Requirements of a unified european payment system for Small and Medium sized businesses (SMEs)

Nicholas Goulding (*)


I. INTRODUCTION

This paper will aim to examine three main areas. Firstly, why in the context of a unified payment system we should focus on the current and future requirements of SMEs. Secondly how do we define those requirements? Thirdly can these requirements be addressed? Although the impact on individual SMEs will clearly vary widely, this paper will examine the subject from the perspective of the impact on the Small Business Community as a whole.


II. WHY CONSIDER THE NEEDS OF SMEs?

In examining the first of these questions we need to understand why the Commission and indeed the banking community should choose to focus on the views of SMEs as they examine any potential unified payment system (and indeed EMU). SMEs are a vital part of the economies of all member States. SMEs have been responsible for the vast majority of employment creation over the last decade. SMEs therefore are essential to the fulfilment of the Community's fundamental objectives.

The single market was intended to give a significant boost to the achievement of the community's fundamental objectives. The single market has, however, failed to the extent that an increasing proportion of the community's workforce is unemployed. Jaques Delors in the "White Book on Employment and Growth" recognised the importance of this single issue. In FPB's view the main reason that the single market has not fulfilled its promises is that the key job creators, the SMEs, are still largely excluded. This observation provides the main impetus for Commission action in facilitating the entry of SMEs into the single market. From the perspective of the Banking industry the potential for expansion of such trade represents a vast potential market which it can help to unlock, and which they would be foolish to ignore.

Next we should consider why SMEs themselves should be concerned about cross border payments. This focus is sometimes questioned on the grounds that only a small proportion of SMEs are actively involved in cross border trade and cross border payments are such small part of the costs involved in trading across borders. Although these observations are true, they rather miss the point. Although the proportion may be low, the numbers are large. Some 10% of UK VAT registered SMEs are engaged in cross border trade either as importers or exporters. This amounts to some 150,000 businesses.

Many SMEs are not involved in the single market because of the barriers. Therefore the fact that a relatively small proportion are currently affected is no reason not to tackle the barrier. FPB research suggests that a further 10% of UK VAT-registered SMEs would trade cross border if the barriers were lowered. At the same time many who currently do trade, only do so on an intermittent or very small scale basis.

SMEs are as a rule financially weak. An environment where payment is uncertain or slow, and where charges take a significant slice of gross margin will always deter SMEs. A further reason that cross border payments deter SMEs, is because when transactions are infrequent, then the same lessons need to be relearned each time, especially if conditions have changed in the interim.

Different market practices, language, differing taste, uncertainties of court enforcement differences in procedure and delays in payment all combine to deter SMEs from cross border trade. Problems created by payment systems are only part of the continuing barrier to trade for SMEs. Cross Border payments do, however, present problems on which there is scope for progress. In any case, even where costs may be apparently small, they can represent a significant part of the SMEs margin and a significant barrier.


III. SMEs AS PAYMENT SERVICE CUSTOMERS

Most SMEs are financially unsophisticated. In most respects they do not differ from the Banks' private individual customers. Payment systems that are complicated and uncertain will always deter them. If we are to create the conditions which will encourage SMEs to enter the single market in significantly larger numbers, any unified payment system developed needs to consider the following areas.

1. Levels of services: It is important that the speed of transaction and level of charge do not discourage trade, and further that there are options to suit differing customer requirements.

2. Certainty and transparency: The service needs to be clear and understandable to the customer, who must have certainty that what has been promised will be delivered. This is especially important in the area of charging and time taken for the payment to reach the destination account.

3. Redress: Where things go wrong, redress should be simple and inexpensive. This implies that not only the mechanism for obtaining redress, but also the questions of where liability for the provision of the service falls needs to be clearly addressed.

In considering systems of cross border payments, we are often told that technical barriers make certain developments impossible. There are certainly complexities within the system, but these are of no more importance to the customer than, knowing how the motor trade distributes vehicles is to the typical purchaser of a new car. All that matters is that the service offered is clear and understood, i.e. the car will cost £x and will be delivered by day "y". On the other hand when things go wrong the customer does want to know how to complain and who is liable.


IV. IMPROVING THE FRAMEWORK OF CROSS BORDER PAYMENT

FPB has supported the Commission's efforts to improve the conditions for cross border payments. The Current directive now entering Co-decision procedure follows two separate surveys of cross border payment performance. The initial survey was criticised on various grounds by the European Banking Federations, although they have been unable to convincingly refute the findings. Our view is that the survey was broadly valid if the results are properly interpreted. Suffice to say, the survey revealed significant problems in all the areas set out for consideration, especially double charging. Following the first survey, the Commission paper which followed the initial survey set out its proposals for a directive together with the various performance criteria which would trigger the directive. These criteria were measured by the second survey, but again performance failed to meet the criteria.

It is important to remember this is a customer/supplier relationship. The less legislation interferes with this relationship the better. However, we also need to recognise that this is a market place where the customer is ill-informed and unable under the current environment to make rational choices between suppliers. In an ideal world suppliers would provide the necessary framework. However, if they will not, then there is justification for framework regulation to establish the basis of the relationship, ensuring transparency, and redress. Such regulation, however should not interfere in the core areas of price or level of service. The customer (business or individual), should understand what is being offered, and have reasonable certainty that the service he contracts for will be fulfilled, and that there are effective means of redress where it is not. But it is in no-one's interest for Government to determine what the market can offer. Those who call for such controls need to reflect that banks are commercial organisations who can only continue to provide a service where they can make sufficient a profit

FPB rejects the more prescriptive approach advocated by some so-called consumer groups. A publicly imposed straitjacket of charge levels and service criteria would over time disadvantage the bulk of customers. It would do this by restricting the availability of service, and curbing innovation. In addition, the level of information such groups advocate would significantly increase the cost for customers generally, while being irrelevant to all but the Consumer fanatics.

FPB argued that certain limited criteria should be covered in community legislation if an effective payment environment was to be created. The Commission's Directive goes some way to meeting these demands, although certain issues are not covered.

1. Levels of services

In outline our position is that Community legislation should not lay down absolute price or service conditions although a "default" which applies unless otherwise specified might be useful. The key issues are:

Transfer times: FPB does not believe that any targets should be imposed on the banks. The banks, however, should be bound by their own promises. Prices quoted should specify the maximum time for payment to be received. Where the target time is not met, the originating bank should be liable to pay compensation through a simple and inexpensive redress scheme.

Level of charges: FPB does not believe that the Commission should interfere with charge levels. The prices charged should reflect the service given, A business could reasonably be expected to pay more for a more rapid service. Charges should be expressed in a manner which is clear and comparable. Whilst banks need to profit from the service, from the point of view of the Community's objectives however, the higher the charges, the more difficult it will be for SME's with their low volumes to engage in cross border trade. FPB believes that a properly transparent market place without cross subsidies is the most efficient way to deliver the right service at the best price. However, the Commission should continue to monitor charges.

If cost should remain a significant barrier, then this area should be reconsidered at a later date, with a view to introducing non-binding benchmark levels in agreement with the Banking industry.

2. Certainty and transparency

Unless the banks improve customer understanding through greater certainty and transparency, the relationship will continue to be problematic.

Certainty: The bank accepting payment for transmission should be able to state the time and cost involved. Liability for delays or excess charges should rest with the originating bank. Once a customer has entered a payment into the banking system he should be certain that the transmission will take place within the agreed timescale. This is already generally the case within domestic banking systems, but it is not clear that the same perception is held of cross border payments

Transparency: The charges and prices of competing services should be expressed in a manner which is clear and comparable. The agreement setting out quality and price must be clear and understandable to both parties. The lack of transparency may well contribute to the perceived lack of certainty (see point above)

The directive should provide for minimum levels and types of information, so that customers can effectively compare the services offered by the different providers. Individual banks should be required to advise their customers precisely what service they offer. This should not be taken to mean that customers are overwhelmed by oceans of small print, but that key information is made available in forms which are easy to understand. More detailed information should be available on request, and clearly signposted.

3. Redress

Where things go wrong, redress should be simple and inexpensive and must deal with the issue of liability.

Liability: The originating bank should be responsible to the customer for the fulfilment of the agreement. If the bank fails to meet its obligations (either the cost or the timescale) the customer should be entitled to redress. The bank then could of course pursue redress itself with any other bank in the chain responsible for the problem. This is essential to provide certainty to the customer, and is no more than the bank fulfilling its promise.

This service consists of the transmission of an agreed amount in an agreed time frame to the recipient's bank

account. FPB rejects the suggestion that responsibility for the payment process should end when the payment reaches the payee's bank. Responsibility should end when the payment actually reaches the payee. Up to that point the relevant contract should be that between the payer and the initiating bank

This is the same as the provision of any other service, banking is no different. If I contract with a builder for work in my house, and he contracts with another company to complete the electrical installation, then any complaint I have is with the builder with whom I contracted, not the electrical company. It is up to the builder to pursue redress against the electrician.

Where the sender has agreed to pay all charges, then the destination bank should be precluded specifically from raising an additional charge, before the full value of the payment reaches the destination bank account. If the recipients banker subsequently levies an account charge in relation to receiving the payment, then this should be an issue purely between the recipient and his bank, the originator and his banker having fully discharged their respective obligations.

Redress: Where complaints arise, there should be simple and accessible systems for pursuing the complaint and obtaining redress. Initially, it is preferable that complaints should be dealt with between customer and supplier. If the response from the bank is unsatisfactory, there should be access to an ombudsman with the power to make binding decisions. Ombudsmen in each member state should have an obligation to support the investigations initiated by ombudsman in other member states. A customer should be able to initiate a complaint through any of the national ombudsmen regardless of where the alleged error took place e.g. an SME based in Greece initiates a payment while in France to a German supplier. There is a problem with the transaction. The SME should be able to pursue the issue through the Greek Ombudsman who would deal with the French Ombudsmen to get redress as appropriate.

We consider the absence of provision for the establishment of effective redress schemes in all member States is a weakness, as such schemes are not equally effective in all states, and in any case are focused on domestic concerns. In some cases cross border payments, or complaints from foreign customers are expressly excluded.

An effective redress scheme should provide inexpensive and rapid (within 90 days of the complaint) resolution and compensation for failure by a bank to meet its published obligations. This liability should always fall on the bank accepting a payment for transmission. (Where the fault lies elsewhere in the chain, then it should be up to the accepting bank to pursue the other bank for damages except where the payment has actually reached the recipients bank account). Such provision would not offend against the principles of subsidiarity, as firstly the establishment of an effective single market is properly a function that rests at EU level.

It is difficult to think of an area more crucial to cross border trade than cross border payments. The details of national schemes within the overall framework should be decided by member states. The European rules should establish the minimum requirements for national complaint centres and include binding rules on the handling of cross border complaints, and their co-operation requirements with other schemes. The findings of national complaint centres regarding cross border payments should be published regularly. The schemes should provide specifically for compensation where payment has not been made in the time agreed, where double charging has occurred and where incorrect charging has occurred (i.e. charges levied at the wrong point).

As part of the transparency objective, an agreed deadline for payment to reach the destination account should be clearly specified. Once the date for payment passed without the payment being executed, the customer should have the option of demanding an immediate refund payable on the same day, plus interest, or continuing with the payment. In the latter case, he should be entitled to interest. The customer would not of course be able to opt for both. Once the instruction to halt payment was received, the customer should be entitled to an immediate refund. Should the transaction be subsequently executed, then it should be up to the bank which has failed to fulfil its contract to recover the funds from the recipient. It should be remembered that this situation would only arise where the Bank was in breach of its original undertaking to make the payment within the agreed period.


V. CONCLUSION

This paper has attempted to set out the criteria within which any unified Payment structure should work. The establishment of such an environment would assist in facilitating cross border payments for SMEs, and encouraging such businesses to enter into the single market. The realisation of this objective can only add to the prosperity of the community as a whole not least the banking sector. I would therefore urge all those involved to think constructively about the needs of SMEs and build them into their product design and decision-making.

14-09-1995


(*) Head of Policy The Forum Of Private Business. Ruskin Chambers, Drury Lane, Cheshire WA16 6HA UK. The Forum of Private Business is a UK based membership organisation, representing 23,000 UK SMEs. Membership profile broadly reflects the distribution of VAT-registered businesses generally. Although membership underrepresents the smallest businesses proportionately, very small businesses still represent the largest single category of member.

FPB is a research based organisation. Before FPB reaches an opinion, all policy issues are put before members through our range of postal and oral ballots. This intensive knowledge base places FPB in a good position to represent the views of SMEs. FPB has been particularly active in the sphere of Banking and the relationship between Banks and SMEs.

FPB represents European SMEs on the European Commissions Payment Systems Users Liaison Group (PSULG) and is an active member of the European Union for Craft Small and Medium sized enterprises (UEAPME), the principal pan-European SME organisation. Within the UK, FPB maintains close communication with APACS (Association for Payment Clearing Services) as well as with individual Banks.


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