Pressure on Cost/Income Ratios from SEPA and PSD

It is a mantra that the impact of the single euro payments area (SEPA) could reduce banks’ direct payments revenue by €13-29bn, which is 30%-60% (source: ABN/CapGemini’s World Payments Report 2005). Clearly, if income is going to fall by such an amount, costs would also have to be cut dramatically.

‘Costs’ refers to the recorded, and therefore visible, costs of the payments business. It is a further mantra that the payments business involves substantial hidden costs, meaning costs incurred on the far side of the internal boundaries within the bank that define ‘the payments business’.

There is a latent threat as a result of the Payment Services Directive (PSD) rather than SEPA that will be to the detriment of payments – if other departments identify costs that are incurred to support payments but which are currently not allocated across to ‘the payments business’.

Basel II in particular has led to fewer examples of ‘the payments business’ being either a utility or a service centre or any other kind of cost centre. Instead, it is a line of business with sometimes complex relationships with internal business partners:

• IT and operations to deliver the service.
• Relationship management to lead the sales process and to get sign on to credit lines.
• Relationship management to divide income on credit balances and on overdrafts.
• Treasury to divide FX income and income on customer credit balances and on overdrafts (this can be cut three or more ways).
• Treasury to remunerate/charge payments’ nostro positions.

The more skilful leaders of the payments line of business (LoB) know exactly how to lay claim to income and to mitigate the transfer of associated costs. This skill is well honed in the US banking environment.

One of the most visible effects of the PSD will be to increase the effort of acquiring a payment to the point where it is ‘accepted’ by the bank. Whether this be in communicating terms and conditions, ensuring the FX rates and fees are fully known and communicated to the customer before the point of ‘acceptance’, or documenting that customers received and acknowledged the information, all this extra work will fall on the start of the process (even if other stages in the process have to be altered to enable fulfilment at the front end).

And certain hypotheses can be floated:

• The front end is handled by branches, service centres and relationship managers.
• Treasury will have more work to ensure rates are up-to-date and are communicated.
• In other words the main internal business partners of the payments LoB will be impacted by increased costs of getting the same payment to the point of ‘acceptance’.
• The costs of this work now are not allocated across to the payments LoB in a fully transparent and comprehensive manner.
• The business partners will look to introduce allocations when the workload increases.

As a result it would be essential to factor this into any analysis of the cost of achieving PSD compliance and running the business in PSD-compliant mode, and to very transparently model the increased/changed workload falling onto the main internal business partners of the payments LoB.

If the response to SEPA is to cut cost dramatically, the targeted savings may not be radical enough to achieve a profitable business unless the impact of the PSD is factored into the same project.

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