Since the year 2000, after the European Commission meeting in Lisbon determined to create a fully integrated European economic and monetary union, there have been significant efforts made to create a single European financial marketplace within the euro trading zone. Forty-two legislative directives have been created to bring down the barriers in cross border financial trading. A large number of meetings and conferences have taken place to move forward the creation of a single financial marketplace across the eurozone. However, even with all of this time and effort spent on creating this marketplace, it still does not exist. And isn’t all of this going to disappear anyway now that France and the Netherlands have given European integration a big thumbs-down?
For five years, European financial services have been battered by a range of directives, designed to create a level playing field for financial services across the eurozone. These directives range from the simple to the revolutionary, and cover everything from savings to securities, fraud, money laundering and payments.
In particular, European banks have been waiting for the New Legal Framework (NLF) for the Payments Directive. This Directive should have been released during the first quarter of 2005 but is still being drafted, with many not expecting to see it until early 2006 or even later. The importance of the Directive will be that it legitimizes all of the operations required to run PE-ACH (Pan-European Automated Clearing House), PE-DD (Pan-European Direct Debits) and all the other components of SEPA (the Single Euro Payments Area).
However, in light of the rejection of the Constitution by France and Holland, alongside the in-fighting among Europe’s leading politicians over the future of Europe, a range of serious questions need to be answered before SEPA can move forward.
Moving SEPA Forward
These questions include speculation over what happens if the Constitution could be agreed and moves forward as originally planned, to what happens if the economic union is stopped and the euro needs to be dismantled. The latter question would have been heresy until recent times but, after the ‘non’ and ‘nee’ votes, the Bundesbank has questioned the future of the euro and one extreme Italian minister has asked for the return of the lira. With all of this uncertainty, is SEPA still a valid vision for banking in Europe?
Many would say that the SEPA vision, from a banker’s viewpoint, was never there in the first place. Most of the movement towards integration of the eurozone and European financial markets has, thus far, been driven by politicians. The Financial Services Action Plan (FSAP) itself came out of the political will power of the Lisbon meeting of 2000 that created a vision to make Europe the most powerful economic force by 2010. That economic force is dependent upon a single currency across the players involved – the euro – and an ability to use that currency transparently across the eurozone. Hence, the need for the FSAP.
The lack of movement of the banks to adopt the FSAP and, specifically, create a single eurozone payments infrastructure led to the European Central Bank (ECB) calling all the leading European banks together in 2002 and creating the European Payments Council (EPC). The EPC has done a good job of creating an implementation plan for eurozone payments to support the FSAP. That plan included the launch of STEP2 (straight through euro processing) by the Euro Banking Association (EBA), the creation of TARGET2 for 2007 and the implementation of the Credeuro as well as IBAN and BIC standardization by 2006. All looked rosy in the euro garden. That was until the Constitution vote.
The ‘No’ Votes
It was not so much the vote, as the ripple effect it has had since the rejection of that political union platform. For example, immediately after the French and Dutch rejection, we hear about German Finance Minister Hans Eichel entering into scenario planning for the failure of the euro with Bundesbank President Axel Weber. A few days later, we hear that the Italian extreme right-wing politician Umberto Bossi and his political party, the Northern League, is calling for abandoning the euro and restoring the lira. Apparently, according to a June 2005 survey by Telefono Blu, almost half of Italians miss the lira and think the euro is responsible for rising prices.
Add on to this the political fall-out since the rejection of the Constitution, with France, Germany and Britain all fighting over budgets, rebates, subsidies and costs. That fall-out was brought to a head at the European budgetary meeting on 17 June 2005, which was one of the most bitter meetings since the EU began. Specifically, the debate related to the fact that Britain has had a rebate of €3bn a year since 1984 and France wants it stopped. Not surprisingly, Britain’s Tony Blair rallied against France’s Jacques Chirac, saying that he was using this to shift focus away from the French rejection of the Constitution. He went on to attack the billions of euros given to the French farmers as agricultural subsidies and said Britain would only look at the rebate if France and the EU reviewed their subsidies. After 15 hours of debate, the meeting ended with President Chirac calling Britain’s stance “pathetic and tragic”.
The result was that the euro spiraled further downwards. The euro was already down 10 per cent in value against the dollar in 2005, due to European economies slow growth and poor performance against the USA. The aftermath of 17 June showed the euro losing another half a per cent against the dollar, with the likelihood being that it will continue to slide as you have a combination of poor economic performance combined with political warfare and a budgetary mess. The scaremonger claims that Europe is in crisis. For the financial markets, the question then arose as to what all of this could mean for SEPA?
SEPA: Mired in the Mud?
SEPA was already finding itself mired in mud. On the one hand, you have the SEPA advocates – of which, the European Commission, the European Central Bank, the EBA and EACT (European Association of Corporate Treasurers) are all members. On the other, you have the SEPA skeptics, of which many operational staff within the banks and the large clearing houses are the most vocal. The advocates all have something to gain, while the skeptics all have something to lose.
For example, the European Commission needs SEPA to enable seamless, straight through processing of payments across the eurozone as though it were one country rather than 12. That is why the SEPA vision is that all euro area payments should be as easy to process as domestic payments, and be charged in a similar manner. The European Commission can only successfully create economic and monetary union if such a system is in place.
Equally, as the Eurosystem is the system for all central banks incorporating SEPA and TARGET2, the ECB needs SEPA to be a success. For the ECB, it reinforces its role as the single most important banking authority in the eurozone.
For the Euro Banking Association (EBA), SEPA is also good news. SEPA gives it a mandate to become the PE-ACH using STEP2. The PE-ACH and PE-DD roles are all up for grabs, but the EBA has the licence of the European Payments Council – of which it is a member of the board – and the European Central Bank. Hence, it would be hard for the EBA not to become the most important ACH in Europe and enhance their role and standing across the eurozone.
Impact on Corporate Treasury
Finally, you have the corporate treasurers, represented by the EACT. As I like to think of them, the customer. The customer – both the corporate treasurer and the retail consumer – stand to benefit most from SEPA as it means they no longer have to pay fees to banks across the eurozone for currency movements. Until the Credeuro agreement and EU Regulation 2560/2001, the customer had to pay substantial fees for moving funds between countries and accounts within the eurozone, even though the currency was meant to be a single currency. In fact, until 2002, most of the eurozone banks trafficked the euro as though it were still the days of the deutsche mark, French franc, Spanish peseta and Italian lira. At least, between the FSAP, SEPA and these other changes, the banks are waking up to the reality that the euro is a single currency.
For the corporate treasurer in particular that is good news, because they can now run a euro account using a bank in one eurozone country and cover all eurozone countries from that one account. That means the customer can now choose the most competitive bank in the eurozone to run their whole business.
That must be good news for the Shells, BMWs and Carrefours but is it good news for the banks? Not necessarily. The banks and ACHs are either winners or losers in the SEPA world.
Winners and Losers
The winners are those banks and ACHs that have the economies of scale, structure and leverage to operate in a zero margin pan-European operation. There are only a few banks of that size – ABN Amro, BNP, Deutsche, JPMorgan Chase, Citigroup – and they are the ones most likely to benefit from SEPA as they begin to focus on winning the corporate treasury business for the eurozone operators that seek to place their financial accounting with a single bank.
Similarly, there are a few major ACH operations, such as Voca and Interpay, who believe they offer higher functionality, scalability and reliability than STEP2 for cross-border payments. In particular, for direct debit and credit transfer requirements of a more complex nature, these ACHs are more than likely to gain business with STEP2. What that really means is that there will not be a single PE-ACH, but multiple PE-ACHs made up of the best bits and capabilities of the EBA and those domestic ACHs that have something more to offer.
Equally, the big banks that have size and structure across the eurozone will also potentially benefit in other ways from SEPA. For example, they could easily offer outsourced service to process cross-border payments for the smaller, national banks in the eurozone.
Most domestic banks will not be able to operate pan-European payments operations. The cost will be too high and the returns too low. However, that could outsource cross-border payments to the big players who have size and structure. Equally, and more importantly for these domestic players, most of their domestic customers – especially those focused upon retail banking to consumers – do not make cross-border payments. In fact, TowerGroup estimates that 98 per cent of all payments are domestic. If that is the case, what is all the bother about SEPA anyway? If only 2 per cent of payments are cross-border, why the big concern?
For many, SEPA is nothing more than a noise, and a bothersome noise at that. And that has been the point of this article. The aim has been to raise and answer two questions. First, will the euro disappear – in which case will SEPA disappear too? And second, if the euro stays, is SEPA that important anyway?
First, will the euro disappear? No. The political turmoil and national fall-out created by the budgetary arguments and rejection of the Constitution will be resolved. Even then, the European Constitution was never about the euro and the economic movements within Europe – they were already in play through the Treaty of Nice and the Maastricht Agreement. No, the Constitution was a political vision. It is that vision which is no longer in play. So we should leave the idea about the EU and the euro falling apart well alone. It is only the anti-euro movement that raises that debate and that movement has no legs.
Second, is SEPA that important anyway? The answer is yes. SEPA is a big deal for Europe, for the banks and for European business. In the same way as Europeans can move across borders without changing currencies, they will be able to move across borders without changing banks. Supposedly, they can do that today but, in reality, it does not work well. The vision of SEPA will be one where it will work well.
There will be a level playing field across the eurozone in the financial markets, and treasurers and consumers will have freedom to place business with the most competitive banks. It is that competitiveness, transparency and openness which the European Commission, the ECB, the EBA, the EPC and the EACT want to see in the eurozone. That is not necessarily good for banks, but it will be good for business.
So, the euro will be around for the long haul and hence, so will SEPA. The focus then must be on banks exploiting the opportunities this brings rather than complaining about the loss of margin it incurs. The lost revenues are purely the costs of losing historical protectionism. Like all deregulated markets, there are always some losers. Similarly, there will be some winners. And I would rather be a winner than a loser.
As George Burns said, “I look to the future because that’s where I’m going to spend the rest of my life”. Here’s to a future where eurozone banking wins.