What is the Business Case for SEPA?
As a result of the Single Euro Payments Area (SEPA), banks will have to offer new pan-European payment instruments to their customers from 1 January 2008 at the same cost and efficiency as existing domestic payments. By 2010, a critical mass of customers is expected to be using these new European instruments, gradually replacing the need for domestic payment products.
The success of SEPA depends on cooperation between the various parties involved: government bodies (i.e. European Commission, national governments and government agencies such as tax authorities), banks, corporates, consumers, infrastructures (e.g. automated clearing houses/ACHs) and supervisors (e.g. central banks). What are the benefits for these stakeholders and how can they create the business case to justify the investment necessary for SEPA?
Most of the industry is still struggling to identify the real benefits of SEPA.
It is clear that large, internationally focused banks have more to gain than local players. Extending market share, however, needs considerable investment so the business case is not necessarily a lucrative one in the short term.
Large, globally active corporates will certainly enjoy benefits through the reduction of interfaces and bank accounts within the eurozone and also increased transparency. However, several large corporates have already invested in payment factories and international cash management structures with cash pooling of their accounts. The return on these investments has not yet been fully recovered so the incentive for additional investments is low.
There is pressure on governments to set a good example in shifting their payments volume from domestic to pan-European, as they are responsible for a large number of payments (civil servants’ salaries, pensions, social expenses and taxes). Although a direct return on investment will be just as difficult for governments to achieve, they must take the lead in being early adopters of SEPA products in order to encourage other industry participants to migrate.
The real benefit of SEPA is in reducing the role of paper and cash in payments by automating most payment transactions. The next step in this electronic evolution, which will have an even bigger impact, is extending the scope of SEPA from payments to the supply chain through e-invoicing or even e-order management.
There is a clear trend towards increasing the automation of processes, where the focus shifts from processes within the organisation to processes between organisations. These are major innovative developments that will take considerable time and investment; and this is precisely the challenge of SEPA.
The European Commission has set ambitious timelines with critical milestones in 2008 and 2010, which leaves little time to adjust processes and IT applications. The experience of previous large IT projects – most companies and banks still shiver when they think back to the introduction of the euro – is that managing these projects requires focus and scope management. Current projects focus only on payments in order to make the deadlines realistic. For instance, e-invoicing has been left off the agenda to avoid project complexity and the risk of missing deadlines, exceeding investment levels or failing to achieve the end goal at all.
A challenge for all large organisations is that major innovative changes involve several departments, which makes it difficult to include and satisfy them all. Large corporates may need to involve their treasury, payments factory and their accounts payables and receivables departments, who will have both complementary and conflicting interests.
Changes to fundamental infrastructure such as payments systems with numerous parties involved will require a number of years and considerable investment. Projects of this size need to be managed carefully with well-planned steps towards the final goal.
Managing the investment required by SEPA means that the success of short-term projects should be measured in the context of the broader picture. Many uncertainties still exist, especially with regard to the dynamics of current payments systems in different countries. For example, Scandinavia already has an accepted practice of e-invoicing while Italy still heavily uses cheques and cash and therefore making a payment takes a number of days.
Different industry initiatives have played an important part in aligning market participants and their systems. For instance, the European Payments Council (EPC) consults representatives or large corporates through the European Association of Corporate Treasurers (EACT) and other such associations. The European Commission also pays close attention to the demands and concerns of its various stakeholders.
In addition, the development and use of ‘open standards’ is important where parties involved can discuss current issues, potential solutions and priorities. Internet technology is also paving the way for progress by enabling broader market participation.
There is opportunity for real innovation but it requires balancing the interests of the various parties involved, in the short term this is especially important between banks, corporates and government agencies. Investment needs to be considered in the long-term perspective and it should be acknowledged by everyone that real progress takes time.