The preparation of interbank payment clearing and settlement systems in the European Union for introducing a single European currency would require, on the part of these systems collectively, a minimum timescale of two years and a total cost of around ECU 132 million.
Although some of the changes to interbank systems must precede those to be made by banks, the estimated timescale would, in most cases, be within the period of three to four years required by banks to adjust their own internal systems.
This report presents the findings of a survey undertaken by the Banking Federation of the European Union on the timescale that would be required and costs that would be incurred by interbank payment clearing and settlement systems in the European Union for introducing a single European currency.
This survey is complementary to the Federation's survey on the "Introduction of the Single Currency: A First Contribution on the Practical Aspects", which was published in March 1995.
1. Systems covered
The Federation survey of interbank payment clearing and settlement systems covers a representative sample of both domestic and international systems. Payment operations out-sourced by banks to third parties, which are already covered in the main Federation survey cited above, have been excluded.
a) "Domestic" systems. Interbank payment clearing systems operating in 11 (out of 15) Member States of the European Union (i.e. Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Spain, Sweden and the UK) have participated in this survey. Such systems can be described as "domestic" in nature in that they handle payments in domestic currency between banks located within the same country; some domestic systems do however have the capability to interface with international systems (e.g. SWIFT) for cross-border payments.
b) "International" systems. Additionally, five interna-tional organisations have participated, namely SWIFT, Europay International, VISA International, Eufiserv and Eurogiro. Organisations which operate at an international level have examined the implications of the transition for their operations within the European Union exclusively.
2. Assumptions which affect the overall results
In view of the uncertainties surrounding the introduction of a single currency - in particular about the timetable and the countries which will participate - it was necessary to build a framework of assumptions for the transition within which interbank systems could work in making their responses. These assumptions are working hypotheses intended to ensure consistency and to simplify the enquiry. They strictly follow the assumptions made in the main Federation survey cited above.
The estimates of costs and timescales in the report are therefore only valid on the basis of the following assumptions:
- A "big bang" transition to a single currency implemented concurrently by all Member States. The survey's assumption of "big bang" is as follows: on a given date ("E-Day") banks would convert their internal accounting and interbank settlement mechanisms from national currency to ECU. With effect from this date, banks would only issue ECU notes and coin to the private sector but would, for a period of several months, continue to accept notes and coin, which would be withdrawn from circulation. It is assumed that cheque and electronic payments made prior to E-Day would be denominated in national currencies (and converted to ECU for processing if necessary) and all payments made on or after E-Day would be denominated in ECU;
Interbank payment clearing and settlement systems will continue to operate throughout the transition to minimise disruption to customer services. Interbank clearing systems will interface with banks (or directly with customers) in national currencies prior to E-Day and in ECU after this date;
- Appropriate deeming legislation will have been put in place by the authorities to clarify all contractual and other legal issues that banks and interbank payment clearing and settlement systems would face. In particular, the legislation must ensure that contracts remain legally valid under the new currency, thus avoiding all need for renegotiation or redocumentation;
- Full public-awareness programmes will be initiated by the public authorities;
- The supply of specialist external resources, especially in the area of information technology (IT) expertise covering both software and hardware requirements, will be sufficient to meet the industry's requirements throughout the transition, and the price of such services will not rise in response to an excess of demand over supply. (There has not been an opportunity to corroborate with external suppliers that they would be able to meet the demand of the banking and other sectors):
- All other necessary action will be taken in good time by the authorities;
- Existing payment systems structures will continue, i.e. there will be no changes to existing domestic or international payment systems and there will be no new systems developed.
Certain assumptions were also made regarding the name of, and symbol for, the single currency, and the number of decimal places to be used. These decisions affect the formats used in the interbank systems and any changes to the assumptions could have a significant effect on the costs and timescales of implementation of the single currency.
If banks were given less time than the three to four years which they require for alterations to their own internal systems, there would be a knock-on effect for the costs of interbank systems; this would lead to significant additional costs as a result of the foreshortening of the various phases initially scheduled.
The main results of the survey of interbank systems are as follows.
The survey shows that, for interbank domestic and international payment clearing and settlement systems, the introduction of the single currency would require, on the part of these systems:
* a minimum timescale of 2 years. This timescale would increase to four years if the estimates given by some systems - such as those operating end-to-end infrastructures (e.g. card schemes or processing systems whose estimates include the time required to refit point-of-sale terminals) - were included.
This timescale only relates to the last phase of the introduction of the single currency, namely the implementation phase, in which the detailed design and implementation of the many systems and other changes are carried out, prior to a specific time (or times) when the single currency is actually introduced.
Interbank organisations consider that most of the changes they need to make to their systems could be introduced simultaneously with those to be made by banks. In these cases, the time required for such changes would fall within the overall timescale estimated by the banks themselves for alterations to their own internal systems.
In some cases, however, it may be necessary for the interbank systems to undertake certain changes before banks can begin their own alterations; in those cases, the time required would be in addition to that required by the banks themselves.
Even in those cases where changes required by interbank systems should be made to the systems before banks begin their own alterations, the time required would, in most cases, be within the period of three to four years required by banks. In this context, it will be important to ensure that, in those areas where interbank systems must develop amended procedures and specifications before banks can commence some of their transition work, these specifications are developed and published as early as possible, in order to avoid additional delays for the implementation in banks.
The preparation of interbank systems for the introduction of the single currency would require, on the part of these systems collectively:
* a total cost of around ECU 132 million. This is a total survey cost, i.e. the aggregate of the costs of all the systems surveyed. Individual costs vary signifi-cantly between systems, depending on the relative balance of changes to be made by the system itself and by the individual bank members of the system.
In most cases, however, the estimate of costs relate only to the central costs which would be borne by the interbank systems, i.e. exclusive of any costs that would be incurred by banks at either end of the transaction. For example, whilst the costs of bank stationery or management information for a payment via SWIFT are included within the costs reported by banks in the main Federation survey cited above, they are not reported here as a central cost for the systems.
The division of responsibilities between an interbank system and its member banks does however vary from system to system. The results for some countries, therefore, include costs which in others would be borne by the individual banks. Although significant in its own right, this figure is in any case relatively small when compared with the total costs reported by banks. It amounts on average to no more than 1 to 1.5% of the total cost to individual banks, estimated at ECU 8-10 billion.
3. Remarks on the variations between interbank systems
Differences in reported costs and timescales between the interbank systems in the survey mainly reflect the nature of the systems:
- Most interbank systems have relatively small amounts of work to undertake themselves, the bulk of the change being borne by the member banks of the system;
- Costs rise according to the extent of the infrastructure owned by the system, rather than by individual members. This may range from virtually none (e.g. the Cheque and Credit Clearing Company in the UK), to having a central processing facility (e.g. PBS in Denmark), or to owning substantial numbers of terminals or ATMs (e.g. Banksys in Belgium);
- Most interbank systems simply switch payments data between banks, and for those the costs are small;
- The costs of implementing change become very substantial where full end-to-end processing is provided;
- Similarly, a few interbank systems (e.g. an interbank company which both issues and processes payment cards) have direct customer relationships with private-sector users. In these cases, their costs are equivalent to those of banks undertaking the same functions.
- Card issuer and acquirer systems will make every effort to remain fully operational during the transition to avoid operational disruption on a worldwide basis - hence the need to provide for a sufficient period of preparation and implementation.
It may, however, be necessary to make some changes to current practice for a very limited period. Any such changes would be the subject of discussion and consultation, and would be clearly advertised to customers.
- Payment systems and card schemes will need to agree common industry operational procedures (e.g. governing amount differences which span E-Day) as early as possible in the period of preparation for conversion to a single currency.
- Some cross-border payment systems base their charging structure upon the turn inherent within exchange-rate conversion. In a single currency environment, this charging structure would no longer be possible and alternative fee structures would require agreement between scheme members.
The introduction of a single European currency will be a significant event for most payment systems operating in the EU, requiring careful preparation and planning. That said, for the majority of interbank systems, the bulk of the work will be undertaken by the member banks, rather than by the systems themselves. Hence the banks, collectively through the payment systems, will have a crucial rôle of defining the precise details of the changes which will need to be completed before they can start individually on the major task of implementing change.