Critical Connections The instrumental role of European Facing Reality: Clearing and Settlement Mechanisms The Diversity of in a changing financial landscape Instant Payments in Europe OPEN APIS: THE NEXT PAYMENTS INDUSTRY GAME CHANGER A white paper by Table of Content 3 9 12 Executive summary The transformation of the New players entering global financial landscape the European payments landscape The growth of digital, e-wallet 4 and e-commerce payments 9 Big cloud-based technology corporations 12 The current state of the The exploration of new European payments market technology 9 Fintech companies and merchants 14 Standardisation and The advancement of Open harmonisation 4 Banking and APIs 10 The European regulatory reactions 14 Regulatory and The evolution of consumer infrastructural changes 5 expectations 11 The era of the Platform Economy 15 Instant payment development The development of financial and adoption 6 service offerings by big technology corporations 11 16 17 Conclusion Glossary European Automated Clearing House Association Executive summary Boise, France Today, the financial services industry is experiencing unprecedented changes which are gradually shifting the dynamics of financial ecosystems, breaking up value chains, and threatening existing financial services business models. Global developments including an increasingly digitised society, evolving consumer expectations, new collaborative partnerships, advancing technologies, and new entrants are all adding to the impact, evidently reshaping the way payments are perceived, initiated, processed, cleared and settled. Parallel to these global developments, circumstances in Europe including changing regulatory and legal frameworks, the transition to instant payments, higher demands for interoperability and reach at a pan-European level as well as an escalating competitive environment involving new industry players are all adding additional layers of complexity to its existing financial infrastructure. These significant changes across regulatory and market dynamics are delineating the needs and expectations of consumers and merchants alike. Consequently, consumers now expect security and consolidation of finances and transactions while merchants (and other service providers) expect payment certainty and speed. With the proliferation of account-based real- time payment systems, the payment account is ideally positioned to serve both ends of the payments value chain through the delivery of security, consolidation as well as fast, final and irrevocable payments. With PSD2 and the Access to Account requirements, it has suddenly become possible for TPPs outside the traditional financial services industry to fill the role as both PISP (Payment Initiation Service Provider) and AISP (Account Information Service Provider). These developments have become the catalyst for increased integration across the traditional boundaries of financial services, thereby opening the doors for different technology providers to enter the financial services space. Against this backdrop, this paper argues that local clearing and settlement mechanisms (CSMs) are ideally positioned to serve the specific requirements of local European environments in terms of reach and value-added services and to facilitate the connection between local financial players – including local fintech startups – and global transaction systems, as well as the connection between global service providers and local payment networks and players. A white paper by the European Automated Clearing House Association GO BACK TO CONTENT PAGE PAGE 3 The current state of the European payments market Across Europe, circumstances including changing regulatory and legal settlement mechanism (CSM) for cross- frameworks, the transition to instant payments, higher demands border payments in Europe. During this for interoperability and reach at a pan-European level, as well as an time, the service attempted to grow its escalating competitive environment involving new industry players, are reach by acquiring domestic volumes. currently adding additional layers of complexity to the existing financial Following the implementation of infrastructure and to the way payments are essentially conducted. SEPA standards (SEPA Credit Transfer, SEPA Direct Debit, SEPA Instant Credit The significant changes across regulatory and market dynamics have Transfer) by all national community helped to delineate requirements and expectations across both ends CSMs and reciprocal reach extended of the payments value chain. Now, consumers expect security and by these CSMs connecting to a consolidated overview of their finances and transactions while STEP2, the initial PSP vision of SEPA merchants and other service providers expect certainty of payment centralisation gradually dissolved as and fast transactions. With the proliferation of account-based real- local CSMs could then serve local time payment systems, the payment account is an obvious choice as needs and offer SEPA reach through it delivers security, an overview, as well as quick, final and irrevocable these links. Since then, STEP2 has payments to merchants. remained the preferred cross-border CSM for non-centralised clearing and Given these recent developments, it is becoming increasingly evident settlement arrangements and little how local CSMs present themselves as a preferred choice for banks and SEPA clearing concentration has been PSPs, as they are ideally positioned to serve the specific requirements experienced. of local European environments in terms of reach and value-added services and to connect local players to global transaction systems as Despite the ability by most CSMs well as global service providers to local payment networks. to serve communities at SEPA level by processing SEPA standards and providing SEPA reach, many local Standardisation and However, even with increasingly banks and PSPs still prefer local harmonisation standardised interfaces, the financial clearing and settlement solutions. This Both the first Payment Service services industry is more than anything is explained by a number of reasons. Directive and the Revised Payment network-based and building up entirely Firstly, the majority of European Services Directive – PSD2 – drive a new networks takes time. This is payments are national transactions, pan-European standardisation and why the existing network hubs will with only a small amount crossing harmonisation agenda with the explicit continue to play a central role if the borders to other countries. This in turn, aim of an internal market for financial political visions for an internal market encourages local banks and PSPs to services and the free movement of for financial services are to be fully prioritise the improvement of local money on par with the free flow of realised. The local CSMs are well- payment solutions at the speed of goods and labour across all of the established conduits to all banks in a their market ahead of possible SEPA- European Union. given country, as well as to other local payment infrastructure components An open internal market for financial which are not likely to be replaced by services will allow for increased pan-European solutions any time soon. competition as a harmonised setup enables easier expansion and export of Prior to the advent of SEPA (the Single services across borders. At the same Euro Payments Area), EBA Clearing’s time, the unprecedented increase of pan-European payment service – e-commerce is blurring the frontiers STEP2 – was the default clearing and across countries. These factors provide opportunities for both existing players in the financial services industry as well as for the fast-growing number of fintech companies across Europe. A white paper by the European Automated Clearing House Association Basel, Switzerland GO BACK TO CONTENT PAGE PAGE 4 wide solutions. It could be argued that from a PSD2 perspective are treated From a consumer perspective, cross- by retaining the governance of a local equally clearly underlines a more border payments need to follow the CSM, PSPs ensure a closer alignment fundamental change in the payments development of cross-border trade, of product delivery for specific market landscape which is that payment where goods and services seamlessly evolutions. Local CSMs are also well- networks are not only about moving travel across national borders at established and acknowledged entities money but about moving data – and a frequency and speed previously in their local communities due to their this in an equally secure manner as unseen – and to have (electronic) long-standing experience and expertise monetary transactions. money moving slower than physical with local conditions and requirements, goods seems counter-intuitive. including their ability to meet local PSD2 is widely acknowledged as a banking supervision requirements, and major catalyst of the adoption of CSMs are the payments world’s they have a long-standing reputation the platform economy in financial equivalent of the distribution hubs of of security and trust in the local market services and as such PSD2 serves as the logistics industry. These entities are place. In addition, CSMs offer some a benchmark for regulators globally responsible for receiving and sending considerable advantages in terms of to introduce open APIs (Application transfers and thereby connect local costs, reach, governance, flexibility, Programming Interfaces). PSD2 is players to global transaction systems. value-added features and back-office