SEPA: The Migration and Motivation Challenge for Banks
Banks are forever having to change their internal systems in order to comply with new legislation. But the single euro payments area (SEPA) is not just about internal systems. SEPA implies business change, which will mean the introduction of new retail, personal, institutional and corporate products into the marketplace.
The imposition of the new SEPA schemes on top of existing services, by the start of 2008, poses a significant challenge. But the drive for a ‘critical mass’ of activity to have migrated from domestic schemes to SEPA schemes by 2010 poses a much greater challenge. A market of 20 million corporates and 450 million consumers will have to be moved onto new products.
With 25 countries involved in the establishment of a common system, it is inevitable that not everyone is going to be happy with the changes that SEPA brings and the effects on banking processes and systems throughout Europe. For instance, there will be service changes to well-established products and additional data requirements that supporting systems cannot meet. This imposes changes to payment initiation systems at source or means that cumbersome data augmentation and conversion approaches need to be adopted.
Countries have significantly different payment schemes to the ones that SEPA seeks to impose. Their current payment initiation systems either do not capture all the necessary data that SEPA requires or they capture data required for domestic services not available in the SEPA schemes. This prevents simple substitution between national and SEPA schemes. Conversion and augmentation services may therefore be required for an extended period at corporate, bank or ACH level and these interim solutions will vary by country.
Existing national ACHs face a threat to their survival and mergers have already begun. This increases total membership and therefore the availability that can be offered to the market. Such mergers also drive up total volumes, which will reduce unit costs. It is to be expected that a consolidation of ACHs will happen over the next few years. There will be little point in maintaining membership of a small ACH unless a bank’s business patterns dictate a very limited range of counterparties in that community, or the ACH supports added value services above and beyond basic credit transfers and direct debits.
The migration challenge therefore differs between countries within SEPA. Those with the more centralised and standardised models will have a marked advantage. But to achieve SEPA, a community of thousands of banks and hundreds of thousands of corporate customers must still be migrated to new systems, while maintaining a safe and efficient payments industry end-to-end.
There are two main challenges that face banks in the light of SEPA. The first being the implementation of SEPA scheme compliant systems and planning the migration of the customer base, the second being motivating customers to accept the new banking products and convincing users of payments services including governments, corporates and consumers to review and change their existing payments arrangements.
2010: A Migration Challenge
The European banking industry faces SEPA not from a ‘green field site’, but from a base of multiple long established domestic bulk payments systems and services. These services have evolved over time to be low cost, and therefore functionally limited, approaches to high volumes of domestic low priority payments.
With stable domestic standards and very low complexity, these services are accessed directly by many applications and departments within each bank, and often directly by corporate customers. There has been little or no case for coordination or centralisation of such access.
SEPA imposes on banks a major change to bulk payments services, to be introduced in a short timescale to a low cost commoditised market. There is limited margin to support significant investment by either the banks or their customers.
The critical considerations for successful migration to the new SEPA products are that:
To address this migration challenge, and to retain customers, banks have a number of options. These include:
The operational model for a SEPA bank must therefore consider the range and scale of payments flows (domestic and cross-border by country), and the most efficient and competitively priced services for each flow. The model should consider using:
Regardless of the options above, picking an arbitrary date for the migration of a whole population onto new banking products is not practical. The introduction of the new instruments in 2008 will mean that from now until the SEPA deadline of 2010 we will see a ‘stick and carrot’ approach to how banks migrate and motivate their customers to migrate to new products. Banks will need to support the phased migration of their customers over a period of years between current domestic services and the new SEPA-compliant model. Faster migration will drive benefit realisation for banks and potentially for their clients.
This will not be an easy task and not everyone will see the benefits immediately. There will be, as expected, a natural bell curve of consumer and corporate clients’ adoption of the new products with some trailblazing ahead and others waiting for the banks to enforce changes. For example, to some large companies the benefits of SEPA are already obvious. But banks will have to start packaging services to make the transition as painless as possible. This will mean providing help desks, planning support and testing facilities to encourage customers to migrate well before the 2010 deadline. Efficient migration of such large numbers of customers will benefit greatly from the availability of managed testing services and help desk facilities.
The banks will need to put testing timetables in place and part of the attraction for some companies will be in securing their preferred timing for implementation and testing, to ensure they are not forced into inconvenient timescales and increased costs to meet the deadline. Now is the ideal time for banks to be talking to their customers about the impact of SEPA and negotiating the timetable for change.
This early communication between banks and customers will be crucial in the success of any banks’ SEPA strategy. At present many customers are unimpressed by the level of information and documentation currently available. Keeping the customer base happy will be essential in retaining existing, and attracting new customers as the SEPA deadline approaches. It is especially important that the changes needed result in an obvious opportunity for a corporate or indeed a consumer to consider switching to another bank with more attractive propositions at the same as moving to SEPA compliant products.
Differentiation in a Standardised Environment
Growth in the payments industry has meant that banks have accumulated hundreds of separate payment ‘products’. Essentially SEPA will bring about a simplification of the market to credit transfers, priority credit transfers and direct debits. But it will also stimulate a richer set of associated services.
The EU directive 2560/2001 on cross border payments prohibits a differential price between domestic and cross border (SEPA) payments. A bank that uses a local ACH for ‘domestic’ traffic and uses a PE-ACH or chain of systems to achieve a pan-European footprint could incur multiple cost elements for which it cannot charge a higher price. In such circumstances, the bank must either charge an inflated price for local domestic payments, or offer cross border payments at a loss. This is also likely to drive consolidation in the infrastructure towards the simplest model supporting full end-to-end availability. However, for a considerable period a pragmatic and flexible approach will be required.
These changes mean that payment products will become standardised, limiting the need for banks to manage and support multiple payments products. These payment products have been developed over the years to meet varying customer needs that justified the price differentiation. Banks will now have to be smarter about making these standardised products profitable as the price will become both standardised and visible. Product enrichments, such as balance warning messages and confirmation of delivery, could be packaged as chargeable bolt-on services rather than as part of the payment transaction. They might even be termed account services rather than payment transaction services to avoid being included in the standard transaction price.
Savvy European corporates will use the arrival of SEPA as a way of challenging the banks. Many will begin to ask ‘what can you offer me as a business that has value?’ Faced with significant change and potential disruption, many corporate customers will be tempted to review their payments services relationships and issue RFP challenges before committing to a SEPA relationship. The earlier the banks get their product offerings and migration policies in place the sooner they can start to educate the market and get ahead of their competitors.
Even with services available from banks, making sure the migration is pain free and the benefits are communicated, there will be a need to discontinue legacy products as an additional incentive to those who delay migration beyond a certain point. The ‘switch off’ policy, however, will have to be very well communicated by the bank, or banks, to avoid customers moving their business if they feel badly treated or have had insufficient time to prepare.
Education, Education, Education
The Lisbon European Council of 23 and 24 March 2000 agreed on a new strategic EU goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion. So despite pressure from the banking industry to extend the timescales there is a strong political intent to defend the resulting 2010 deadline.
This means that banks need to be collaborating now with both their corporate and consumer customer base to ensure that the migration to SEPA compliant products is as painless as possible. This will begin with a communication and education programme that will be essential in motivating corporates and consumers and should be followed with a migration timetable for changes to payments products and services. The longer the banks leave it to begin discussions, the harder it will be to retain existing customers and ensure that they meet the deadline.
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