regulation dominates the transactions agenda*€¦ · the ‘tyranny of the urgent’ will push...

*connectedthinking

Banking and Capital Markets

Regulation dominates thetransactions agenda*Transaction Banking Compass

QuitPrint

One such example, the upcoming PaymentServices Directive (PSD), is a far-reaching pieceof legislation and one that represents aparticular challenge to transaction bankingbusinesses. It is also encouraging some banksto reconsider conventional thinking aboutwhether the internal operation of paymentsystems should remain a core activity or not.With the current financial crisis certain to triggeran additional regulatory response, now is agood time for transaction banks to perform acomprehensive review of their regulatory radarand to sharpen up their industry changemanagement processes.

European financial services arehighly regulated

The European environment is characterised bya variety of recently enacted and forthcominglegislation, which is aimed at creating a liquid,stable and balanced financial system. Theprimary goals of legislation include achievingefficient capital allocation, ensuring economicliquidity and maintaining a favourablemacroeconomic environment.

Regulators are particularly keen to increase theEuropean market’s resilience by reducingeconomic volatility, preserving the stability offinancial infrastructures and correcting marketimperfections. Another key theme is a drive toprotect the interests of depositors, customersand investors.

At face value these are sensible objectives.However, for businesses making crucialdecisions about the evolution of their operatingmodels, it is not only the ‘why’ that is ofinterest; equally important are the ‘what’, the‘how’ and the ‘when’. Businesses are thereforeseeking and need clarity about:

• What will change and when?

• How will it change and who will it affect?

• When will it change and where do they needto direct their effort?

Has your transaction banking business got ananswer for these questions? Do you have astrategy for managing any uncertainties that willresult? Do you feel in control? Can youdemonstrate it? Are you integrating theserequirements into your change portfolio anddoing so early enough to leverage them fully?

Regulation is a critical business issuefor transaction banking

European public authorities are sending aconsistent message to their respective bankingsectors, namely to innovate, compete andprotect. However, the variety of specificinterventions originating from many sourcescombine to:

• create uncertainty;

• reduce discretionary capital allocation; and

• cause unintended consequences.

The former Australian Prime Minister, JohnHoward, captured the need for regulatorybalance when he commented that:

“Regulation can help support businessactivities. It sets standards for corporategovernance, helps ensure our safety andsecurity, guards our freedom and choices andprotects our environment.

However, over-regulation or inappropriateregulation acts to impede economic growth.It limits the scope for innovation, underminesentrepreneurial drive and reduces productivityand competition.”

The business of transactions means regulation,scrutiny and intervention. This therefore meansthat anyone running a transaction bankingbusiness needs to have an excellentunderstanding and perspective of the publicpolicy agenda, as well as an effective responseto it.

Better Regulation and Lamfalussy1 aside, if thetransactions business is your business, youneed to work proactively in the industry toprotect and to leverage it.

Banks are being subjected to a torrentof regulation

Many of today’s changes stem from theFinancial Services Action Plan (FSAP), whichwas designed to create a harmonised market inbanking, investment, insurance, derivatives andcommodities. The FSAP has three specificobjectives:

• to create a single wholesale market inthe EU;

• to achieve open and secure retail markets;and

• to create state-of-the-art prudential rulesand supervisory structures.

Some changes stem from the vision of a singlemarket (Single Euro Payments Area) or are thenatural consequences of Economic andMonetary Union (Target2).2 Taken together, anumber of these changes have led to newpayment schemes, new customer instrumentsand new technical standards. Others havecontributed to the establishment of a new legalframework for payments, in the shape of thePayment Services Directive.

The European transaction servicesmarket is high risk and heavilyregulated; it is also seen as aneffective mechanism for advancingsome key public policy issues insupport of the Lisbon Agenda.This means banks continuing to facean onslaught of either actual orthreatened regulation, and it thereforelimits their ability to invest ininnovation or value-enhancing areas as well as their appetite to do so.

PricewaterhouseCoopers Transaction Banking CompassRegulation dominates the transactions agenda

Mark Hale+44 20 7804 [email protected]

Patrizia Giangualano+39 02 6672 [email protected]

HomeQuitPrint

1 The Lamfalussy Process is an approach to the development offinancial service industry regulations in the European Union.

2 The Trans-European Automated Real-time Gross SettlementExpress Transfer system.

mailto:[email protected]?subject=Transaction%20Banking%20Regulation%20Dominates


PricewaterhouseCoopers Transaction Banking CompassRegulation dominates the transactions agenda HomeQuitPrint

Other regulatory changes flow directly frompolitical objectives, such as combating terroristfinancing (Regulation 1781), reducing clearingcycles (Faster Payments in the UK), orstimulating the e-economy (e-invoicing). Morechanges still flow from other self-regulatory ormandatory sources and are typically designedto combat perceived market imperfectionsrelating to pricing, competition, access andgovernance.

An illustrative timeline for some of the keyEuropean regulatory changes is set out inFigure 1 below.

Regulation is inhibiting innovation

The scope and scale of regulatory changeshave major potential implications for Europeanbanks. If you are responsible for your firm’sinvestment budget, you are likely to find thefinancial demands and compliance risks

overwhelming. The ‘tyranny of the urgent’ willpush discretionary activities to the back of avery long queue of more important priorities.Research and development may often beneglected altogether.

As one new entrant to the market put it,‘we don’t really worry about competition fromestablished banks, because innovation doesn’tmove their investment needle’.

A further layer of complication is added bydiffering legal conventions such as codified lawin Europe and common law in the UK. In theorythis could result in different interpretations ofthe same law if it were tested in differentjurisdictions.

The Single Euro Payments Areais arriving

The goal of the Single Euro Payments Area(SEPA) is to create a highly efficient, automatedand domestic payments experience withinparticipating countries for Euro payments.The European banking community, which hasbeen encouraged to establish a vision for SEPAby regulators and public authorities, did so in aWhite Paper in 2002.

The major elements of the SEPA visionare that:

• the market should be serviced by a pan-European automated clearing house;

• participating countries should be servicedby common payment instruments;

• the new instruments should be highlyefficient, electronic and processedautomatically;

• the rules by which the instruments will beexchanged should be standardised andshould apply global standards whereverpossible; and

• participants should be able to develop andtransparently operate value added serviceson top of the core schemes.

Figure 1: European regulatory changes timeline

European Commission

Regulation 2560 Update

Regulation 1781

E-Money Directive

Payment Services Dir

National Consultation

Implementation

‘D+1’

EPC

BIC / IBAN Resolution

EMV Resolution

SCT Scheme

DD Scheme

SEPA Cards Framework

SEPA Cash Framework

E-mandates

Migration

Decommissioning

ECB

BOP Reporting

Pre-2007 2007 2008 2009 2010 2011 2012 Post-2012

Autumn 2008

Autumn 2008

13/11/2007

Varies by country

1/1/2007

31/1/2009

Customer - Bank standardisation proposals 6/2008

Autumn 2008

1/11/2011

31/1/2010 January 2011

January 20111/11/2009

18/8/2008 (Standardisation Volume Consultation)18/8/2008 (Standardisation Volume Consultation)1/1/2008

1/1/2004

28/1/2008

28/1/2008

1/1/2007

1/11/2009

1/12/2011

31/7/2008 (Consultation) 1/11/2011

8/3/2006

Mandatory

Key

Self-regulatory

Source: PricewaterhouseCoopers3 3 PricewaterhouseCoopers’ refers to the network of member firmsof PricewaterhouseCoopers International Limited, each of which isa separate and independent legal entity.

Behind this vision, the intentions of Europeanpublic authorities can be discerned as:

• increasing cross-border commercial activityand competition;

• challenging the stability of the establishedpayment service providers in each market;

• changing the balance of power betweencustomers and service providers;

• facilitating customer mobility throughprovider transparency and standardisation;

• reducing the cost and complexity ofclearing and settlement; and

• removing the level of price variation forcommon products within the single market.

To investors of capital, to balance sheetmanagers, to proposition managers and tooperations managers this also means:

• threats to existing investment values anddemands for new capital;

• pressure on prices making targets harderto achieve;

• a need for better service to combat fallingcustomer stickiness;

• pressure on cost management in order topreserve margins;

• changes to IT infrastructures toaccommodate new technologies andstandards;

• a need to upgrade outmoded service andproduct propositions; and

• a challenge to pre-existing organisationalstructuring decisions.

In contrast to the programme of newlegislation, much SEPA-related change isbeing driven by the European PaymentsCouncil (EPC). The EPC is a self-regulatedbody that represents the banking communitiesof participating countries and in which anumber of other stakeholders participate atEuropean level.

It is vital for all payment service providers,payment service users and would-be paymentinstitutions to be engaged in the governanceand development processes of the key sourcesof change such as the EPC, so that they canunderstand and influence the changes takingplace. This requires a structured approach and,for more complex organisations, appropriategovernance arrangements.

Perversely, some organisations that have thusfar been on the periphery or even outsideestablished industry change processes havedeveloped public policy positions and industrymanagement strategies that are more insightfuland influential as a result.

The Payment Services Directive is amajor piece of legislation

The Payment Services Directive (PSD) hasbeen a long time in coming. During itsgestation it caused significant angst in thewider industry and was the subject of intensenegotiation. It is, inevitably, therefore theproduct of compromise.

As an official Directive, the PSD must beenacted into the legislative environment ofeach member state before November 2009.This means that businesses have little time toassess the new Directive, participate in nationalconsultations, adjust their budget requirementsand adapt their systems and processes to

comply with the Directive’s new prudential andconduct of business requirements.

To help position the scale and nature of thePSD in the context of other major changerequirements, Figure 2 below compares it withthe introduction of the Euro and compliancewith Y2K.

This analysis highlights:

1. the fact that the introduction of SEPA ismore discretionary than either the Euro orY2K;

2. the absence of a clear timeline with whichto galvanise the banking and non-bankingcommunity;

3. fragilities in the governance structure uponwhich the change depends;


Figure 2

Features Introduction of the Euro Response to Y2K Creation of SEPA

Scope ‘Euro 11’ All Countries EU, EEA, CH

Mandate Intergovernmental treaty Market imperative Policy advocacy

Approach Compliance/Commercial Compliance Commercial/Self regulatory

Change Risk High Medium High

Investors Business & public authorities Business & public authorities Payment service providers

Beneficiaries Neutral – Euro 11 Change industry New entrants/Service users

Timeline Public & commited Calendar Public & unclear

Governance Government led structures Informal & independent Banking network effects

Communication Broadcast & persistent Broadcast & persistent Limited & intermittent

Approach Collaborative Collaborative Competitive

Business Risk Understood Over-hyped Significant

Flexibility None None Significant

Resourcing High High Medium/Low

Awareness Pervasive Pervasive Limited

Legal Drivers Statutory Contractual Mixed

Source: PricewaterhouseCoopers1


4. limitations in the breadth and depth ofcommunications to customers; and

5. the structural difficulties caused by thecompetitive nature of SEPA.

The PSD’s final requirements are stillbeing challenged

Despite the time taken to achieve approval andpublication of the PSD in the Official Journal ofthe EU, the final outcome still remains unclear.This is due to:

1. the complexity, detail and nature of thetext itself;

2. the number of areas of derogations thatexist; and

3. the fact that some communities are seekingto re-open previously contentious areas ofdiscussion.

The European Commission has set up a TaskForce to try to ease this process, together witha website to facilitate issue escalation andresolution. As a result, many of the debatesthat had ended with consensus have now beenreignited. Examples include the implications ofbanking business days, the impact onpayments into or out of the SEPA region, andthe meaning and timing of receipt of a paymentinstruction.

It is vital that these debates are closed as soonas possible. Uncertainty can only lead toindecision, especially when people managingdevelopment budgets are being asked tocommit what are likely to be very large sums.

The scope of the Directive affects theentire supply chain

The Payment Services Directive seeks toaddress its key political objectives ofcompetition, efficiency and innovation through:

(i) a new prudential authorisation regime;

(ii) revised and harmonised conduct ofbusiness rules; and

(iii) non-discriminatory access requirements.

This is to be achieved through six mechanisms,set out in six Titles in the Directive (seeFigure 3).

The scope of the Directive applies to a numberof ‘payment services in the Community’, whichare defined as:

• services enabling cash to be placed on apayment account as well as all theoperations required for operating apayment account;

• services enabling cash withdrawals from apayment account as well as all the

operations required for operating apayment account;

• execution of payment transactions,including transfer of funds on a paymentaccount with the user's payment serviceprovider or with another provider;

• execution of direct debits, including one-offdirect debits;

• execution of payment transactions througha payment card or a similar device;

• execution of credit transfers, includingstanding orders;

• execution of payment transactions wherethe funds are covered by a credit line for apayment service user;

• execution of direct debits, including one-offdirect debits;

• execution of payment transactions througha payment card or a similar device;

• execution of credit transfers, includingstanding orders.

The payment activities which fall into or outsidethe scope of the Directive are summarised inFigure 4 overleaf:

Unlike SEPA, compliance with the PSD ismandatory and not determined by contractualrelationships with the EPC. But both affect theentire supply chain: the payment systems ofbanks, the accounting systems of companiesand the buying experience and rights ofconsumers.

Compliance with the PSD representsa comparable management challengeto MiFID

The PSD is a substantial piece of legislationwith far-reaching implications for transactionbanking. Its scope has been deliberately set ata high level so as to encompass a wide rangeof products and services. This will force marketplayers to consider the practical implications ofthe Directive when making decisions aboutits application.

The Directive’s scope encompasses allbusinesses that provide payment services, and

Figure 3: Mechanisms

Title I

Subject matter and definitions

Title II

Payment serviceproviders (covering the

regulation andqualification criteria forpayment institutions);

Title III

Transparency ofconditions & information

requirements forpayment services;

Title IV

Rights and obligations inrelation to the provision

and use of paymentservices;

Title V

Implementing measuresand Payments

Committee (dealing withthe mechanics

of ongoing technicalchanges to

definitions, etc.)

Title VI

Final provisions (dealingwith amendments to

other Directives,transposition date, etc.)

Source: The Payment Services Directive


places significant operational burdens onPayment Service Providers. It also brings newlyidentified Payment Institutions into the scopeof regulation, albeit that the total regulatoryburden on these entities is considerably lessthan that of their traditional counterparts. Forexample, all customer terms and conditions willneed to be reviewed and many will have to berenewed. Systems and processes will need tobe changed and access to clearinginfrastructures also afforded to all properlyauthorised Payment Institutions.

The PSD also has a significant sting in its tail,stating that by 2012 the maximum permissibleclearing service level will be the availability offunds next day. This will challenge old andcomplex infrastructures, inefficient operating

models and also fragmented or distributed riskmanagement processes. Without investment itwill also increase the inherent risk of fraud.

Finally, like MiFID, the nature of regulationmeans that the greatest practical challenge fortransaction banks may not be in meeting therequired standards of the PSD, but in beingable to demonstrate that compliance has beenachieved. The burden of proof is now heavilydirected onto Payment Service Providers andis well beyond the scope of existing operatingmodels including essential infrastructures suchas ATM networks that do not often come to theforefront of mind.

A domestic experience challenges theEuropean concept

The concept of ‘domestic experience’ lies atthe heart of the planned regulatory changes.It effectively means that a customer using asingle supplier should expect an identicalservice wherever they are in the SEPA area.

This new world will lead to much toughercompetition at a trans-national level. Somecustomers may even be able to arbitrage errorswithin a bank’s own organisation, for example ifit were cheaper to buy services from a Frenchbank in Italy than from its head office in Paris.

Conclusion

The deluge of complex regulation coming intoforce in the near future confronts paymentservice providers with a challenge. Banks willneed to ask themselves whether they can addcustomer value by keeping back-officepayments processing in house. If not, theymight do better to use another bank’scapabilities as well as third-partyinfrastructures, thereby increasing their ownscope to develop new products and focus oncustomer service.

The scale, severity and duration of the currentcrisis in the banking industry is also leading toa review of regulatory policies and practices.It remains to be seen what action regulatorswill take in the wake of the crisis, but the UKFinancial Services Authority for one has alreadystated its intention to overhaul banks’ liquidityrequirements, on a standalone basis ifnecessary.

Not to be outdone, the European Commissionis putting forth amendments to the CapitalRequirements Directive (CRD). These willrequire approval from the European Parliament,but regulators view change as essential, notleast because of the cost of the crisis togovernments and customers. Some of theproposed changes could even reopen thePandora’s box that is the Basel II framework.

There is no time like the present to take stockof the regulatory regime for financial services inEurope and the coming months will reveal thethinking and intention of regulators on manyissues. Whatever the outcome, banks ingeneral, and transaction banking businesses inparticular, will need to have the steady drip ofthese change risks clearly on their radar.

Figure 4

• Credit Institutions

• Payment Institutions

• E-money issuers

• Post Office Giro Institutions

• Central Banks

• Payment account operations

• Cash withdrawal from a payment account

• Direct Debit execution

• Credit, debit and payment card issuing,acquiring or transaction execution

• Credit transfer execution

• Money remittance

• Issuing and/or acquiring of paymentinstructions

• Payments by electronic means

• Some bill payment services

• Card issuing and card merchant acquiring services

• Mobile phone payments

• Cash deposit where there is an electroniccomponent to the transaction

In scope

• Technical/infrastructure facilitators

• Money exchange businesses

• Intra-payment service provider

• Cash handling or transportation

• Cash-back services offered by retailers

• Cheque/bankers’ drafts, travellers’cheques and postal orders

• Bills of exchange

• Money market instruments

• Commercial payments

• Intra-payment service provider space e.g. internal treasury operations, inter-banksettlement, securities settlementarrangements between different divisionswithin on payment service provider

• Services provided by technical andinfrastructure facilitators, e.g. mobile phone top-up services through cashmachine terminals

• Store cards/canteen cards/petrol cards

Out of scope

Source: The Payment Services Directive


ContactsTo discuss any of the issues raised in more detail, please speak to your usual PricewaterhouseCoopers contact, the authors of this article or one of the people listed below:

Transaction Banking Practice Lead (Europe)

Julian Wakeham+44 20 7804 [email protected]

Transaction Banking Practice Lead (US)

Patrick Giacomini+1 646 471 [email protected]

Cards

Jonathan Turner+44 20 7213 [email protected]

Payments

Mark Hale+44 20 7804 [email protected]

Securities

James Chrispin+44 20 7804 [email protected]

Trade Services

Peter Simon+44 20 7213 [email protected]







pwc.comPricewaterhouseCoopers provides industry-focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to developfresh perspectives and practical advice.

Transaction Banking Compass: Regulation dominates the transactions agenda is produced by experts in their particular field at PricewaterhouseCoopers, to address important issues affecting the transaction banking industry. It is not intended to provide specific advice on any matter, nor is itintended to be comprehensive. If specific advice is required, or if you wish to receive further information on any matters referred to in this publication, please speak to your usual contact at PricewaterhouseCoopers or those listed in this publication.

For information on the PricewaterhouseCoopers Global Financial Services Transaction Banking Programme please contact Áine Bryn, Marketing Director, Global Financial Services, PricewaterhouseCoopers (UK) on 44 20 7212 8839 or at [email protected]

For additional copies please contact Russell Bishop at PricewaterhouseCoopers (UK) at [email protected]

© 2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

HomeQuitPrintPricewaterhouseCoopers Transaction Banking CompassRegulation dominates the transactions agenda

regulation dominates the transactions agenda*€¦ · the ‘tyranny of the urgent’ will push...

Documents