European Union: European Commission Investigates E-Payment Standardisation Initiative

Last Updated: 25 November 2011
Article by Rachel Iley

The European Commission has announced1 that it is looking into the standardisation process for payments made over the internet that is being led by the European Payments Council ("EPC"). The investigation is another example of the Commission's interest in standardisation and interoperability. The Commission recognises that standard setting can be efficiency enhancing and promote interoperability and competition; however, how standards are set, used or accessed also has the potential to restrict competition, including by restricting the opportunities for non-participants.

What is the background to this?

The EPC is the co-ordination and decision making body for the European banking payments industry2. Its membership comprises some of the EU's largest banks. The EPC has been working since 20083 to develop a Europe-wide standard for online payments, through its self-regulatory project the Single Euro Payments Area ("SEPA") for cards4.

As things stand currently, the majority of e-payments systems only work within national borders. SEPA will establish a standard framework for e-payments, to enable internet users to buy online regardless of where they are located in Europe, and pay the merchant using their own internet banking services and their current bank account. The aim is to eliminate differences between national and cross-border payments, which could achieve significant cost savings and efficiencies, and to bring benefits such as equal time limits, fraud risk levels, and processes. It is also hoped that SEPA will increase competition between banks and enable them to consolidate their payments processing onto common platforms across Europe. To facilitate this, SEPA would see the development of common financial instruments, standards, procedures and infrastructure.

In June, the EPC published its latest draft document, version 5.5 of the Standardisation Volume, for public consultation5 . This defined the functional and security standards requirements as well as an evaluation methodology designed to achieve interoperability based on open and free standards within SEPA.

What is the Commisson concerned about?

The investigation has been prompted by a complaint – the identity of the complainant has not been revealed but it is known that this follows a complaint made by the German online payment provider, Payment Network AG, earlier this year.

The Commission has made clear that it supports the work of the EPC to develop standards in this area. However, the Commission intends to examine the standardisation process carefully to ensure that competition is not unduly restricted, for example by excluding new entrants and payment providers who are not controlled by bank.

The EPC has promoted the creation of the Cards Stakeholders Group ("CSG") together with representatives of five sectors also active in the cards domain, including retailers, vendors (e.g. of card payment devices and related IT systems), processors, card schemes and banks. Nonetheless there seems to be some concern on the part of the Commission that competitors in the online payments market, particularly payment solutions providers that are not linked to a bank (such as PayPal and Hipay), have been or are being excluded from the process, and that this could result in higher transaction prices for web merchants and ultimately consumers.

This could breach the EU rules against restrictive business practices set out in Article 101 of the Treaty on the Functioning of the European Union6.

How do the competition law rules apply to standardisation?

Standardisation can be efficiency enhancing for a number of reasons. For instance, standards can establish technical interoperability and so encourage competition between technologies developed by different companies, reduce the time it takes to bring a new technology to the market, facilitate innovation by allowing companies to build on top of agreed solutions, and reduce transaction costs for sellers and buyers.

However, there is potential concern under competition law that how standards are set, used or accessed can discriminate against, or even exclude, certain parties. Further detail on how the competition law rules apply to standard setting is provided in the Commission's new guidance on horizontal co-operation agreements, published in January7, and our recent article summarising this8.

The Commission has not indicated exactly what aspect of the EPC's standards initiative is being investigated. However, a number of fundamental principles that govern how standard setting is carried out, would seem to be particularly relevant in this context:

  • the standard setting organisation (SSO) should guarantee that all relevant actors can participate in the process leading to the selection of the standard - an appreciable proportion of the industry should be involved in setting the standard transparently;
  • the information needed to apply the standard must be available to all those wishing to enter the market;
  • the rules of the SSO should also safeguard against the process from being biased towards certain participants: the solution adopted should ideally be technologically neutral and it must be objectively justifiable why one solution is adopted over another;
  • any industry standard must remain as open as possible and be applied in clear, non-discriminatory manner;
  • access to the standard must be possible for third parties on fair, reasonable and non-discriminatory terms; and
  • there should be no restrictions placed on the parties' freedom to develop alternative standards or products.

What can the Commission do if it considers there to be a competition law problem?

The Commission has a range of sanctions it can adopt to deal with any breach of competition law it identifies. The restrictions (and sometimes the entire agreement) can be rendered unenforceable, and parties may be ordered to cease or modify the arrangement. Parties may be fined up to 10% of their worldwide turnover. Third parties can also bring an action for damages or, in appropriate cases, an injunction in the civil courts.

The resulting adverse publicity and reputational damage can also be of concern. Added to this, those under investigation usually have to dedicate significant time and resources to dealing with the investigation or case and there is also an increased risk of on-going surveillance by the competition authorities following an infringement, as well as of future complaints and investigations under EU or national competition law.

The EPC has made clear that its standardisation project is a work in progress and that no final documentation has been published. Therefore, in practice, if the Commission does have concerns, there might still be room for the EPC to change any practices that are found to be problematic, such as taking positive steps to ensure that competitors in the online payments market are informed and involved to the extent necessary to fulfil the EPC's obligations under competition law. However, at present, the EPC has emphasised that it does not agree with the allegations that its work in this area could potentially discriminate against certain market participants.

What will happen next?

The initiation of proceedings does not imply that the Commission has made a finding of an infringement; only that the Commission will deal with the case as a matter of priority. The Commission will start by gathering information and views from those involved, and other interested parties. There is no deadline to complete the investigation and its duration depends on a number of substantive and procedural factors.

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Footnotes

1. The Commission's announcement is at: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/1076

2. For further information on the role of the EPC, see: http://www.europeanpaymentscouncil.eu/content.cfm?page=what_is_epc

3. The SEPA project, in fact, can be traced back to 1990, with the publication of a European Commission report 'Making Payments in the Internal Market'. This outlined a vision for a single payments area, stating that "the full benefits of the single market will only be achieved if it is possible for business and individuals to transfer money as rapidly, reliably and cheaply from one part of the Community to another as is now the case with(in) most Member States". There then followed a number of legislative acts designed to work towards achieving an integrated e-payments system, such as Regulation (EC) No 2560/2001 on Cross-Border Payments in Euro (now repealed), Regulation (EC) No 924/2009 on Cross-Border Payments in the Community and Directive 2007/64/EC on Payment Services in the Internal Market, all accessible at: http://ec.europa.eu/internal_market/payments/legislation_en.htm

4. For further information about SEPA, see: http://www.europeanpaymentscouncil.eu/content.cfm?page=sepa_vision_and_goals

5. This can be accessed via: http://www.europeanpaymentscouncil.eu/content.cfm?page=epc_/_csg_consultation:_sepa_cards_standardisation_volume_-_book_of_requirements

6. Text of Article 101, Treaty on the Functioning of the European Union: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12008E101:EN:NOT

7. Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:011:0001:0072:EN:PDF

8. Surviving Standards Wars and the Commission's New Horizontal Guidance: http://www.kemplittle.com/html/stay-posted/publications/short-lines/surviving-standards-wars-june-2010.html?SESSIONFRONT=08bf16dca0244dd52bd7c3cb752a9462

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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