1. The Single Euro Payments Area and payment innovation Johannes Priesemann Head of Payment Systems Policy Division Magyar Nemzeti Bank, 19 November 2004

2. 2 Two topics: 1. Retail payments: Single Euro Payments Area and payment innovation 2. Large value payments: TARGET2

3. 3 1. Retail payments - 2 streams: integration and innovation Single Euro Payments Area (SEPA) by 2010 fully established and SEPA services as option for citizens by 2008 In the euro area innovation shall be taken benefit of: pan-European payment solutions should be leading in terms of efficiency and safety

4. 4 1. SEPA: EC regulation Message of EC Regulation 2560/2001 All payments in euro are domestic payments: Single Euro Payment Area (SEPA) Regulation covers all payments in euro also in countries that have not adopted the euro as their currency No price difference anymore between national and cross-border payments for cards (since July 2002) and for STP credit transfers up to EUR 12,500 (since July 2003)

5. 5 “From Regulation to a real SEPA” Efficient pan-European infrastructure Profit margin Processing costs Profit margin Processing costs Loss Processing costs Profit margin Processing costs Transparency & Competition Efficiency gain 1. Consequences of the EC regulation

6. 6 1. SEPA : Present state of payments integration PEACH All euro area banks BankCorporate customer € € € € € € Payment initiation (no standard) “Cross-border payments ” “National payments ” € Euroarea country: X Y Z Flows of money & information: 12 different files 12 formats (incl. BBAN) 1file 1 format (incl. IBAN) ACH X Z Y X Y Z Payment initiation (national standard) reconciliation (national standard) reconciliation (no standard)

7. 7 1. SEPA Objective Citizens should be able to make payments throughout SEPA from a single bank account, using a single set of payment instruments, as easily and safely as in the national context today. The Eurosystem’s vision for the SEPA is that all euro area payments should become domestic, and reach a level of safety and efficiency at least at the level of the best performing national payment systems today.

8. 8 1. SEPA for citizens and corporates euro area bank euro area customer PEACH All euro area banks € Flow of money & information € € € € € 1 file 1 format (incl. IBAN) all payments Automatic reconciliation Payment initiation (ePI) “in the euro area all payments are domestic ” “Credeuro + PEDD”

9. 9 1. SEPA: Our expectations towards the banking industry Reconfirm the white paper of May 2002 and present a convincing project plan with realistic milestones Define pan-European schemes for credit transfers (Cred/Prieuro), direct debits (PEDD) and cards agree on and employ standards (IBAN) Make national migration plans by mid-2005 Make pan-European instruments available also for national use from 2008 (SEPA for citizen)

10. 10 1. SEPA: Our expectations towards the banking industry Complete SEPA by consolidating national infrastructures into a few remaining PEACHES by 2010 (SEPA for the infrastructure)

11. 11 1. SEPA: Central Banks’ contribution Assist national banking communities in making national migration plans by mid-2005 Monitor progress of the national migration to SEPA for the citizens 2008 and SEPA for the infrastructure 2010 Contribute to the local implementation of SEPA objectives

12. 12 1. SEPA: List of relevant publications The Eurosystem has pushed for SEPA since 1999 Improving cross-border retail payment services in the euro area - the Eurosystem’s view, September 1999 Improving cross-border retail payment services - Progress report September 2000 Towards an integrated infrastructure for credit transfers in euro, November 2001 (ECOFIN report) Towards a Single Euro Payments Area - 2nd Progress report, June 2003 and a 3 rd Progress report expected to be published still in 2004

13. 13 1. Innovation leads to diversity of options

14. 14 1. Innovation raises questions of public interest Level playing field for all EU countries? Consumer protection? Social exclusion? Substitution effects? Addressing changes in transaction needs? Competition between different institution types? Changing preferences / habits? Cost-benefit / risk distribution? Privacy? Merchant interests? Lisbon Agenda? Externalities? Core Principles Compliance? Redeemability? Terrorist financing? Money Laundering? Shadow economy? Safety? Efficiency? Monetary order? Trust in currency?Network effects? Availability?

15. 15 1. Observing payment innovation Relative use of cashless payment instruments in EU-25, according to total number of transactions (2002 figures) Direct debits 23% Credit transfers 30% Credit/debit cards 31% Card-based e-money 1% Cheques 15% Blue Books addendum incorporating 2002 figures (2004) Paper-based P2P, B2C, B2B; Truncation & substitution B2C (e-commerce, cash substitution), new: P2P P2P, B2B, new: integrated B2C B2C, G2C… (trust/liability requirements) B2C, new: P2P/server-based

16. 16 1. ECB activities as innovation-related catalyst i.e. improve and facilitate co-ordination, provide analysis and information Articles, issues papers, events, newsletter “Payments and Settlements News” (P+S-N)” Re-launch of the electronic Payment Systems Observatory (ePSO, www.e-pso.info) in 2003 Offering online databases, discussion forum Work to improve statistics (beyond Blue Book), first results envisaged next year Facilitate the development and adoption of EU-wide standards for the whole payment cycle Single Euro Payments Area (SEPA) - observer at the e and m payments task forces (EPC)

17. 17 Users’ request for more harmonised service level Cost recovery problem Adaptability problem EU enlargement Credibility of the EurosystemAMPLIFIES 2. The reasons for building TARGET2

18. 18 2. Current status and future milestones 20032007200620052004 Definition phase General functional specifications (GFS) Detailed functional specifications (DFS) Development phase (technical implementation) Testing phase Customer Migration Process = country window (wave) Tests with users: - Credit institutions - Market infrastructures - Central banks

19. 19 What will remain? Direct business contacts between central banks and their banks SWIFT-based messaging No upper or lower value limits Broad customer base 2. TARGET2 features and functionalities (I)

20. 20 What will be new? “Single platform” system More robust and resilient system Harmonised interfaces for the connection of the users to TARGET2 Same core service for all TARGET2 participants Single price structure Flexible liquidity management 2. TARGET2 features and functionalities (II)

21. 21 “Single platform” system all central banks will use the same technical platform Central Banks remain responsible for the accounts of “their” banks and for the business relationship Cross-border transactions processed in same way as domestic transactions Availability of “TARGET-wide” liquidity saving features 2. TARGET2 features and functionalities (III)

22. 22 2. Oversight of TARGET2 Oversight of TARGET2 Project is being reviewed against the Core Principles for systemically important payment systems (BIS “CP”) Initial assessment of the design of TARGET2 project against Core Principles is ongoing (CP III, IV, V, VI, VIII and IX)

23. 23 TARGET brochure, October 2004 http://www.ecb.int/pub/pdf/other/target_brochure_update_2004en.pdf Future developments in the TARGET system (ECB Monthly Bulletin April 2004) http://www.ecb.int/paym/pdf/target/future/mb-target2-future.pdf TARGET2 brochure, October 2004 http://www.ecb.int/pub/pdf/other/target2_brochure_update_2004en.pdf TARGET2 presentation – Sibos, October 2004 http://www.ecb.int/paym/html/sibos2004target2presentation.pdf Article on TATGET2 – Sibos, October 2004 http://www.ecb.int/paym/pdf/target/future/sibos_article_en.pdf 2. Information on TARGET and TARGET2