2) Introduction and general remarks

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1 Payments Operations Department Response from Banco de Sabadell SA to the questions raised in the European Commission consultation: Towards an integrated Market for card, internet and mobile payments 1) About Banco Sabadell Banco Sabadell (IBEX:SAB) has more than 130 years of experience in corporate and personal banking. It has over 1,300 branches throughout Spain and a presence in another 18 countries, notably in United States, China, India, the Middle East, Africa and Latin America. Banco Sabadell's capital ratios are among the highest in the European banking sector. It has assets totaling more than million euros and over 10,000 employees worldwide. Banco Sabadell is the only Spanish bank with ISO 9001 certification for all its global processes and the Gold Seal from the European Foundation for Quality Management (EFQM). 2) Introduction and general remarks Banco Sabadell is overtly committed with the success of the SEPA project as a means of furthering the benefits of the Single Market. As such, it does support the overall objectives stated in the Green Paper, namely: a) more competition, b) greater choice and transparency for consumers, c) increased innovation, and d) enhanced security and customer trust. Nevertheless, despite concurring with the authorities assessment on the importance of a true digital Single Market for the future of the EU, we are of the firm belief that changes in the payments landscape cannot by themselves be taken as a sufficient driver to achieve the greater degree of integration pursued by these public bodies. This seems to have been also the conclusion of the 6 February SEPA Council when clearly qualifying an EU wide online e-payment offering as one (as opposed to the sole) of the pre-conditions for a single market for e-commerce. The document refers to competition and price efficiency, in the sense that more competition could mitigate the current domination of the payment cards market by the two existing international card schemes and thus optimise level of prices. In the Spanish market there are three local schemes and the competition is guaranteed because there are the banks the ones which are competing among them and not the schemes. In our experience, the level of prices will not be reduced by introducing more competition: our experience shows that during the last years payment prices have been reduced in Spain with no further impact in the intended areas of consumer prices or proportional Página 1

2 increase of use. Additionally, card fees are fully transparent since they are publicly available, which is not the case for other means of payments, such as cash, that entails very high hidden costs. Finally, referring to innovation, we should highlight that it requires not only resources but incentives. We are afraid that the conclusions drawn from the assessment of the present situation lead to proposals not pointing in the right direction in which innovation should be nurtured. 3) Detailed comments 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? 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? 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? 1. Divergences in MIFs from one country to another and with regard to cross-border payments, as is also the case with the various price levels across EU markets, are to be assuredly drawn on objective underlying structural differences (e.g. economic and technological development stage, de facto cost structure, actual use of cards, etc.) To cite but one example, as of today payment penetration in the different European markets is as diverse as one could imagine. On the one hand, about half the countries feature a yearly total of 50 transactions per capita. In some others this figure rises up to 150 operations per capita. On top of that, nominal MIF values render very hard to compare across countries. They may sometimes hide underlying strategies closely bound to the specificities of each market. Página 2

3 Along the same lines, cross-border MIF levels should not be taken as the role model for the expected medium-term evolution in the MIF landscape at domestic level. Cross-border card transactions still account for a very small share of the overall number of payments made by means of a card. Moreover, their MIFs are the result of a settlement between DG-COMP and the international card schemes, pending future costs studies that support objectively the outcome of the merchant indifference tests. Hence, Banco Sabadell does not consider the diversity of MIFs in Europe neither as cause of market fragmentation nor as an inhibitor of competition in the issuing or acquiring business. 2. Increased legal clarity on MIFs is indeed very much-needed at this stage in order to have developments in the cards market speed up. The lack of a clear guidance from competition authorities is visibly delaying investment decisions due to uncertainty and, as a corollary, it is also hampering the degree of innovation in the area of electronic payments. Nevertheless, in order for this guidance not to create additional distorsions, the resulting practical methology for the determination of an appropriate level of interchange fees has to take into account the particular circumstances of every market and every scheme. A one-size-fits-all regulatory approach on the MIF would underestimate the existing structural differences between payment service providers and countries, thus potentially favouring oligopolistic or even monopolistic outcomes in the market. This would be further detrimental to the interests of consumers as it reduces their choice. 3. In line with the previous reply, Banco Sabadell strongly believes that a workable methodology for the calculation of interchange fees must guarantee that the interests of all the various parties are properly balanced. This is the only way to secure a mutually acceptable and stable environment which fosters efficiency and growth in electronic payments alike. As the abundant economic literature on interchange fees has demonstrated thus far, a social welfare-maximizing price structure does indeed depend on a wide array of factors 1, hence making it virtually impossible to anticipate the actual effects that a decrease in the levels of interchange fees may have over the market. A practical case study like the one in Spain, where ceilings on multilateral exchange fees and a calendar of reductions was agreed between banks and merchants over an extended period of time, suggests that this measure has not necessarily led to further cutbacks in end-user prices for the goods or services they purchase at the point of sale. This measure did not lead either to an increase in the penetration of payments with cards at merchants. As a matter of fact, evidence shows that, for the period , while interchange rates decreased more than 60%, the penetration of payments with cards only grew by 168 basis points, from 15,09% to 16,77%. Converserly, a potential side effect of this action has been the nominal increase in average cardholder fees, ultimately Página 3

4 resulting in a transfer of profits from cardholders to merchants, i.e. potentially giving rise to the emergence of additional sources of revenues for the merchant side. In reference to the question of the distinction between consumer cards and business cards, there are certainly important differences between them. The risks taken by business cards have other parameters than the ones of consumer cards. Additionally, there are special services which are only offered to the business segment. 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? 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? 4. ICS already have centralised cross-border in place with substantial volumes which has been growing in the recent years. This is an evidence that all stakeholders have found an acceptable balance, and that there is not any obstacle and thus that there is no need of intervention. 5. On any cross-border program, MIF s should be based on those applicable where the merchant is located. This may eliminate the competitive advantage that local merchants have over cross-border merchants. 6) What are the potential benefits and/or drawbacks of co-badging? Are there any potential restrictions to cobadging 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? 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? Página 4

5 6. Co-badging is an already existing method which has worked properly in the past. This method allows for example that a local card can become of global use at the same time. For this reason, we don t see necessary to restrict the usage of co-badging. Co-badging facilitates the interoperability which is the cornerstone of the cards payments industry. 7. The decision of which instruments should be prioritised in case of co-badging should be made by the issuercardholder side as is set in the SEPA CARD FRAMEWORK which allows to the issuer, asking to the cardholder, to preselect the brand of the co-badged card. As the SEPA CARD FRAMEWORK establishes, this should be reflected in the contract with the cardholder: Cardholder experience: Card scheme rules must enable and facilitate for cardholders a consistent payment and cash withdrawal service experience throughout SEPA. In accordance with Directive 2007/64EC, where several payment applications are made available by the issuer in the same card, supported by the same terminal, and accepted by the merchant, cardholders will have through their cardholder s agreement with their card issuer the choice of which payment application they will use provided the merchant accepts it and its POS equipment supports it. The agreement between the cardholder and the issuer will define the choices available to the cardholder. Prevalence at POS or ATM for a particular payment application may not be mandated by a card scheme or ATM operator or merchant 8) Do you think that bundling scheme and processing entities is problematic and, if so, why? What is the magnitude of the problem? 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? 8. SEPA Card Framework is not enough clear in the extent of the separation and the way to do it. Moreover, those card schemes which already have done the way to the separation are in clear disadvantage from those that haven t done it yet. 9. In order that all existing card schemes and PSP at the European Union compete at the same level, all companies still having processing and scheme under the same roof should comply with Oversight Framework for Card Payment Schemes and separate it. Also is important that all separation follow the same rules and should be done in the same manner. Página 5

6 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? 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? 10. Access to clearing and settlement systems entail risk implications that are carefully considered when defining access criteria, either in a direct or indirect way. Bearing this in mind, indirect access is a very common way of access for banks without meaning any competitive disadvantage. Options and solutions for participation differ depending on the various systems. In our view, any steps taken in this direction should be preceded by a thorough analysis of their potential risk-related implications in terms of its sound management, its systemic impact on financial market infrastructures as well as any associated security issues. Greater harmonization of solvency and prudential supervision requirements along with risk management policies among the various players would be considered as a necessary precondition in order to help to create the required level-playing-field prior to granting wider access to clearing and settlement systems. 11. Cards processing framework should be generic and global. Card payments are a global industry, and as such, should be compatible with global rules in order to guarantee global interoperability. In the Spanish case (at least for Servired and 4B), with the separation of the schemes from the processors, the competence authorities have been regulating the compliance of a set of compromises regarding the conditions and fees from the processor to the scheme. Thus, a market driven model of fees setting is guaranteed in the Sapnish market. 12) What is your opinion on the content and market impact (products, prices, terms and conditions) of the SEPA CARD FRAMEWORK? Is the SEPA CARD FRAMEWORK sufficient to drive market integration at EU level? Are there any areas that should be reviewed? Should non-compliant schemes disappear after full SEPA CARD FRAMEWORK implementation, or is there a case for their survival? Página 6

7 12. The framework content seem enough to guide us to market integration given that it has been defined by all stakeholders involved in this activity. Before any significant assessment of its final impact, an effective and appropriate implementation is required. 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? 13. It is not totally clear what is meant by the Commission when referring to access of non banks to information on the availability of funds in bank accounts. Firstly, a definition of a non-bank would be welcomed. Secondly, information on the availability of funds is of no value for payment purposes. If it is synchronous with the payment, its execution (or not) proves availability (or unavailability); if it is not, there is no guarantee the payment will be executed later as availability may have changed for many reasons. Thirdly, accounts are already available for payment purposes to any payee (banks or non banks) issuing direct debits on the basis of the payer s consent. At present, information related to the accounts is only available for the account holder and never for third parties, banks or non banks, unless there is express consent of the account holder and provided that this is duly known by the bank holding the account. Banks do not have any restriction for their customers to access their account information, easily available thanks to new technologies and through numerous channels at any moment. Current availability already entails hard efforts to certify proper identification of the person accessing the account in order to ensure security and avoid fraudulent impersonation or unlawful cession of authentication methods placed at customer s disposal, which are totally personal and not transferable as long as they are equivalent to its hand-written signature. At this junction, the multiple and intricate legal, contractual, operational, fiduciary and security implications of providing non-banks (and even other banks not holding the actual payment account in their books) with access to information on the availability of funds in a given customer account seem to be missing from the Green Paper. The former stem from a variety of laws (e.g. data protection law, payment services directive, consumer rights directive), best industry practices and a certain organizational setup currently in place and which have evolved in some concrete ways over the years. Hence, from a practical perspective, it wouldn t be advisable to turn the back to this factual reality if the market is to continue functioning smoothly. Against this light, it is therefore necessary to devote first some time to understanding the deeper connotations of any actions in this field, prior to taking any material steps that could see the current rules of the game change profoundly. Página 7

8 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? 14. As far as there is no obligation to accept card payments, this is a voluntary means of payment for both merchants and consumers. Should any business depend on the ability to accept payments by card, this would be undoubtedly due to commercial reasons or competition within the concerned activity sector. Should this be the case, we would be witnessing the best way to integrate and adjust the market and, therefore, there would be no need of regulation that could interfere in this natural process. 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? 15. Without underestimating customers right to information, what is relevant for them is the final price to pay for goods or services. Any other information related to MIFs or fees charged to merchants would lack meaning and would not influence the payment choice since, as any other cost, it is expected to be already included in the retail price. Any obligation to disclose charges related to payments should require disclosure of any other cost directly or indirectly supported by the merchant and the breaking down of the whole margin for each sale; otherwise, it would have no meaning. The same should be done for any other means of payment including hidden costs for cash. This is nonsense and has no value regarding the consumers payment choice. Página 8

9 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? 16. Without being against of any harmonising solution, we prefer market integration mechanisms. Should authorities intend to take any step forward this direction, the measures should be aimed at discouraging the usage of less efficient means of payment such as cash, in favour of those more efficient. In Spain, the actual law ( Ley de Servicio de Pagos ) allows surcharging limited to the cost of the payment instrument. We consider that this regulation is enough in our case. Despite the law allows surcharging in Spain, the benefits for consumers and for merchants are still to be discovered. In Spain, most of the merchants don t use surcharging even though they are allowed. When analysing the efficiency of a payment instrument, both sides of the coin should be take into account. The advantages that cards offer to the consumer (chargeback possibility, insurances, etc) should not necessarily match with merchant needs. 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 micropayments? 17. Present regulation on payments includes transparency and information obligations for the payment service providers to payment services users and ensures a competition environment to guarantee appropriate Página 9

10 mechanisms to set prices for the card payments market. At least in the Spanish market, prices for all schemes, inter-schemes prices and the methodology being applied for calculation are publicly available. 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? 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? 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? 21) On e- and m-payments, do you see specific areas in which more standardization would be crucial to support fundamental principles, such as open innovation, portability of applications and interoperability? If so, which? 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? 18. In our understanding, standardisation is always beneficial (generally speaking) and there are already enough efforts and initiatives in the market not to make advisable any related regulation. Market is enough to define standards, provided they should respond to all needs across the payment chain. In the case of the cards market, standards should be global and not reduced to a European scope, therefore not defined by means of any European regulation. Página 10

11 19. Once standards defined under the above conditions, adoption by all stakeholders in the payments market is required for standards to be efficient. This standardisation processes should be led by the industry itself and not by regulation. Thus ensuring that all stakeholders are involved in the process. 20. There are already enough specialized standardization bodies of free access for interested parties or groups to be able to actively participate in the standardisation process, and we think it is not necessary a major role of CEN or ETSI in the payment industry. These bodies are not specialized in payment industry. There are already global standards followed by the industry (e.g. ISO for PIN management and for security) which are good enough for the industry). 21. E-payments and m-payments markets are yet incipient and further developments and investments are required for them to be globally feasible and optimally efficient. Still, it is too soon to proceed imposing artificially standardised solutions that intend to make them more efficient. Any intervention coming from the outside could interfere in the process, could reduce efficiency and could discourage further developments and the adoption of best in breed solutions. 22. See answer to points 20 and 21 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? 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? 23. SEPA Cards Framework and SEPA Cards Standardisation Volume Book of Requirements Version 6.0 already set a valuable level of standardisation. Lacks in interoperability will disappear as long as recommendations in the above mentioned documents are implemented in all the national schemes. 24. See answer to point 21 Página 11

12 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? 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? 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? 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?? 25. Security in any field, and certainly payments are not an exception, must be considered in connection with the protected object. No system is inviolable and security requires constant adjustment and updating. In this sense, security is a matter of risk in which there must be a balance between cost of adding further security and effectiveness of the contributions of new measures. This balance is of particular relevance in view of innovation processes for payment solutions, where too much security may make the adoption of new solutions by users more difficult if measures are seen as obstacles to them. The party assuming the risk is the one supporting the related costs and, therefore, the one that should decide where the acceptable balance is. 26. Industry has already adopted high security standards for card present and electronic payments and the same will happen for m-payments to ensure that both consumers and merchants will rely on the cards industry regarding mobile payments. 27. We don t see necessary a regulation in the security field. Self regulation has worked properly in the last year (e.g. EMV or PCI standards). We don t see the necessity of joining together payments security with e-identity. Once e- identity has become standard, of course, will be accepted as an authentication method, but it has to be managed separately. In Spain edni has had little use due to its complexity of use and the lack of attractive applications available. Even more, as a national identity method, cannot be used abroad which is not acceptable for the consumers. 28. Actually there are already in place enough regulation about data protection (Data Protection Directive and Data Protection Regulation) with enough mechanisms to keep safe personal data. Additionally, self regulated PCI Página 12

13 standards help al participants in the payments chain to ensure the proper storage and management of personal data. 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? 29. The current governance arrangements should focus on ensuring the interoperability of payments through promotion and oversight. The focus, therefore, should be on the requirements of an industry-led standardization for e- and m-payments and ensuring that interoperability occurs, not only in Europe, but globally, with the authorities acting through promotion and oversight measures but not through regulatory initiatives. Certain aspects, such as the different rates of adaptation of the individual Member States to SEPA requirements, should be matched so that the effort is shared by all stakeholders, while taking into account the various situations and starting points of different countries. 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? 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? 30. The introduction of additional regulation would slow down the process of adopting rules and make it much more difficult. A balance must be found between effective decision making and obtaining the views of all represented Página 13

14 parties. Different payment card schemes (mostly domestic, which knows the peculiarities of the markets in which they operate and, moreover, can express the collective views of its members) should be more widely represented in the various governance forums. 31. Given the importance of SEPA for current and future means of payment, it is essential that the relevant parties that take part in the value chain of payment transactions have access to the various forums. The Commission's efforts to explore an appropriate role for public Authorities are appreciated. However, any involvement of public Authorities should be limited to avoid the risks of "over-regulation", because it could limit change, innovation and new entrants in the market. The industry is better positioned to analyse the market and set itself any goal, timetable or action plan. 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? 32. It is our understanding that consumer rights are underestimated in analysis and consultation processes. They are key players in the effective use of different means of payments. We cannot forget that payments are not considered by them as an obstacle for market integration. There seems to be no obstacles for them regarding electronic payments for e-business, but only for merchants, as studies in Spain demonstrate. The European market is characterized by diversity and not only from historical or cultural reasons, which should be respected. In this framework, harmonisation should not mean a single and unique way of doing things and especially not if established artificially by regulation. It seems to us that mechanisms aiming of stimulating the usage of electronic means of payments, more efficient and safer in comparison to other options socially more expensive, are equally missing. Incentives should emanate from public administrations and through a regulatory process. Página 14