Abstract: This paper discusses recent developments in the governance and innovation of UK retail payments. It is a follow up to an earlier paper (Ganguly and Milne (2002b)) an interview study with senior payments management in eight UK banks. That study identified concerns about governance and weak

incentives for innovation as major issues for the operation of retail payments systems in the UK. The present paper reviews the subsequent experience in the UK and draws lessons for payments innovation and governance across the European Union.

Key words: bank payment services, financial infrastructure, payment schemes, payments governance, SEPA, technology adoption.

Introduction: the problem of inadequate incentives for payments innovation

The principal barriers to innovation in payments instruments are those of business and economics, not those of technology. The technology for highly automated and efficient payments transactions is already available. As a result of falling costs and increasing speed of information processing, together with advances in both encryption and communications (including latest applications of mobile telephony and contactless cards), there are now major efficiency gains obtainable from the adoption of real-time, online and mobile transactions technologies. But to date the payments industry in most European countries has taken up only a fraction of these available technological opportunities, even though they offer payment processors major cost reductions and customers much greater speed, reliability and convenience.

There are two economic reasons why the providers of payments services may fail to take advantage of substantial potential efficiency gains: problems of co-ordination and a lack of business incentives. The co-ordination problem, the need to attract critical mass for a new payments instrument, is well understood (1). Payments are, in this respect, a well-known example of a "network industry", with user externalities. Taking the example of a new payments card, this will be carried by personal customers only if a sufficient number of merchants are able to accept the card. Yet merchants are unwilling to pay for the machinery to accept these cards if there are insufficient customers using them. A retail payment instrument can be further characterised as a 'two sided platform', with incentives to join the platform influenced through the membership and usage charges applied to different groups of users (2).

A further consequence of this need for critical mass in payments is that, in practice, all successful payments instruments have to be bank-based or at least bank-accessible. While technologically it is relatively easy to devise a payment mechanisms without bank involvement, in practice such schemes inevitably fail because of lack of customer uptake. The vision of a non-bank payment instruments and electronic money replacing the banking system has turned out to be a mirage. Even those apparently successful alternatives to bank payments turn out on closer examination to rely on bank partnerships or access. Thus PayPal, the only really successful payments scheme on the internet, relies for its commercial success on low cost mechanisms for customers funding their Paypal transactions from their bank accounts. The use of transport cards for low value payments (for example, Octopus in Hong Kong or the new arrangements for a jointly branded Barclays-Oyster payment card in London) also relies on banking relationships for merchant acquisition.

As well as this issue of critical mass, there is the further problem of lack of business incentives for banks to introduce payments innovation, especially with regard to improvements to shared payments infrastructure (the central processing that handles communications, clearing, and settlement). MILNE (2006) argues that innovation in shared bank-to-bank payments systems is held back because no individual bank can gain any competitive advantage from improvements in these shared payments arrangements. Thus, left to individual profit motives, bank to bank payment systems can lag well behind technologically feasible systems. MILNE (2006) argues that this problem can explain the observation of HUMPHREY, PULLEY & VESALA (1996) that a large share of payments continued to be processed using relatively slow and costly paper based and manual processing in most larger developed countries. Business incentives for adoption of innovation may also be limited by the common practice of not charging customers directly for payments services.

Similar problems of lack of business incentive apply to most other payments innovations, even when they offer substantial consumer benefits, for example person to person or consumer to business payments using mobile devices rather than card readers (so called mobile proximity payments), virtual payment instruments, or the use of electronic purses as a cash replacement for micro-payments.

How are these critical mass and incentive problems that hold back payments innovation to be overcome? This paper examines the recent relatively successful experience of the United Kingdom, where the industry has now agreed on a radical improvement to the credit transfer system (moving from a three working day to near real-time transmission by late 2007) and discusses governance issues that arise in relation to the adoption of efficient pan-European payments arrangements under the SEPA initiative.

* Governance versus market mechanisms

Incentives for adopting payments innovation, while undoubtedly very weak relative to the economic gains available, can be strengthened in two alternative ways. Economic analysis suggests a market-oriented way to improve these incentives, by minimising the amount of shared infrastructure, encouraging the adoption of interoperable standards that will allow institutions to upgrade their part of the payments processing chain without impacting on other institutions, and finally introducing direct customer charging for payments services, thus enabling banks to offer value-added payments services with improved functionality and performance for a premium price and hence recoup the costs of innovation (3). Norway, Australia, and New Zealand are perhaps the countries that have gone furthest down this route, with widespread acceptance of customer charging and relatively rapid payments innovations (4).

Nonetheless there is a great deal of customer and political resistance to the introduction of charging for payments services. In several countries there are legal restrictions on the ability of banks to charge for payments services. In the UK, while there is no legal restriction, the convention of 'free in credit banking' is well established (this is the convention that personal bank customers should not be charged for payments services provided their accounts remain in credit or within agreed overdraft limits). If a market orientated approach is not feasible, then the alternative for improving incentives for innovation is to introduce governance arrangements for payments institutions that allow household and business customers, together with public authorities, to have greater influence on payments organisation, to help overcome the problems of co-ordination and where appropriate lobby the industry to make beneficial improvements in infrastructure and service. The recent experience of the UK therefore merits attention, because significant changes in payments system governance has been followed by agreement on adoption of new payments technologies, without a widespread shift towards the charging of payments services.

The original motive in altering the governance arrangements for UK payments systems was not primarily that of encouraging innovation, but rather concern about lack of competition in UK banking. UK commercial banks make a great deal of money (5). Concern about possible excess profits led to the March 2000 government sponsored review of competition in banking services (the "Cruickshank review" HM Treasury, 2000), which concluded that were competition problems requiring a public policy intervention in two aspects of UK banking: finance for small and medium sized enterprises (SMEs) and payments services.

The government accepted the Cruickshank recommendations on SME banking, referring this market to the UK competition commission (6). In contrast, the authorities chose not to apply the tools of competition law to UK bank payment services (7). Instead HM Treasury, after some further analysis, announced the establishment of a "Payments Systems Taskforce", chaired by the Office of Fair Trading and with members representing both the banking industry and payments users (retailers, consumers, and others) addressing a variety of issues in the governance and operation of UK payments (8). This payments taskforce met from April 2004 until December 2006. In November 2006 the UK Treasury then announced that the work of the payments taskforce will be continued by a new permanent body, the Payments Industry Council, an organisation with an independent board that will have responsibility for overseeing governance, access, and innovation in UK payments.

Thus, the outcome of recent UK concerns with competition and efficiency problems in payments has been neither the creation of a payments regulator with legal powers--the 'paycom' called for by the Cruickshank report--nor the allocation of responsibility of payments regulation to the existing single regulator for financial services, the Financial Services Authority. Instead the UK decided upon the creation of an overseeing body for payments, but with no specific legal powers--a talking shop, but with at least the potential of having a substantial influence on the organisation of payments in the UK. This raises the question, examined in the present paper, what is the potential for changes in governance arrangements of this kind, with much greater customer and competitor involvement in payments decisions, to improving incentives for innovation, relative to the situation when these decisions were purely in the hands of the major banks?

* The history of payments governance in the UK

Unlike central banks in many other European countries, the central bank in the UK--the Bank of England--has almost no involvement in small value non-cash payments. Its only responsibility has been to oversee non-cash retail payments systems from the perspective of systemic safety and soundness, such as the possibility of an outage from a terrorist attack or bank insolvency. Otherwise retail payments arrangements in the UK have historically been left to the banks themselves.

This practice of leaving bank payments arrangements in the hands of the industry is reflected in the traditional expression 'clearing bank', applied to the large UK commercial banks, a reference to membership of the London cheque clearing developed in the 19th century for the processing of cheque payments. While cheque clearing evolved over time, it has continued to be organised through a collectively owned bank scheme, the Cheque and Credit Clearing Company (CCCL). In the 1970s automated payments such as standing orders and direct debits were also established by collective arrangement, with a second bank owned scheme BACS--the Bank Automated Clearing System.

Card payments and ATM arrangements in the UK have also been mostly organised through bank owned associations. The original and highly successful debit card system in the UK--Switch-was developed by a small group of commercial banks to compete with the Barclays Visa Debit product (with Switch subsequently being absorbed into the Mastercard Maestro debit card processing system). ATM systems in the UK, while remaining in individual bank ownership, are all operated through the common processing system LINK, originally promoted by smaller banks and building societies to enable their ATM provision to compete effectively with those of the largest banks. LINK proved so successful that large banks also joined in this system with the outcome that all UK ATMs are interoperable, providing real-time information transfer between the different UK bank systems.

Prior to the creation of the payments systems taskforce, payments issues in the UK were all addressed collectively by the industry, under the auspices of these various industry associations for particular schemes and also through APACS, the UK association of payment and clearing services providers--an umbrella organisation that housed the various UK non-card payments schemes (the BACS ACH and cheque clearings together with the UK large value payment system CHAPS), and undertaking research, lobbying, and public relations work on behalf of the UK payments industry.

While arguing that UK payments were a cartel that restricted competition, the Cruickshank review did not provide persuasive evidence to support this viewpoint (9). The industry successfully resisted the Cruickshank proposal for the creation of a payments regulator with legal powers to intervene in payments provision, arguing that a regulatory body attempting to dictate payments innovations and organisation would inefficiently duplicate the knowledge and skill base of APACS and interfere with efficient decision-making in the industry.

However the political attention created by the Cruickshank review and subsequent HM Treasury analysis did lead to significant shifts in the organisation and governance of UK payments, even before the payments taskforce began its work. These changes included (10):

* Removal of a number of restrictions on membership of APACS, LINK and the individual UK payment schemes; also members of BACS, CHAPS and the cheque scheme were no longer required to be members of APACS.

* The separation of UK ACH payments system processor as a for-profit company VOCA from the BACS Payment Schemes Ltd (BPSL), the ACH payment scheme to which banks and other UK payment service providers belong.

In addition there were a number of significant payments innovations, notably the upgrading of the BACS processing system ("NewBACS") to enable it to cope with the increased volume of activity once all UK social security payments were made by credit transfer rather than by cheque; and the introduction OF "chip and pin" for point of sale card transactions, all UK issued cards now being chip cards and requiring the customer to have a personal identity number (PIN) to confirm identity at point of sale.

* Achievements of the UK Payment Systems Taskforce

The creation of the payments systems taskforce in 2004 and its subsequent two and half year operation was a political compromise, meeting industry concerns that a regulatory body knowing little about the technical details of payments could not direct the industry, but also addressing political and economic concerns that the industry itself was doing far too little on its own to introduce payments innovations. The taskforce met under the chairmanship of the Office of Fair Trading, the UK competition regulator, with a membership consisting of both bank and customer representatives (11).

The Payments System Taskforce can be credited with promoting a number of significant innovations to UK payments, in its relatively short 32 month existence (12). The most high profile of these changes is the introduction of immediate payments. In May 2005 the Taskforce published its BPSL (i.e. the UK ACH) innovation working group report (Payments Systems Taskforce, 2005b). The contents of this report reflect the very cautious position taken towards innovation by many in the industry. It found that demand for faster payments was likely to be relatively small, leading (if offered without charge) to some 269mn payments per year (only about 5 payments per year for every adult in the UK) and offering benefits (estimated on a "willingness to pay" basis) to consumers and business of between GBP 748 million and GBP 1340 million over ten years (i.e. at most about only about GBP 25 for each adult in the UK) (13). The basic costs of implementation were meanwhile estimated as a one-off total of around GBP 65 million.

These estimates of costs and benefits are both remarkably small. However, they were sufficient to trigger a major change in UK payments arrangements. A subsequent implementation group study working closely with APACS led to agreement in early 2006 by the industry on the introduction of a near-real time ACH payment service, covering direct credits initiated by telephone and by internet and standing orders. The contract for processing of this new priority credit scheme was awarded to Immediate Payments Ltd (IPL), a joint venture operated by VOCA (the ACH processor) and to LINK (the ATM processor) (14). The IPL immediate payment service will be available from late 2007 as a chargeable service, allowing payments to be transferred on a 24-7 basis within 3 hours of initiation, and with guarantee of receipt (IPL payment instructions unlike the CHAPS payments, cannot be repudiated). IPL are able to make use of the LINK network, to which all UK banks and building societies belong, for the necessary real-time transmission of information.

Two further reports (Payments Systems Taskforce, 2005c, 2006b) address the governance of two UK payments schemes, those of BACS (the UK ACH) and LINK (the UK ATM) respectively. These reports cover several aspects of governance, including membership and access fees, membership and voting rules and mechanisms for representing customer viewpoints. They also compare governance arrangements with those found for similar schemes in other countries. These reports have both led to significant changes, favouring further innovation in UK payments instruments. The statements of purpose of both schemes have been amended to include innovation and service improvements. An affiliate interest group has been established, which allows major user groups such as trade bodies representing the corporate sector to represent their views directly to the BACS (BPSL) board. This has, in turn, highlighted a number of specific customer concerns (see Payments System Taskforce, 2006a) that are now being addressed by BPSL. The report has also led to a clearer separation of the LINK card scheme from its service processor LINK Interchange Network Limited, with a service level agreement clarifying the processors obligations. This is of particular importance because it allows competing companies to access the LINK network and provide value added processing services, a factor of key relevance to the business model of independent ATM providers.

The final achievement of the Payments System Taskforce was the establishment of its successor body the Payments Industry Council as a new permanent governance arrangement covering all payments schemes in the UK. The Payments Industry Council has not yet been officially launched, but it will have an independent chair (Brian Pomeroy) and a constituent membership representing consumer and business groups, as well as the payments industry (15).

* The wider European challenge

The introduction of efficient automated payments processing is a major European policy issue. Firstly, the continuing fragmentation of payments arrangements along national lines is a considerable barrier to the single European market, for example in retail financial services where cross-border payments facilities (to make loan interest or insurance premium payments, for instance) are critical to cross-border provision. Secondly, payment transactions, especially the reconciliation and processing of business to business payments, already absorb an unnecessarily large fraction of gross national product. There is debate over the figures, but it is not at all farfetched to believe that creating fully efficient pan-European retail payments systems can result in a permanent increase of European GNP of over 5 per cent---a massive potential efficiency gain.

Europe is addressing this challenge, through the new Payment Services Directive or PSD (adopted by the European parliament in March, 2007) and through the program to establish a Single European Payments Area or SEPA by 2008. The PSD draws together existing national and European legislation, addressing several issues, including transparency of payment systems, legal certainty and rights of access and service. It also introduces a specific licensing regime for payments service providers, less burdensome than that on credit institutions and hence facilitating greater competition in payments provision.

The PSD provides the legal framework for pan-European payments, but the critical tasks for provision of pan-European payments are being undertaken as a part of SEPA, notably in the work of the European Payments Council (the EPC is the body representing the banking and payments industry and co-operating with the European Commission and European Central Bank to further pan-European payments processing). The EPC has been preparing the ground for SEPA through the creation of a number of standards for pan-European payments: for credit transfers, for direct debits and for card payments. In late 2006 the EPC published detailed rulebooks and implementation guidelines for these pan-European payments schemes and all European banks are expected to provide both SEPA payment receipt and payment instruction services to their customers. The aim has to be achieved "SEPA for customers" by 2008, i.e. from a customer perspective, there should be no difference either in charging or in mode of interface between a domestic and a European cross-border payment. While there is a delay in achieving SEPA for customers for direct debits (partly arising because of the very different national legal frameworks supporting these instruments), SEPA for customers will be achieved on schedule for card payments and credit transfers.

A core element of SEPA is establishing agreed messaging and operational standards for pan-European payments (16). It builds on the established IBAN numbering system. SEPA payments will also all follow ISO 20000 XML messaging standards i.e. they will use these flexible messaging conventions that are particularly helpful for the efficient automated processing of payments instructions. SEPA has also defined the processes to be followed by a pan-European ACH (or "PEACH"), ensuring that pan-European credit and debit transfers can be processed by a number of competing processors and will potentially support distributed processing solutions which do not even require a central processor.

Despite these successes, there are real concerns whether full SEPA--the transfer of the bulk of domestic payments onto the new SEPA arrangements as targeted by 2010--will achieve the desired cost efficiencies. Several dangers have been highlighted by respondents to various industry surveys. Implementation of SEPA is stretching bank resources (17). SEPA schemes may remain an "add-on", used a specialised solution for cross-border payments, but not fully replacing existing inefficient domestic architectures i.e. the integrity of SEPA may be compromised (18). Another danger is that banks spend large sums to convert their domestic processing onto a SEPA basis, but achieve few customer benefits by doing so and may indeed lose important domestic functionality (19).

The potential gains from SEPA are large. However, as argued by LEINONEN (2006), the governance of SEPA is crucial: "There is also a danger that SEPA will delay long-term developments if there is no governance structure in place for the standardisation of modern and added-value services". What are the lessons that might be learnt from UK experience?

A first lesson, and one that is already being accepted in the world of card payments, is that there are clear benefits to be gained from fully separating the payment schemes, mutually owned by banks, from the revenue generating payment processing that supports them. There will be a much more favourable environment for European payments innovation when all payments processing, whether card or ACH based, is conducted independently from both national and European level schemes on a competitive, for profit basis. This observation poses a particular challenge for central banks and centralised banking organisations that currently have important payment processing responsibilities in several European countries.

A second lesson is that it is essential to have effective customer involvement in the governance of payments. Banks, left on their own, take an understandably conservative approach to payments innovations, being reluctant to alter arrangements that work satisfactorily from their own perspective unless customers express a clear preference for change. Regulations can force banks to take action, but cannot make them do more than the minimum necessary to achieve compliance. It is therefore a concern that the corporate Europe---the biggest gainers from SEPA--appears as yet to be relatively unengaged in the SEPA process (20). While corporate associations, notably Twist.com and the European Association of Corporate Treasurers, are actively involved in SEPA debates, there is no formal governance arrangement to ensure that their views are reflected in bank decisions. Such representation is urgently required at both domestic national and pan-European level.

A third lesson is that while both stronger governance and regulation are needed to encourage banks to respond to customer demand, both for technological innovation and pan-European functionality, the details of these responses should still be the responsibility of the banks themselves. To take one example, forcing banks to introduce full SEPA compliance with the (relatively difficult) SEPA direct debit arrangements through regulation, could actually lead to considerable and unnecessary costs for both banks and customers. Taking this further, a much more practical way forward may be the promotion of electronic e-invoicing, as a pan-European alternative to direct debit. The payments industry and their customers needs an effective debate about which of these--pan-European direct debit versus pan-European e-invoicing--is the best way forward before co-ordinating on one solution. Other SEPA challenges will be best met on the same basis, a full dialogue amongst payments providers and payments users before coordination on a cost effective way forward.

Recent UK experience with payments governance offers lessons for the rest of Europe, but UK arrangements are themselves changing once again. As described in POMEROY (2007), the board of the new UK Payments Council will be elected by banks and other payment services providers. Although four independent directors will also sit on the board, it is unclear that this new body will represent the interests of payment users as as effectively as the now disbanded Payments Taskforce. We will have to wait and see whether the recent pace of technology adoption in UK payments is continued into the future

References

Accenture (2006): The European Payments Revolution: An Accenture Survey, September.

CRUICKSHANK D. (2000): Review of Banking Services in the UK, HMSO, especially Chapter 3. Money Transmission, 53-102, Annex D2, D3 and D4, March, pp. 237-295.

Boston Consulting Group (2006): Navigating to Win: Global Payments 2006.

ENGE Asbjorn & Grete OWRE (2006): "A retrospective on the introduction of prices in the Norwegian payment system", Norges Bank Economic Bulletin, 4/06, pp. 162-172.

EVANS D. & SCHMALENSEE R. (1999): Paying with Plastic: The Digital Revolution in Buying and Borrowing, MIT Press.

First Data International (2006): Perspectives on SEPA.

GANGULY B & A MILNE:

--(2002a): Do we need public policy intervention in UK payment systems and if so how?

--(2002b): UK retail payments: competition, regulation, and returns to innovation.

H. M. TREASURY (2000): Competition in Payment Systems: A Consultation Document, December.

MILNE Alistair (2006): "What's in it for us? Network externalities and bank payment innovation", Journal of Banking and Finance, 30, pp. 1613-1630

MILNE Alistair & LeiLei TANG (2005): The Benefits and Dis-Benefits of Faster Clearing in Retail Payments, research report for the Office of Fair Trading (available via www.oft.gov.uk).

LEINONEN G (2006): "Understanding the Changing Economics of SEPA", GT-News, August.

Payment Systems Taskforce:

--(2005a): First Annual Report of the Payment Systems Taskforce, Office of Fair Trading, London (available via www.oft.gov.uk).

--(2005b): BPSL Innovation Working Group report, Office of Fair Trading, London (available via www.oft.gov.uk).

--(2005c): BACS Access and Governance Working Group report, Office of Fair Trading, London (available via www.oft.gov.uk).

--(2006a): Second Annual Report of the Payment Systems Taskforce, Office of Fair Trading, London (available via www.oft.gov.uk).

--(2006b): LINK Access and Governance Working Group report, Office of Fair Trading, London (available via www.oft.gov.uk).

POMEROY Brian (2007): Interview in SPEED magazine, Vol 1, no. 4, Spring 2007, Central Banking Publications.

ROCHET J.-C. & TIROLE J. (2003): "Platform competition in two-sided markets", Journal of the European Economic Association, 1 (4), pp. 990-1029.

Treasury Strategies (2007): "European Corporate Treasury Research Program", reported in FinNews, April 19th.

(1) See EVANS & SCHMALANSEE (1999) for an analysis of the role of critical mass in the development of the credit card as a payment instrument. GANGULY & MILNE (2002a) provide a broader review of the literature.

(2) For a general economic model of such two-sided markets see ROCHET & TIROLE (2003).

(3) See GANGULY & MILNE (2002a) for discussion.

(4) See ENGE & GOWRE (2006) for an assessment of Norwegian experience.

(5) The top five UK banks reported record collective profits in 2006 of 32bn pounds, more than 2.5% of UK GDP, although it must be recognised that domestic retail banking accounts for only a part of this total.

(6) The subsequent enquiry focussed amongst other issues on charges to SMEs for payment services. It found that there was a "complex monopoly" in SME banking and as a remedy required UK banks to pay companies interest on current account balances. Press statement and final report can be accessed via: http://www.competition-commission.org.uk/pressreleases/15-02.htm .

(7) There is one exception, the ongoing but not yet effective work of the Office of Fair Trading on credit card interchange fees (see the OFT press release of 2006, www.oft.gov.uk/news/press/2006/97-06.) Their original investigation of MasterCard UK, announced in 2005, found that interchange fees had been set above the levels necessary to recover the costs of operating the credit card payments scheme and hence were a restriction of competition; but this judgement has been set aside (on grounds associated with the technical difficulties of cost measurement) after an appeal by MasterCard to the Competition Authorities Tribunal. The OFT is now focussing its resources on investigation of current rather than historical levels of interchange fee.

(8) See www.oft.gov.uk/news/press/2006/93-06 for a summary of the work of the taskforce.

(9) GANGULY & MILNE (2002a) point out some of the weaknesses in the "cartel" interpretation. There is no monopoly pricing of payments in the UK since the central payments services are not-for-profit charging members on a cost basis and banks do not generally charge customers for payments services. Furthermore GANGULY & MILNE (2002b) finds that there is substantial competition in indirect agency access to the various schemes, so limits of access to existing payment schemes do not appear to restrict competition in other aspects of banking services.

(10) Payments Systems Taskforce (2005a) reviews the post-Cruickshank changes to governance and access arrangements for UK payments systems.

(11) The Payments Systems Taskforce pages on the OFT website provide full details of its operation and membership. Members were OFT (chair), APACS (Association for Payment Clearing Services), BACS Payment Schemes Limited, British Bankers' Association, British Retail Consortium, British Chambers of Commerce, Building Societies Association, CHAPS, Cheque and Credit Clearing Company Limited, LINK, Visa, MasterCard, S2, Federation of Small Businesses, National Consumer Council, Which?, The Bank of England (sitting as observers), and HM Treasury (sitting as observers). Individual banks were members of the various Task Force's working groups.

(12) The work of two further Payments Task Force working groups on cheque clearing and on European affairs are summarised in the two annual reports (Payments System Taskforce (2005a, 2006a), but not reviewed here.

(13) A parallel economic analysis (Milne and Tang (2005)) suggests that the actual economic benefits may be considerably larger than those in the working group report because the "willingness to pay" measure excludes potentially large benefits of faster payments receipts to smaller liquidity constrained companies.

(14) Subsequently, on March 6th 2007, Voca and LINK announced their plans to merge and create a single processing company VocaLINK.

(15) See POMEROY (2007), an interview with Brian Pomeroy in a recent issue of SPEED magazine.

(16) The "back of the envelope" calculation runs as follows. Comparison of the most efficient payments systems in Europe (such as Norway) with those in the largest European economies (Germany, France, UK) suggests a cost-reduction to banks of the order of 1,5% of GNP. Reductions in the costs to corporations of operating their invoicing and reconciliation systems could amount to a further 1,5% of national income. Further gains from pan-European competition in cross-border goods and services, consequent upon low cost payments transfers across the Union, yield 2% of national income or more.

(17) See LEINONEN (2006) for a review of SEPA emphasizing the economic benefits offered by this standardization, especially to the end-to-end automation of the corporate supply, invoicing, payments chain.

(18) Accenture (2006) project some EUR 3 billion of expenditure by European banks to implement SEPA, but even then, many will fail to achieve full SEPA compliance by 2008.

(19) This is the message of the First Data Systems interview survey focusing on SEPA for cards.

(20) See Boston Consulting Group (2006).

Alistair MILNE

Faculty of Finance, City University Business School, London and Monetary Policy and Research Department, Bank of

Finland (*)

(*) The views expressed here are not necessarily those of the Bank of Finland.