The Future of ACHs Post-SEPA
In January 1999, the Economic and Monetary Union and the euro were introduced to help achieve the European Commission’s political and economic goal of a single European market, where currency would move as freely and cheaply within the new eurozone as it had within previous national borders. From a policy point of view, the foundations of a single euro payments area (SEPA) had been laid.
One of the key components to the successful creation of SEPA is the introduction of new infrastructure(s) to support new SEPA instruments. At present, efficient national infrastructures in the form of automated clearing houses (ACHs) exist, but one is very different from another. European banks have argued that without the necessary pan-European payment infrastructure in place, the cost of moving money nationally will always be lower than between countries. SEPA aims to remove these barriers, harmonise the rules and establish a clear legal framework.
One solution being promoted is the development of pan-European automated clearing houses (PE-ACHs). PE-ACH-compliant service providers must be ready and able to process pan-European payment instruments, offer fair and open access to any financial institution in the EU, be ‘country neutral’, be able to deliver payment instructions to any bank operating in the EU, to help minimise internal processing costs and be designed in a way that allows integration of local traffic.
In parallel to the creation of SEPA, the European Commission (EC) issued their proposal for the Payment Services Directive (formally known as the New Legal Framework/NLF) in December 2005. This, alongside the SEPA rule schemes, enables the successful delivery of SEPA.
The directive establishes the legal framework for payment services in the EU. Currently, the diversity of national legislation relating to payments makes implementation of SEPA difficult. Bringing the national legal requirements for payments into line will therefore assist in the effort to establish SEPA.
It is worth noting that, should adoption of the proposed directive be delayed, the introduction of SEPA-compliant schemes on 1 January 2008 and full migration to SEPA instruments by 2010 could be put at risk.
Initially there was much debate among the ACHs as to their intent in providing PE-ACH capabilities. However there was no way that the market was going to be able to support them all forming full PE-ACH capabilities.
The desire for creating SEPA is to ensure that payments can be made from one European country to another at a price and speed resembling the national ACHs. The Commission has decreed a desire to see that providers ensure the interoperability of schemes. For example, if schemes make it difficult for a bank in Portugal who is a member of one scheme to send a payment to a bank in Germany who is a member of another scheme, then SEPA will struggle.
What we are starting to see, thankfully, is a rationalised approach being taken by players that will see a reduced number of providers offering a full PE-ACH capability. The majority of the Italian banking community has agreed to move their national traffic onto STEP2, the only pan-European ACH currently available, as have the Luxembourg banks. The Belgian central bank has confirmed that the ACH (CEC) will not develop PE-ACH capability – instead they are seeking a PE-ACH to provide ‘full service’ PE-ACH capability.
There is further consolidation being seen with the announcement of the signing of a memorandum of understanding to establish a merger of Interpay (the Netherlands-based card and ACH processor) and Transaktionsinstitut of Germany. This creates a combined player with significant volume in the ACH space.
With this in mind we see that there will be at least five providers of full PE-ACHs and these are likely to be:
In addition there will also be some players who will offer a SEPA-compliant service to clients but not necessarily provide full PE-ACH capability. One such example is the German Bundesbank Retail Payment System (RPS), which has stated that it will provide a SEPA-compatible clearing procedure through combining the national links with the current links to STEP2 for full clearing throughout SEPA.
What is becoming clear is that there will be no simple ‘one-stop’ solution for full credit transfer clearing. It is likely that banks and schemes will have choices in the creation and routing of payments. Providers of clearing services will therefore have to design their business and capability models clearly to attract (and retain) those corporates and institutions creating large volumes of payments.
With the NLF aiming to break down entry barriers, there will be competition for low value payment (LVP) volumes. Each player will have volume as its key target – the protection of current domestic volumes and the leveraging of both cross-border and country opportunities where the incumbent ACH will not be playing.
A key element to a successful LVP for SEPA will be the interoperability of these schemes. While the big global banks may take the view that there are benefits in joining all the PE-ACHs, most will not want the associated cost and bureaucracy. Although it is not currently mandatory, the ECB is calling for euro payments providers to create interoperability. Therefore PE-ACHs will be under significant pressure to accept payment instructions from other PE-ACHs and SEPA-complaint ACHs.
While the most obvious new challenge is the provision of a SEPA-compliant cross-border service there are a number of challenges facing current national ACHs who intend to stay in the game. Current domestic volumes will have to migrate to the new service by 2010 and there is a significant challenge in migrating existing traffic into a new environment. There will be a real desire to make this as straightforward as possible.
Another real challenge for the PE-ACHs is how they make their products and services easy and beneficial to integrate with existing players in the payments value chain.
Of course the world will not stand still while new SEPA services are developed. The new PE-ACHs will face competition from a number of existing and new players. Card companies and processors are facing their own requirements to become SEPA compliant for card processing but as a result are bound to be investigating what opportunities they can leverage in the provision of processing large volumes of transactions.
Currently, a number of ACHs mandate that all payments are submitted through their banking members. The industry will potentially see the removal of this barrier to corporate direct submission with the creation of SEPA, which is good news for corporates and allows more flexibility in their payments processing. As a result, new payments bureaus are likely to be set up to act as the gateway to the PE-ACHs, allowing corporates to submit bulk files, which will be routed by the bureau according to spend and cost. However, for this to happen, and for banks to ensure the required infrastructure is acceptable for risk, settlement and sponsorship, etc, corporates need to make clear statements to the banks and schemes that they want this capability.
Another potential outcome is the expansion of payment joint ventures where (groups of) banks form a clearing venture. A side effect of this will be the clearing of ‘on-us’ transactions internally/intra-venture without the need to use the schemes.
Developing new LVP capability for SEPA will be a challenge in itself but in addition players have to look at the requirements for multi-purpose pan-European direct debits (M-PEDD). Similar in nature to PE-ACH requirements (the retention of domestic direct debits (DDs) alongside developing cross-border capability), the issue is further complicated by the current national rules on DDs, such as response timeframes and retention requirements, etc.
Another challenge for players will be cultural perception. For example, to gain volume current players will have to cross borders – what hurdles will an existing French player (who is aggressively targeting markets throughout the whole SEPA area) encounter? Branding of the product and service may well be more important than is currently realised.
It is perhaps easy to understand that, until recently, corporates have been rather quiet on the subject of SEPA. The lack of detailed clarity of how SEPA will move forward has been a challenge to the banks and therefore corporates have not been in a real position to consider the impact. However this is starting to change as corporates realise that there is considerable overlap between the benefits SEPA will bring and the current drive for better integration, information and cash management relating to their payment requirements. The European Association of Corporate Treasurers (EACT) has clearly stated that for SEPA to give full value, the whole payments chain needs to be looked at, not just the message exchange.
What is clear is that SEPA can bring significant benefits to a corporate that trades in (a number of) European countries. There is now less need to seek many domestic clearing relationship banks as SEPA solutions will provide access to all banks in the eurozone. However, there will potentially be more choice for corporates in the routing and integration provided by the various services. This means that corporates in the future may conduct fewer country-based banking tenders but may start to conduct payment tenders.
There are many areas a corporate needs to consider:
There is no doubt that the corporates facing the biggest impact from the creation of SEPA services are those based in Europe due to the volume of business they will need to transact in the eurozone. However, corporates conducting European business from outside the eurozone should not ignore its looming presence. The choice of how to process payments to and from Europe widens and corporates should consider whether to move provision of their payments to a full SEPA player, which would reduce costs and increase integration.
SEPA provides corporates with a real opportunity to drive benefits and efficiencies from their cash operations and payment processing. As the rules and requirements are becoming clearer, now is the time for corporates to investigate and understand the impact SEPA will have. By doing so corporates will be able to help and drive banks and providers to create the appropriate services that they require. This will help give the market the impetus to ensure that competitive offerings produced are based on end-user requirements and not driven out of rule-sets decided by central authorities.
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