v2 08/05/2008 have banks lost the war on regulation? essentis euronet software executive conference...

V2 08/05/2008

Have Banks Lost the War on Regulation?

Essentis Euronet Software Executive Conference14th May 2008

Paddington Hilton

Peter Jones, Managing Director, PSE Consulting

PSE – Essentis Euronet Software Executive Conference2V2 08/05/2008

“The quickest way to end a war is to lose it”

George Orwell, Shooting the Elephant, 1950

Evidence banks have lost the war against regulation Evidence banks have lost the war against regulation


Topics for Today

The Growth of Regulatory Interventions

EU Interchange Outcomes and Impacts

EU Payment Services Directive (PSD) Harmonisation of Legal Frameworks

How Banks may Succeed or Fail

Banks are struggling to adjust to the transparency needs of customers and citizens

Banks are struggling to adjust to the transparency needs of customers and citizens


Why the Regulators Do Not Like Banks!

Public antipathy and unease reflected by regulators

Banks perceived to operate in clubs/cartels, exclude outsiders, operate without consultation, impose fees

Long history (12 years) of European Commission pressure for openness and improved service cross border – no result

Listen to strong anti-bank consumer, merchant, corporate lobbies

Recognition that banking fees very high in several EU markets

Banks to blame, complacency, lack of listening, slow moving Banks to blame, complacency, lack of listening, slow moving


The Regulators Key Targets!

Common EU credit and debit card interchange (MIF) fees and resulting MSCs

Cross border intra-EU transfer fees and service levels

Bank account and annual card fees; pricing and transparency of charges (bundled fees), Dynamic Currency Conversion (DCC)

Membership and access to card schemes and ACHs

Penalty fees and fines – often combined with free banking

Terms and conditions – accounts, cards and information

Liability, consent, authorisation, unauthorised use

Service levels, clearing and settlement periods, security

… and more to follow!… and more to follow!


Some Important Worldwide Regulatory Events

EU Regulation 2650/2001 (cross border payment fees) clear statement harmonisation imposed pricing by European Commission

Resulting SEPA project has created more change in EU

EC harmonisation of payments legal framework – the Payment Services Directive (PSD)

MasterCard and Visa MIF both under investigation within EU

Spanish banks obliged to significantly reduce interchange

Australian regulatory action significantly reduced interchange

Interventions in Latin America (Mexico) - interchange

In US many group merchant legal actions against card schemes


USA Recent (April) ProposedRegulation of Credit Cards

Prevent interest rate increases on existing balances

Outlaw fees for account opening

Outlaw spend allocation to high rate balances

Outlaw interest charges on late/over limit fees

45 days notice of an interest rate change

Interchange set by “great and good” panel

Clear evidence of poor US practice – also seen in EUClear evidence of poor US practice – also seen in EU


EU Regulatory Interventions Since 1999

Country Year Action Outcome

Austria 2003 Card market investigation starts

Europay Austria fined €5m end 2006

Belgium 2000 Continuance of regulatory pressures

Negotiated 50% cut in MSCs - c1.65% for credit, €0.06 for debit

Denmark 2005 Parliamentary action re Dankort Act

Abolished acquiring fee; imposed annual charge

Germany 2001 Negative regulatory reaction Proposed new interbank charges dropped

Italy 200220052006

Investigation into contractsFurther investigationFurther investigations incl ATM fees

New debit Interchange formula in 2003 and 2004New issuer annual fee, new acquirer rulesReduction in interbank fees for ATMs of 11%

Netherlands 2003 Investigation into Interpay regarding excessive fees

Fines imposed on Interpay (€30m) and Banks (€17m) in 2004; Interpay fine reversed on appeal.

Poland 2001 Investigation into Interchange Banks fined €42m and Interchange banned in 2007

Portugal 2005 Regulatory questionnaires Post IRPC banks drop bilateral CC agreements 2006

Spain 19992003/5

Regulatory pressureContinuing regulatory and Parliamentary pressure

Major groups agree to reduce domestic interchangeBanks agree to gradual reduction in MIF in 2005 and introduction of a new Interchange regime.

Switzerland 2003 Investigation into domestic Interchange

Visa/MCE agree reduction in 2005 of DMIF to 1.3% plus additional transparency

UK 2000

200520062007

Investigation into MC MIF

SO issued against VisaNew MC MIF investigationEnquiries widened to include debit

MC Interchange fees deemed to infringe competition rules in 2005. Ruling set aside in 2006. Still outstanding.Still outstanding.

Year Action Outcome

EC 2002

2003

2004

2005

2006

2007

2007

2008

2008

2008

Visa MIF deemed anti-competitiveMasterCard Statement of ObjectionsIncreased transparency required Opening of Retail Banking EnquiryInterim Report on payment cardsSecond MCE SOFinal report on Retail Banking

Visa Fined €10m

PSD Directive

MasterCard MIF RulingVisa MIF Ruling

Visa reduces rates

Still outstanding

Visa/MCE post MIF data on Internet

Action threatened under anti-trust lawsStill outstandingInterchange remains a live issue; local regulatory action remains a possibility Penalty fine for restrictive practice re Morgan Stanley acquiringHarmonisation of legal frameworkOutlaws MIF unless alternative identifiedVisa included in ruling

ECB 2006

2007

Issues view of SEPA for cards Regulation for Schemes

Suggests introduction of common MIF Exclusions for start ups

30+ interventions excluding mandated voluntary change of SEPA and card schemes 30+ interventions excluding mandated voluntary change of SEPA and card schemes


Why Banks are Concerned

Worldwide growth of intervention

In Europe SEPA and PCI - need to implement voluntary “mandates”

Banks, card schemes and interbank processors concerned over future shape of cards business

Lack of consistency and certainty of regulation damaging

Declining revenues and increasing costs during a period of falling profits and rising risks

IT/project resources (up to 70%) committed to regulatory change – stifles innovation

Banks weak at communicating and defending their position! Banks weak at communicating and defending their position!


Does Regulation Work?

Many “populist” regulators leverage bank regulation for political reasons – many mis-statements

But…

Law often fails to understand card frameworks

Harmonisation often an end in itself

Efficiency and displacement of cash/cheques not primary objective

Consumers seldom benefit from forced reductions in fees

Result…

Few successful attempts to fit complex market into competition straightjacket … Australian regulators semi-withdrawal

Many anomalies, inconsistencies and unintended consequences

SEPA for Cards – although voluntary, now increasingly perceived as unsuccessful

Some evidence that when challenged regulators change opinions Some evidence that when challenged regulators change opinions


Regulatory Over Kill in EU

A growing regulatory governance structureA growing regulatory governance structure

Main Players at European and National Levels

European Level

European Commission

DG Competition

DG Internal Market

European Central Bank

Banking Associations

EBA

EBF

EFMA

ESBG

Lobbies

BEUC

Eurocommerce

Schemes

Visa

MasterCard

Amex

Diners ClubRetail Banking Enquiry Payment Services

Directive

National LevelLocal Consumer and Retailer/Merchant lobbies

Local ICS Schemes

National Debit Schemes

NCAs

National Central Bank – ECBS

FSA

Local Bankers Association

Issuers Acquirers

National Processors and TPPs


DG Competition on MasterCard/Visa Intra MIF Likely Impact

Intra European MIF outlawed from mid 2008

MasterCard’s confrontational approach – EU less amenable

Concept of 3 to 5 party model may be perceived as a work around

Visa has potential first mover position – agree 5 year deal with stepped reductions as in 2002

Credit to fall to 0.5% and debit to <€0.10 per transaction – PSE speculation

EAPS excluded – scheme of scheme – bilateral arrangements - Monnet unknown

EC appears to have recognised the damaging impact of implementing common MIFEC appears to have recognised the damaging impact of implementing common MIF


Painful Impact of Reduced MIF

Issuer Impact

Reduces bank account revenues, increase in consumer fees – public issue France particularly

Damages growth in credit card revolving and usage

Damages loyalty reward schemes

Damages growth of cards in developing markets

Reduces revenues for investment in new product features and innovation

Pressure to move to higher interchange based schemes

Acquirer Impact

Lower MIF’s reduces MIF to acquirer fee ratio thus reducing basis of charge

Increased acceptance of cards by merchants in markets where MSC rates fall

Damages “on us” revenues so “on us discounting” reduced

Drives acquirers to unbundle fees and charge separately for all service components

Very damaging impact on three party scheme MSCs (Amex/Diners)


The PSD Regulatory Nightmare!

Are banks once again heading for an implementation nightmare?Are banks once again heading for an implementation nightmare?

PSD - the first attempt to implement a harmonised legal payments framework for 29 nations

Major change to the way payments transacted - impacting 450m+ people and 25m+ corporates

… but many banks have yet to start planning

… few have examined legislation in detail

… interbank and bank associations slow to lobby for local variations


PSD Scope

EU law December 2008 – implement by 1st November 2009 – 6-7 year gestation

Impacts banks, mutuals, e-money issuers, post offices, giros

Common EU legal framework for payments - maximum harmonisation directive

All EU payments, all currencies except cash and cheques

Focus on customer protection – the relationship between providers and users of payment services

End to end payer and payee relationship - Conduct of Business Rules

Exclusions for large corporate users but may encompass SME’s and micro business

Improved customer protection and transparency, opens up markets, creates level playing fields, improves efficiency

Improved customer protection and transparency, opens up markets, creates level playing fields, improves efficiency


Why the PSD Will Keep You Awake at Night!

Payments Institutions new non-bank, lightly regulated competitor

Burden of Proof/Liability Shift on proof of transaction authorisation and completion moves from the consumer to the bank

Extended Cancellation: Banks must retain data on payment and consent for at least 13 months – increase in liability and have ten days to refund

Information requirements impact Terms & Conditions for all payments to and from current accounts, savings accounts, mortgage accounts, as well as all debit and credit card products

Unbundling: The aggregation of charges/fees etc into a single fee is prohibited

One Day Settlement Timeframe: with a maximum of three days up to 2012

Additional data, improved service, shorter timeframes significantly increase bank costs

Additional data, improved service, shorter timeframes significantly increase bank costs


Lowering the PSD Stress LevelsNeed a standard methodology

Strategy Overview

Competitors positioning, interbank initiatives – early or late mover – new non bank competitors

Model impact on pricing and costs – revenue losses

Build competitive edge, assess increased risks, liabilities, regulation

Impact Assessment

Review PSD clause by clause with departments and legal

Assess end to end payment instrument set but also product

Impact on corporates, SME’s/micro businesses

Documentation and customer communications

Data retrieval, faster access, new redress procedures, changes to security

Standard Implementation Framework and Resources

Extent, scope and cost of work should not be under estimated – less than SEPA but still significant

Extent, scope and cost of work should not be under estimated – less than SEPA but still significant


How to Minimise the Damage for Banks

Understand the long term challenges posed by continued regulatory action

Accept transparency and redress and build into offers

Be ahead of the regulator and implement best practice now

Campaign to displace cash to offset revenue losses

Consider outsourcing or consolidation to cut costs

Review merchant relationships and pricing menus

Of most importance is growing volume, displacing cash to offset revenue reductionsOf most importance is growing volume, displacing cash to offset revenue reductions


Can Bankers Fight Back?

Winning Strategy

Nations with strong banking associations – lobby government

Dialogue with EC-DG Competition – understand each other

Fully implement the PSD

Campaigns to change key opinion formers views

Change and simplify governance structures

Deliver consistent message via one organisation

Losing Strategy

Do nothing – accept interventions as inevitable

Communicate by press release

Reluctant implementation of PSD

Continue passive reactive approach

Continue fragmented multi institutional approach

Continue to allow communications free for all

Largest EU banks – opportunity to have significant impactLargest EU banks – opportunity to have significant impact


Final Conclusions

Future many unknowns and challenges – clash of visions – banks, regulators, public opinion

Regulation here to stay and becoming more demanding

Negative view on MIF - significant reductions but not abolished – no common

MIF outcome a five year deal lead by Visa

Issuer, Acquirer, banking revenues damaged - costs reduced to maintain profits

No silver bullet solutions

EU a regulatory test bed – big, unanswered question is the speed of change – largely dependent on PSD and SEPA for Cards outcomes

Banks have lost the way – issue now to complyBanks have lost the way – issue now to comply


“Distrust all in whom the impulse to punish is powerful”

Nietzsche, 1883

Regulators have talked tough in past – and appear determined to act tough in the future!Regulators have talked tough in past – and appear determined to act tough in the future!


Peter Jones

+44 (0) 20 8891 6244

[email protected]

v2 08/05/2008 have banks lost the war on regulation? essentis euronet software executive conference...

Documents

eu slide

eu spanish banks

eu markets banks

regulation slide

eu regulatory interventions

pse consulting slide

regulators banks

evidence banks