EBA CLEARING INFRASTRUCTURE: Will owners and users make “real” become “possible”?

SPIN 2010

Presentation by Giorgio Ferrero, Chairman, EBA CLEARING

SPIN 2010

EBA CLEARING INFRASTRUCTURE:

Will owners and users make ‘real’ become ‘possible’ ?

EBA CLEARING INFRASTRUCTURE:

Azionisti e utenti renderanno il ‘reale’, possibile ?

GIORGIO FERRERO

Chairman Eba Clearing Co.

Head of Payment Systems Strategy and Development – Intesa Sanpaolo

Roma, 17 giugno 2010

First of all, I would like to welcome all of you to this traditional appointment in the Roman summer and thank ABI (Italian Banking Association) and the SWIFT Italy National Member and User Group for the pleasant organization of this event and for inviting me to speak to you today.I am here today in my role as Chairman of EBA CLEARING and thus as shareholder and user, like most of you, of a company which during this crisis has continued to represent a point of reference and continuity, a guarantee that has even more value in these difficult times.

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A “reality” as mentioned in the title of this presentation, “Will owners and users make ‘real’ become ‘possible’”.

However, with an eye on cooperation, I believe it is fair to think also about the future of this company and the value it represents to banks and how we, as shareholders and members, in general consider this asset.

We should evaluate if and how we wish to increase its value to face the current challenges and the ones will meet in the future, to protect our investments and to take up opportunities that may arise in the short and medium term.

Such remarks seem to be appropriate in a session that draws on the crucial transformation introduced by the PSD.

And it is correct to think that we have to reflect on the opportunities that we want to offer to ourselves, because EBA CLEARING represents the banks and the entities that use its services. The company does not make profits against the interest of its shareholders and users and what is done within EBA CLEARING is done for the banks and their customers.

Some weeks ago, on 26th May, the Shareholders Annual General Meeting took place and I would like to take the opportunity to take up some of the topics addressed during that event.

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Activities 2006/2010

We were able to present a positive outlook in terms of activities and volumes in 2009, despite the challenges and the difficulties that the crisis, certainly not yet completely overcome, introduced and will continue to present.

These results are also and in large part due to the contribution of the Italian community and I take the opportunity to thank all of you for your commitment. Obviously, I would also like to thank all those participants who are not Italian but are present at this conference.

We have been witnessing some positive and lasting results in terms of volume growth: since February this year the average volume of daily transactions has exceeded 2 million on a monthly basis, (April 2,213,669/May 2,185,226 transactions).

Recently, the term “sustainable growth” has become a popular concept and I believe this concept is applicable to this company in its various facets.

EBA CLEARING is capable of some progression, characterised by a sufficient level of dynamism to face new challenges and input from the market.

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EBA Clearing: Systems & Participants

SYSTEM PARTICIPANTS

EURO1EURO1 banks 66Pre-Funding Participants 11Sub-Participants 58

Total 135

STEP1STEP1 banks 98Sub-Participants 50

Total 148

STEP2 XCTDirect Participants 105Indirect Participants * 1.705

Total 1.810

STEP2 SCTDirect Participants 117Indirect Participants * 4.358

Total 4.475

STEP2 ICTDirect Participants 6Indirect Participants 70

Total 76

STEP2 SDD COREDirect Participants 62Indirect Participants 2.440

Total 2.502

STEP2 SDD B2BDirect Participants 44Indirect Participants 2.246

Total 2.290

* Representing more than 5.000 institutions

* Representing more than 4.000 institutions

I believe that this slide, which shows the participation in the various services, summarises the growth in a range of services that – together with some flexible participation options – makes the EBA CLEARING platform a “universal” platform for euro payments, to meet either local, regional and international needs.

For example, the flexible nature of the EURO1/STEP1 participation model has been proven to be an asset during the various merger and reorganisation processes that marked the banking industry during the past few years.

Banks were able to adapt to a changing situation comparatively quickly and easily, and to adopt the participation status most suitable for their evolving reality.

I wish to highlight how, at a time when fragmentation is often confused with competition, these evolutions have allowed us as banks to operate in the euro market even in difficult times and to “wear the most appropriate clothes” for each occasion in line with our possibilities.

All the above results were achieved with an unrivalled level of efficiency.

In my role as Chairman, elected by the shareholders, I wish to say that the creation of such a multifunctional infrastructure, achieved in line with

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time to market rules and at such limited costs for its shareholders and participants, has rarely been seen.

The latest practical example of the company’s achievements has been the adoption of the ASI, Ancillary System Interface for settlement in TARGET2.

The new EURO1 settlement process started successfully on 7th June. The project had been set up with the objective to have the least possible changes to the existing legal agreements and to ensure minimal development costs for the users of the service.

The successful EBA CLEARING model is supported not by a profit philosophy but by a service philosophy, a philosophy which probably had been missing in some other contexts and realities and towards which the financial crisis, the regulators and our customers’ requests are pushing us to focus on as an industry.

While this principle that I have just mentioned and its success seem to be obvious, I ask myself from time to time the following little test question: “what if EBA CLEARING did not exist...”

SEPA and PSD surely imply high costs in terms of investments, but try to imagine what it would have meant to launch SEPA without the PE-ACH of EBA CLEARING.

Would we have been able to meet the deadlines? Would we have been able to guarantee the reachability? What additional economic and regulatory pressures would we have had to face in such a case? If SCT and SDD were costly, what would alternative solutions have cost us?

What is taken for granted today would probably not be there without the infrastructure created by the banking industry when it was still capable of dreaming.

And in this respect, we have already had the outcome of a litmus test: the card business.

The authorities are claiming that the SEPA Cards Framework is not sufficient and that we have to build a European cards scheme in addition

to the main international schemes and that the interchange fee-based business model needs to be reviewed.

I believe that the actors of the cards business or those whose activities are linked to this business are aware of the issues that the banking industry is facing in this area, not only with regard to finding a good reason to make such investments, but also with regard to reaching a consensus on the operating model and on the infrastructure that will have most chances to be successful.

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Activities 2009/2010

EURO1/STEP1 – evolution of daily average volumes 2008-2010

While EBA CLEARING as a whole is a platform that is run properly and is reusable for different purposes, the combination of EURO1/STEP1 certainly constitutes the engine or the heart of this platform.

After the peaks reported in 2008, the worldwide recession had an impact on the volumes processed by this infrastructure. If at midyear the 2009 decrease vs. 2008 was 9%, by end of the year this decline was reduced to 4% and volumes in 2010 were reported as increasingly recovering. So the figures, on the one hand, reflect the expectations of a potential

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reduction. For example SWIFT had foreseen a volume reduction of 5% in 2010.

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EURO1 – back to basics: key benefits

• Net basis backed by Single Obligation Structure: a solid legal foundation valid all over Europe

• Liquidity Bridge: optimises use of liquidity and limits collateral costs

• Offers the highest levels of resilience in the industry

As a result, EURO1 is

• Able to process higher payment volumes and values

• Open for domestic as well as cross-border andinternational payments

• Able to accept increased group traffic through onegateway as banking groups expand

EURO1 Service: Minimising the cost of liquidity for payments

On the other hand, the figures confirm that participants continue to use an infrastructure that reduces liquidity costs now that Regulators focus on liquidity risk management and the related reporting.

At present, efficient liquidity management is one of the main objectives of the banks’ Treasuries, also within a banking group, and EURO1 with its legal basis allows to combine settlement based on multilateral balances with irrevocability and immediate finality of payments.

During the whole period of the financial crisis, during a time of severe liquidity shortages, the Liquidity Bridge continued to be well-used: 85 per cent of the funds paid in (i.e. pre-funded) were distributed on average each day.

All above-mentioned activities follow a “universal” logic, which allows to aggregate liquidity no matter what the underlying transactions are and where the traffic is located.

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Both the Regulators, if we think of the follow-up illustrated by ECB in the document “Lessons learned from the crisis”, and the banking industry – I refer to the panel on real-time payments and liquidity risk held in the recent edition of the EBAday – think of additional tools to monitor and to optimise the working capital.

EBA CLEARING is as usual committed to supporting the community of participants and to developing the necessary functionalities.

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10th Anniversary of STEP1

Ten years of serving the small and medium-sized banks in the European Union

• launch on November 2000: 21 banks

• Today: 98 STEP1 Banks and 50 Sub-Participants

“STEP1 has paved the way for smaller and very cost-conscious banks to play an active role in the

pan-European area.”Janina Grönholm

Chair of the STEP1 Committee and User Advisory Group

An important community and a vital role for reach

The volumes and benefits of the engine supplied by EBA CLEARING are well known. These would not have been possible without the STEP1 banks, to which the Italian banks contribute with a wide participation.

Since in 2010 we celebrate the 10th anniversary of the service launch, I would like to thank particularly this community of participants, without whom we would not have achieved the efficiency and the pan-European coverage of which we all benefit.

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The launch of the EURO1/STEP1 Directory in 2009 successfully completed a path towards an enlarged participation, which makes us aware of the value and usefulness of the “indirect participation”.

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0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

+ 30%

STEP2 – evolution of daily average volumes 2009-2010

Activities 2009/2010

I would like to close this short overview with a look at the STEP2 activities. The increase in volumes has been steady and in December the 2 million mark was broken with regard to the average daily volumes processed over one month.

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+ 40%

STEP2 SCT – evolution of daily average volumes in 2010

Activities 2009/2010

Change in volume 2010 over 2009: 85.71%

May 2010: record daily average volume of 604,561 payments

For the STEP2 SEPA Credit Transfer Service, a steady volume growth can be reported as well with a 40% increase since the beginning of the year and + 85% in 2010 vs. 2009.

In May, the service witnessed a record with more than 600,000 daily transactions processed on average.

The above figures, however, are the result of a logical inertial progression.

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9

STEP2 SCT Domestic

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LU FI IT ES Others

X-borderDomestic

STEP2 SCT – percentage of domestic traffic sent (April 2010)

Status: April 2010

The next challenge is represented by the migration of domestic flows, now that the awareness of the need to go for an end-date and to have the flows converging on integrated platforms is growing, in order to remove the costs of the current redundancies.

Four countries are at the forefront in terms of domestic traffic migration. Over 75 percent of the Italian traffic sent to STEP2 SCT in April were domestic SEPA payments.

The PSD transposition on 1st March led to an increase in the overall Italian STEP2 SCT traffic by 35 percent.

In Finland, banks have decided to migrate all domestic traffic to STEP2 by December 2011, and not just that.

The Finnish banks, which often anticipate solutions in the electronic payment market, are evaluating to phase out the POPS system, which processes urgent payments, and use the EBA CLEARING platform and XML standards also for non-mass payments.

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As Gilbert Lichter, our Chief Executive Officer stated, the project has been kicked off thanks to the initiative of the Finnish community but the solutions will be made available to all interested banks and communities.

Some contacts have also been established with the Estonian community, which will start to migrate its domestic traffic to the SEPA instruments in 2011 when the country adopts the euro as its national currency.

Another interesting initiative is led by various Public Administration entities, who in some countries have started to send flows with tens of thousands payments every day. In general they are fiscal and pension authorities and governmental agencies.

In accordance with the above, we can say: “Eppur si muove”: SEPA is moving on, despite the current difficulties.

With regard to STEP2, two different work streams have been successfully completed by EBA CLEARING a few months ago:

A benchmarking exercise and a stress test were completed, proving that the STEP2 platform is capable of processing tens of millions of payments in a day without any modification. With simple hardware upgrades, it will be capable of processing more than 50 million transactions in a day and is therefore ready to cater for domestic volumes.

At the same time, potential competitive pricing options for massive volumes were analysed.

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• Implementation of multiple cycle functionality in February 2010– Makes it technically possible for participants to exchange payments via

STEP2 SCT any time during the day or night– Additional processing and settlement cycles can now be implemented for

a closed user group upon request

• Successful implementation of RBAC (Role-Based Access Control) for all STEP2 Services on 3rd May 2010.– Optional feature in SWIFTNet service controlling access to end-user or

application– Each SWIFTNet service can be configured with specific roles based on

application requirements

STEP2 SCT – new flexible functionality

Thanks to the dynamism of this system, some additional flexible features were introduced earlier this year.

A multi-cycle functionality was launched in February, which allows to further enhance the processes and the liquidity management of those banks interested in the adoption.

As regards controls and activity monitoring, the Role-Based Access Control functionality has allowed since 3rd May to configure the SWIFTNet service in order to better manage roles and related access-rights regarding specific SWIFTNet applications and activities.

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11

Technical Facilitators

VocaLink

SIBSIberpay

Equens NL

EMZ

SIA SSBEquens IT

STEP.ATSIX

BANKART

DIAS

KIR

14

Equens DE

PBS

• The PE-ACH with the reach – interoperability

Activities 2009/2010

11Status: May 2010

• STEP2 SCT: 99% SEPA-Coverage

4,404 financial institutions having signed the EPC SCT Adherence Agreement are reachable in STEP2 SCT.

In summary, it seems that the PE-ACH has delivered the appropriate solutions and will continue to evolve in line with the needs of its users, in order to guarantee reach and play a key role in the consolidation of the European platforms.

If one asks the question whether physiological dynamics exist in the market, which push the industry towards achieving optimisation and overcoming redundancies (already existing in our local markets), the answer will be positive.

The timing and the precise conditions are not well known and depend on different factors, without taking into consideration nationalistic impulses that may be easily inspired regardless of the needs of the payment market.

Pragmatically, EBA CLEARING has found in its cooperative models – the Shared Platform and the links created in collaboration with Technical Facilitators – the solution to aggregate the flows of the different local communities, by positioning itself as the central point of interoperability.

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Today, STEP2 SCT provides a total coverage in terms of reachability. The critical mass is represented by 4,404 financial institutions and by interoperability agreements with 14 of the 16 SEPA compliant CSMs.

This scenario is satisfactory, with 16% of the STEP2 SCT traffic being channelled through these CSMs, which are either managed by the Central Banks or by the private sector.

In view of the above-mentioned evolution, there will be further opportunities to achieve integration and greater efficiency (similarly to what was achieved by migrating from TARGET to TARGET2).

And precisely in this context I would like to provide you with some food for thought.

This is related to the Governance of a company and how this can have a positive impact on the capability to keep up the steady evolution that EBA CLEARING has proven to be able to achieve.

Should we try to find better solutions to become interoperable with some local CSMs? Should we create a new Governance level that includes shareholders and users of the PE-ACH and somehow combines the local Governance needs of the CSMs, which often correspond to the needs of the Central Banks?

The theme is complex, but I am sure that once again we will manage to find the most appropriate solution to protect the pan-European spirit of EBA CLEARING and its capability of staying abreast of the times and the needs of all participants.

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Payment Services Directive

“Rules shall be objective, non-discriminatory, proportionate and do not inhibit access more than is necessary” *

Open Access & Sound functioning in payment systems

“Rules shall safeguard against

specific risks such as settlement, operational and business risks

&protect financial and operational stability of payment systems” *

+ECB on Financial Crisis follow up:report of main lesson from financial crisis & follow up actions on EU Financial Market Infrastructures

RISKCONTRO

L

OPEN ACCESS

EBA ClearingThe right Balance

* Article 28 of PSD

After all, if we analyse the PE-ACH and the whole EBA CLEARING platform in line with the PSD requirements, we can consider ourselves fully compliant.

In the above slide, we have on the two pans of the balance the text of the article 28 of the PSD, which defines the access rules to the payment systems.

The more I read it, in my role as Representative of the company and as a banker involved since the beginning in the foundation of EBA CLEARING, the more I come to the conclusion that EBA CLEARING has always respected and honoured these principles, obviously in the context of precise situations and market evolutions.

On the Risk Control plan, we will have to take into account the recent conclusions of the ECB following the financial crisis, which will certainly have a regulatory impact on the evaluation of open access, if we consider that the monitoring activities foresee a strict oversight of the participants and take into account their financial stability.

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However, EBA CLEARING relies on an accurate and well-balanced management, which allows for enlarged participation models and provides risk protection tools that ensure the solidity of its services.

The company has built up this experience throughout the years thanks to its supranational nature, which has always prevented its decision-makers from taking anything for granted, and because we can count on the oversight and cooperation of the ECB.

EBA CLEARING’s SEPA Services are also open to Payment Institutions, which can participate in these services as Indirect Participants. Alternative solutions may be assessed, but the ECB guidelines regarding the relationships with TARGET2 represent a sort of prerequisite.

In addition, with reference to the PSD and SEPA, we must not just consider the weight and the impact of the adoption, but I believe, we also have to evaluate the “revolutionary” contribution they bring, by changing the rules of the game or by formalising existing realities kept so far at the margins of the financial schemes, like for example the context in which money remitters operate.

Numerous market analysis reports conclude that a revolution is taking place in the payments market, which impacts the roles of traditional and non-traditional players, and not just an innovation process affecting the evolution of an existing model.

Traditional service models and offerings are decomposed to be again composed in different solutions, which often reuse existing components, but from a technological point of view require flexible and integrated infrastructure.

Successful models start from strong competencies and vertical specialisations but also have the capability of achieving cross-integration in order to avoid silo offerings.

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SEPA & E-SEPA landscape

E.g.

Online payment

E.g.

E-invoicing

E.g.

SDD E-mandate

SEPA Credit Transfer

SEPA Direct Debit

Cards products

E.g. Verified by Visa, Mastercard

Securecode

Clearing & Settlement Mechanism (CSM)Infrastructure

Scheme, product

E-SEPAValue added services (for online channel)

Sepa Card Framework

Source: Innopay – May 2010

To conclude this point, I will show two graphs that can be found in a document on on-line payments recently published by Innopay, a neutral third party.

While looking at this first graph, some thoughts of different nature are possible. I would just like to offer some additional food for thought: Is there any economic, architectural, logical rationale that restricts the usage of the PE-ACH to clearing and settlement activities for the SEPA Credit Transfer and Direct Debit only? Or could the lack of an aggregation factor be one of the reasons that prevent the development of other schemes?

If we wish to remain in a traditional context, we could wonder why the balances of any new future European scheme related to the cards business should not be settled in EBA CLEARING as well, which would further optimise our liquidity management.

As regards the so-called e-SEPA, you are aware of the initial contacts established with the EBA Association on e-invoicing, and their request to analyse operative initiatives and streams of activities.

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E-invoicing is a valuable initiative and surely EBA CLEARING will not fail to support the community if areas of development in the cooperative space will be found.

I believe that in this context the first cooperative space that should be evaluated is the EBA CLEARING SWIFT ecosystem.

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PSD and online payment networks: roles and actors

Merchant

Customer-supplier relationship

Who

lesa

le b

ank

rela

tions

hip Retail bank relationship

Scheme

Product/service delivery

Transaction data & money transfer

Money transfer

Issuer

Transaction data & authorisation for money transfer

Acquirer

Transaction data

PSP

Payment request

Transaction data

Consumer

Interbank Relationship

Source: Innopay – May 2010

By talking about online payment networks, I would like to address the theme of this session and come to the following conclusions:

Web solutions make new models emerge and technologies converge, putting the role of the ACHs under pressure and generating the need for more and more flexible technological integration and real-time operations.

However it is not just a matter of activities, but it is also a matter of roles.

Slide 14 contains a traditional scheme for a web solution. But if we just think about the role of the so-called “new entrants” and their formalization under the PSD, the scheme can become as illustrated in slide 15:

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PSD and online payment networks: evolving roles & actors

Merchant

Customer-supplier relationship

Who

lesa

le b

ank

rela

tions

hip Retail bank relationship

Product/service delivery

Transaction data & money transfer

Money transfer

Issuer

Transaction data & authorisation for money transfer

Acquirer

PSP

Payment request

Transaction data

Consumer

Scheme

Processing / ACH

A Payment Service Provider acting as a service provider, which enables online transactions for merchants, can correspond to the acquirer and can replace it and find new types of partnerships. And this is just one of the possible alternatives.

It is a fact that the banking system should not perceive itself as a besieged blockhouse: if we manage to overcome this syndrome, although understandable, we could find new forms of cooperation and new commercial offerings.

We could enhance our assets not just in the processor and ACH roles.

Why should we not analyse what opportunities become possible thanks to a better control and involvement in the scheme management?

EBA CLEARING is following closely the progress of the e-payment framework and has included in its to-do list the identification and evaluation of any potential opportunities that may arise, also thanks to the contacts with different e-payments providers.

It is up to the banks to decide if they want that a company like EBA CLEARING helps us to move ahead in the future with the objective of achieving the maximum level of efficiency.

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As Robert Schuman stated, 60 years ago in his famous declaration: “Europe will not be made all at once or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.” 

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Activities 2009/2010

For further details on the EBA CLEARING activities, please consult:

Report of the Board 2009

Overview of KeyActivities 2009

Available at www.ebaclearing.euAlso available: leaflets on EURO1/STEP1 Services and Sub-Participation as well as on STEP2 SEPA Services

EURO1 Service: Minimising the cost of liquidity for payments

 

For those of you who would like to get further information on the topics addressed today and on the activities of the company, more details can be found in the above-mentioned EBA CLEARING documentation.

Giorgio Ferrero Chairman of EBA CLEARING Rome, 17th June 2010

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