Transnational governance of innovation in payment services: A case study of the Single Euro Payments Area

This chapter examines the Single Euro Payment Area (SEPA) as a case study of the role transnational business governance interactions (TBGIs) might play at the frontier of innovation in financial services. In 1999, when the EU asked European banks to eliminate barriers to cross-border electronic fund transfers in euros in time for the official launch of the euro in 2001, neither regulators nor banks could have imagined that SEPA would not be completed until 2016. While EU regulators blamed the delay on industry recalcitrance, this chapter explains it as a failure to mobilize TBGIs. EU regulators failed to recognize the public good characteristics of proprietary payment systems, while regulators and banks alike systematically underestimated the difficulty and cost of modernizing banks’ legacy computer systems and re-engineering their business processes. As a result, the emergence of a productive coregulatory relationship in which the EU would catalyze market-driven technical and regulatory innovation was frustrated. The EU became increasingly heavy-handed, rejecting the banks’ cost-recovery proposals, countermanding industry consensus and ultimately stripping the self-regulatory European Payments Council (EPC) of policy-making authority. Without a cost recovery mechanism to incentivize participation, the EPC made glacial progress and could not convince many banks to join SEPA even after it was in place. The chapter suggests that constructive TBGIs can be achieved by treating proprietary market infrastructures as partial public goods and establishing consensus-based co-regulatory processes, but warns that future EU-bank interactions may suffer from the same downward spiral of frustration due to regulators’ unwillingness or inability to factor commercial realities into their policy calculus.