SEPACorporate StrategySEPA: Achieving Critical Mass by 2010

SEPA: Achieving Critical Mass by 2010

What is a ‘Successful SEPA Implementation’?

Like beauty, ‘success’ is in the eye of the beholder and each group of stakeholders is likely to have different criteria for measuring it, not necessarily convergent. The regulators are seeking a standardised competitive environment allowing payment service providers (not exclusively banks) to choose between the most efficient operator for each activity within the value chain, irrespective of geographical location, and where the payment schemes offer a platform for the development of value-added services such as e-invoicing.

Corporate customers are seeking correct referencing for reconciliation, open standards to enable end-to-end automation of the supply chain and (no surprise) reduced fees. Having concentrated their treasury operations, they are likely to reduce their banking relationships as it will no longer be necessary to maintain accounts in all countries where they operate for paying salaries and local suppliers, etc. They also wish to ‘migrate their existing systems to the new standards without significant efforts beyond testing’ (TWIST SEPA whitepaper, May 2006).

As for the banks, their main concern is to retain the profitability of their payment business. Banks active in several countries are looking forward to increasing market share and reducing operating costs through the availability of pan-European schemes and standards. Alternatively, local banks will probably be seeking minimum compliance solutions.

All counterparties will be keen to minimise migration costs. The transition period starts in January 2008, during which the SEPA schemes and the national schemes will co-exist with the need to ensure interoperability, and it is recognised that the anticipated benefits will only accrue when it ends. The investments to implement the SEPA schemes will not be offset by the savings resulting from legacy applications and processes to handle the current national schemes until these have been abandoned.

Theoretically, this should happen by the end of 2010. So far, only two countries (Luxembourg and Italy) have taken steps to phase out their national schemes. National transition plans are still being elaborated by the relevant bodies in each country. What is the best way to achieve this? A pan-European ‘big bang’ does not appear practical and is not necessarily required, unlike with the introduction of the euro. Each country will need to define a deadline by which to discontinue national schemes depending on their respective investment cycles, either as a national big bang or instrument by instrument. A trade-off is also required between a short transition scheme and the need to retain features of the national instruments not currently included in the SEPA schemes. The EPC has defined the concept of additional optional services (AOS) to allow groups of users to select features on a country or group basis.

With time, they will be incorporated into the ‘mandatory’ scheme depending on demand. It is reassuring that the initial outcry about the SEPA schemes not being ‘best of breed’ has abated as regulators and users realise that competitive payment services are principally dependent on the value-add of the banks built upon the foundation schemes. Nevertheless, the setting of clear deadlines to abandon the current national schemes in favour of the SEPA ones is necessary to motivate all counterparties. It is also important to demonstrate realistic intent to avoid regulatory imposition of a big bang deadline.

How Can SEPA Achieve Critical Mass?

Reaching critical mass will depend heavily on customer adoption of the new schemes. For retail customers, the widening use of Internet banking should render the transition transparent to the end user. Converters should also ensure that the output from scanned documents can be adapted to the SEPA schemes.

Although criteria and thresholds vary from bank to bank, corporate customers are generally segmented as follows:

  • Global multinational and large domestic corporations: the major ERP vendors addressing this market segment have committed to implement the SEPA schemes.
  • Small and SME businesses, at the opposite extreme of the scale: most banks have developed Internet portals for their smaller business customers that should be adapted to enable an effortless transition.
  • The major danger would appear to lie with the second tier enterprises: will their accounting and corporate finance package suppliers upgrade to the SEPA schemes? Will the customers be prepared to invest?
  • Most hopes appear to rest on government agencies: they can certainly provide the pull, but one cannot help questioning their motivation when considering the fact that the number of cross-border transactions they handle is marginal.

Some banks already offer conversion services between various formats and will need to expand them to include the new ISO 20022 XML standards to help their customers. Financial incentives could also be considered to encourage customers to migrate to Internet banking and/or adopt the new schemes. Large corporations and government agencies can also use their purchasing power to ‘persuade’ suppliers to accelerate migration.

What Must Banks Do?

It is surprising how many banks are only now establishing cross-border SEPA project teams. The first step should be to assess the financial impact of SEPA based on a comprehensive study of the profitability of the bank’s payments services across all countries, instruments and customer segments. As several uncertainties exist, different scenarios will need to be established. The next step would be to carefully review relationships with corporations operating across the EU to identify those who could benefit from a concentration of payment accounts, as well as relationships at risk.

Banks must then define their SEPA product/services portfolio in line with their business strategy which can range from ‘minimum compliance’ for local banks to aggressive market expansion built upon value-add services and sophisticated treasury management. No one doubts that the overall profitability of payment operations will suffer. Banks should therefore endeavour to develop value-added services around the payment, remembering that a payment is the result of a commercial transaction or a trading operation. An important step in this process will be an open dialogue with customers to create awareness of SEPA and assess their requirements. How can banks help with the transition to SEPA schemes? Can a critical mass for e-invoicing be created? How can banks ease the reconciliation of accounts payables and receivables? Can banks help with the integration of the supply, logistics and financial chains? How should these services be priced?

Having selected the appropriate clearing and settlement mechanisms, payment services providers will then need to define their operational and IT architecture. SEPA will no doubt accelerate the current trend to concentrate back-offices and the quest for cheaper operating locations. Applications can be simplified as banks will no longer need to support as many interfaces to local clearings as countries in which they operate. But most importantly, it will force banks to closely look at the processes that yield competitive differentiation in line with their business strategy and their operational performance. Decisions should then be taken as to which processes need to be retained in-house, as opposed to outsourced to other institutions, shared service centres or utilities operated by third parties.

From an IT standpoint, banks should consider integrating their various payment applications around a services oriented architecture (SOA). In a business environment where existing products and services are either changing to adopt new standards, or are being gradually replaced, SOA enables the re-use of competitive components from the legacy environment to be progressively integrated with new applications and/or outsourced processes.

To conclude, the regulatory drive behind SEPA appears unstoppable. National payments associations should lay realistic plans to phase out national instruments in favour of the SEPA schemes. A constructive dialogue must take place with customers. Banks, who will bear the brunt of the transition costs, should devote maximum efforts to ensure SEPA’s success: the worst-case scenario would be not to reap the benefits of the heavy investments required to comply.

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