardisation (Comité européen de normalisation, CEN) or the European Telecommunications Standards Institute (ETSI), play a more active role in standardising card payments ? In which area do you see the greatest potential for their involvement and what are the potential deliverables ? Are there other new or existing bodies that could facilitate standardisation for card payments ? Standardisation is important in an continuous globalising economy. The European specifications, c.q. SEPA requirements, would best seamlessly be compatible with the global standards. Lots of other markets look at the efforts delivered by the EC to eventually adjust their payment systems. Standardisation is key to levelling the playing field in payments.

21. On e- and m-payments, do you see specific areas in which more standardisation would be crucial to support fundamental principles, such as open innovation, portability of applications and interoperability ? If so, which ? Different standardisation bodies are currently active in payments, in mobile, and in online : there should be at least interface ensuring that there is interoperability between the various systems.



22. Should European standardisation bodies, such as CEN or ETSI, play a more active role in standardising e- or m-payments ? In which area do you see the greatest potential for their involvement and what are the potential deliverables ? No specific comment other than that it would be beneficial to talk one voice at European level in global standardisation bodies.

23. Is there currently any segment in the payment chain (payer, payee, payee’s PSP, processor, scheme, payer’s PSP) where interoperability gaps are particularly prominent ? How should they be addressed? What level of interoperability would be needed to avoid fragmentation of the market? Can minimum requirements for interoperability, in particular of e-payments, be identified ? There should be a generalised interoperability between the different payment instruments (credit transfers, direct debit, card payments, voucher systems, etc...), the different markets, and the different channels (face-to-face, online, mobile, etc...). This will help to bulk processing and to benefit from economies of scale. Migration of all the different processing protocols into a single protocol (like XML 20022) would probably be a solution to this.

24. How could the current stalemate on interoperability for m-payments and the slow progress on e-payments be resolved ? Are the current governance arrangements sufficient to coordinate, drive and ensure interoperability within a reasonable timeframe ? Are all stakeholder groups properly represented ? Are there specific ways by which conflict resolution could be improved and consensus finding accelerated ? See previous comments. It should be a clear requirement that all payment services (inclusive mobile and e-payments, but also petrol cards, voucher systems, retailer cards, etc...) be interoperable. This will allow innovation to come into the market and create economies of scale.



25. Do you think that physical transactions, including those with EMV-compliant cards and proximity m-payments, are sufficiently secure ? If not, what are the security gaps and how could they be addressed ? EMV chip and PIN, combined with secure systems for mobile and e-payments, in particular for online banking, is currently probably the best system and the most realistic to implement. Major efforts have been undertaken by acceptors, acquirers, networks, and issuers to be compatible with EMV chip and PIN. However, it is an illusion to think that fraud will disappear when the entire world has migrated to EMV chip and PIN.

26. Are additional security requirements (e.g. two-factor authentication or the use of secure payment protocols) required for remote payments (with cards, e-payments or m-payments) ? If so, what specific approaches/technologies are most effective ? Alternate payment systems should implement and support the minimum security requirements to ensure trust in the payment system.

27. Should payment security be underpinned by a regulatory framework, potentially in connection with other digital authentication initiatives ? Which categories of market actors should be subject to such a framework ? Adhering to minimal security standards should be a prerequisite to any new payment system being allowed to operate. If we agree on taking the EMV Chip and PIN standard as a base requirement, one should be aware that in numerous countries outside the EU this is not yet a standard. All market players offering payment services should be subject to adherence to the minimum security requirements.

28. What are the most appropriate mechanisms to ensure the protection of personal data and compliance with the legal and technical requirements laid down by EU law ? An independent certification of cards, POS, interfaces, operating procedures, and security should guarantee compliance with current and future legal and technical requirements.



Upon complaint by stakeholders (could be consumers and retailers, as well as any party involved in the value chain) regarding any aspect of the payment, inclusive protection of personal data or security standards, an independent body (public or private organisation) should investigate and get back with recommendations. Failure to implement the recommendations could lead to a withdrawal of the license for a particular payment instrument.

29. How do you assess the current SEPA governance arrangements at EU level ? Can you identify any weaknesses, and if so, do you have any suggestions for improving SEPA governance ? What overall balance would you consider appropriate between a regulatory and a self-regulatory approach ? Do you agree that European regulators and supervisors should play a more active role in driving the SEPA project forward ? The European regulator needs to take the next step in SEPA. Only the banks have organised themselves, into EPC, largely to protect their interests. Retailers, corporations, and consumers should organise themselves to actively participate into the debate. Objective should be to move forward in electronic payments, contributing to making the EU become the most competitive economy by 2020.

30. How should current governance aspects of standardisation and interoperability be addressed ? Is there a need to increase involvement of stakeholders other than banks and if so, how (e.g. public consultation, memorandum of understanding by stakeholders, giving the SEPA Council a role to issue guidance on certain technical standards, etc.) ? Should it be left to market participants to drive market integration EU-wide and, in particular, decide whether and under which conditions payment schemes in non-euro currencies should align themselves with existing payment schemes in euro ? If not, how could this be addressed ? The further implementation of the SEPA project should be driven by a governance structure whereby all stakeholders are adequately represented (see earlier comments). Acceptors (retailers, corporations, public sector) and consumer representatives should have the majority vote, as they are the ones initiating the payment transaction and are ultimately held liable for the transaction.



The SEPA Council, in another composition, could be established to reflect the above.

31. Should there be a role for public authorities, and if so what ? For instance, could a memorandum of understanding between the European public authorities and the EPC identifying a time-schedule/work plan with specific deliverables (‘milestones’) and specific target dates be considered ? The EPC represents the financial sector. As such, and as any stakeholder in the value chain, the EPC could make proposals or be tasked with producing certain deliverables or milestones. Up to date, EPC has delivered a major set of milestones, on which one can build the future of SEPA. However, and contrary to the ongoing process, the main stakeholders, being acceptors and consumers, should ultimately decide about all aspects with a direct impact on their relation.

32. This paper addresses specific aspects related to the functioning of the payments market for card, e- and m-payments. Do you think any important issues have been omitted or under-represented ? The EC Green Paper is pretty comprehensive and covers most issues to be dealt with progressing SEPA. One important items omitted is fraud management, fraud reporting, and fraud detection. This is an important area to deal with, involving other stakeholders (law enforcement) in the payments value chain. It also touches on sensitive issues such as acceptor and consumer data privacy issues. Also the issues of AML reporting should be taken into consideration. There should be standard interfaces to report AML occurring on all sorts of payments, inclusive card payments, mobile and online payments. The role of network services providers, as an element in the value chain, has not been discussed. Reporting on payment transactions should also be aligned. Reporting should be done towards neutral bodies, such as national central banks. Payment schemes cannot mandate reporting on volumes made on (potentially competing) products, as they do today.



Finally, some minor issues were communicated in two earlier reports, shared with the EC (see attached) : - DHAENE, Leon. Barriers to new payment services in a SEPA environment...SEPA for innovation. Brussel, EC SEPA CIM Reflection Group, 24 September 2010, 20 p. - ALEXANDER, Roger and DHAENE, Leon. European Card Acquiring Forum 2011. Participant Survey on SEPA barriers. Consultation of the Forum participants regarding the issues blocking the completion of the SEPA regulations and objectives, and the roll-out of the SEPA benefits in Europe. Brussels, Presentation to the European Commission, Brussels, 8 September 2011, 21 p.

IN CONCLUSION : BARRIERS TO COMPETITION IN PAYMENT SERVICES IN THE SEPA AREA Following have been identified as key barriers to competition in payment services : 1. MIF (Multi-lateral interchange fees) – mechanism 2. Unbundling (product, processing, scheme) not legally enforceable 3. Market (infrastructure) access for new payment services providers and

access to banking services by payment services providers 4. “Honour all cards”-rule should be abolished, and acceptors should be

entitled to refuse accepting payment instruments which are different in brand, functionality, channel, cost (both level and structure), operations, security, ...

5. No uniform technical and operational standard : open standards 6. No independent certification bodies 7. Independent certification of cards, terminals, and processing interfaces 8. Governance of the SEPA project, including an adequate representation of

all stakeholders 9. Transparent fee structures to acceptors and consumers 10. Incident management procedures, independent from stakeholders

comments and suggestions by n2finance - circabc · of cards, consumer experience at the pos, ...),...

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