Payments of the Future and the Future of Payments
The European payments market is coming up to an inflection point and the introduction of the Single Euro Payments Area (SEPA) is going to change the payment industry in ways that will make it unrecognisable 10 years from now. National and cross-border Euro payments will be indistinguishable, which will increase levels of service and competition among banks for corporates’ custom and thus lower prices. The drivers for these changes are both external and internal to the industry: regulators and legislators have been pushing for SEPA for some time, and customers have been demanding it. At the same time, technological advances have facilitated innovative operational models within the industry and the liberalisation of governance and ownership models promises to accelerate competition among payments providers.
All of this sounds a bit like the ingredients for the perfect storm, which many, including Voca, have argued will blow away current market structures in one big gust. What we have seen so far, however, has been gradual and continuous progress. There are and will continue to be major changes that will bring major benefits to corporates, but they will occur incrementally rather than all at once. After all, re-engineering the plumbing of the payments system is difficult and needs to be done without compromising its reliability, efficiency and level of service.
About one year ago, the European Payments Council (EPC) and the European Central Bank (ECB) articulated clear timetables for the further development of SEPA. The standard for pan-European credit transfers will become compulsory for cross-border transactions in the eurozone from the beginning of 2006. A pan-European direct debit scheme is proposed for implementation in 2008, at the same time as the introduction of harmonised debit card standards. Plans are also afoot for a priority pan-European credit transfer scheme, known as Prieuro, which is likely to offer credit transfers within at most a few hours. Existing national payment schemes are to be phased out from 2010 and national banking associations are expected to prepare plans for migration to SEPA standards by the end of this year. Decisions are likely to be made in the next few months about how precisely this is going to happen.
The EPC’s intention all along has been that migration to SEPA will be evolutionary, and it is understandably keen to maintain control as it is the banks that will have to bear the greatest burden of change and risk. However, change is not exclusive to banks. Corporates and payments infrastructure providers are key stakeholders in the payments arena and are keen to embrace the opportunity to transform the way we conduct our payments business in Europe.
Most countries have recognised that, given the differences in national payment systems, it would be folly to attempt to harmonise them in one great leap. The EPC is unlikely to select a particular payments processor to process payments under the terms of the schemes it is developing. Instead it envisages that banks and communities of banks will choose a processor for their payments, and payments processors will compete for banks’ business.
Most of the national payments processing infrastructures have stated that they intend to continue to operate in the SEPA era, rather than consolidate quickly into just a handful of processors. What this means is that no single payments processor will have the reach to deliver payments across the EU in the way that national processors have universal reach today, albeit in more limited geographical areas. This implies that they need to cooperate with one another to deliver payments in a unified manner. Under the banner of interoperability, Voca has highlighted the need for European processors to cooperate seamlessly to ensure that payments can be delivered without compromising the speed, cost and efficiency of national payment systems as they operate today.
The early stages of SEPA following 2008 will be marked by a core SEPA payments service that is truly pan-European, and it is likely that there will be a variety of optional services offered to banks and corporates by payments processors. It is also likely that there will be a variety of operational models for payments as well, ranging from bilateral clearing through to layered hub-and-spoke clearing systems. As is always the case as deadlines approach, plans are becoming more realistic. Progress is being made and Voca has been watching these developments with great interest.
Augmenting a core SEPA interbank clearing and settlement service with a range of optional features will give banks the opportunity to reduce their operational costs and to offer a wider variety of services to their customers. By using a central processor to provide increased services to corporates, such as error correction, bulk submissions and reporting of payments and electronic invoice facilitation, banks can reduce their costs while maintaining their revenues. Banks and corporates can both win: corporates receive valuable services and banks minimise the cost of change while enhancing their competitive positions.
As one detailed example, pan-European standards are unlikely to include direct submission as a mandatory element as most countries currently require a corporate to submit files to their banks before they are passed through to the interbank payment processor. Moving to common standards often leads to adoption of the lowest common denominator. In the parts of Europe that are not accustomed to it, however, direct submission of payment files by corporates represents a significant opportunity to increase the efficiency of the payments system by reducing duplication of infrastructure at each bank. The bank nevertheless maintains the commercial relationship to the corporate, but outsources the connectivity to the payments processor.
Banks have the opportunity to help corporates in other areas of the payments value chain as well. Considerable benefits can be achieved through automating the process that runs from the purchase order to payment settlement and reconciliation. The benefits from improving the financial supply chain have been widely recognised by independent analysts and, while there are existing products in the market, none cover the full financial supply chain across all industries and few support integration with banks to improve cash management and financing. Barriers to adoption include the lack of standards, number and size of existing suppliers and implementation costs.
At a recent conference organised by Eiger Systems, Voca was invited to speculate on what SEPA will really mean to corporates. Ultimately, SEPA could well bring about the following advantages for corporates:
This may sound like payments nirvana for corporates, and it will not appear all at once out of thin air. While these advantages also represent a significant threat to banks’ revenues from payments, they also provide an opportunity for them to provide additional services to corporates. By encouraging a competitive environment for SEPA processors, banks will be able to improve their competitive positions relative to other banks based on the payments processors they choose. Corporates have made requests, the industry is responding, allowing competitive forces to actively shape the market. It can only lead to an easier environment for corporates.