SEPA: Blessing or Curse for SMEs?

Following the introduction of the euro, the creation of the single euro payments area (SEPA) is a natural progression within the payments market. However, in spite of its obvious goals, SEPA is still shrouded in mystery. There is not long to go until the first deadline for SEPA instruments (i.e. 1 January 2008) but few corporates, particularly SMEs, really understand SEPA and its likely impact on Europe.

The Ideal Scenario

In principle, generating competition and transparency in a relatively closed market, such as Belgium, will have positive consequences for the various players in that market. SEPA will profoundly change the current Belgian system of transfers, standing orders and card payments.

Transfers

Transfers within the euro area have to be performed under the same conditions, stipulations and security as national transfers. The use of international bank account numbers (IBANs) for all payment instructions will also affect SMEs’ payment processing programs. The use of the bank identifier code (BIC) will also necessitate adjustments and requires a single investment from SMEs to adapt their software. This is comparable to the introduction of the euro and is a reminder that society, and the environment in which SMEs operate, is continuously evolving. Every SME, large or small, is expected to keep in step with these developments. UNIZO supports such progress and the investment involved, as long as they are of relevant added value for SMEs.

The disappearance of the structured message that is the link between the bookkeeping and the transfer threatens to cause more problems. Transfers with a free message make automatic processing of transfers virtually impossible. Belgian banks are working on a way to retain the structured message, at least on a national level.

Direct debit

For payments by direct debit, an order is no longer given to the bank, but to the contracting party, where debtors will be able to protest against such payments for a period six weeks instead of four days. This implies longer-term uncertainty for the self-employed and SMEs that allow payment by standing order.

SEPA is not a question of yes or no, but rather a question of how? The changes described above can be implemented by every SME through effort and resources. From now on, SMEs will be able to execute and receive payments by means of transfer and standing order with virtually no problems within the euro area. Here, too, every SME has to keep in step with the changing environment in which they operates.

Card payments

SMEs will experience the most far-reaching SEPA changes in card payments. Until now, there has been (too) little competition in the area of terminals and none at all in the field of transaction processing, such as Banksys in the Belgian market of card payments. Opening up this market must lead to better prices for payment terminals as well as technical assistance. With regard to transaction costs, Belgium is already relatively inexpensive although better prices are always welcomed. Increasing competition will not only have a positive effect on the price; market players will also start to look for more attractive formulas and new ideas in other fields in order to differentiate themselves.

Many companies are ‘small users’, i.e. SMEs who have a few transactions a month and therefore significant fees per transaction, therefore competition may reduce costs for this category of SMEs. Since price policy is only one way to convince SMEs to take their chance with a particular market player, service and security will increasingly be leveraged post-SEPA. One single large European payments market should stimulate innovation in the fields of technology, security and service.

SEPA will hopefully mean that SMEs will improve their customer potential, for instance, more than 270 million European card holders with the Maestro function will be able to pay with their card in Belgium¹. In addition, every SME will be able to choose with whom they contract to accept Maestro. In the long term, Maestro will in fact be only one of the various operational SEPA systems.

Cost of SEPA

The cost of SEPA is not just determined by the price of the investment needed but more so by the banks’ lost income. In the next six years, European banks will have to invest more than €8bn in SEPA². Moreover, by 2010 they are estimated to lose €13-29bn income because of SEPA³. As a result, the overall cost of SEPA (costs plus lost income) for banks amounts to between €21-37bn. UNIZO will resist any scenario in which SMEs or self-employed people, as the link between the bank and the consumer, will have to bear any part of this financial burden.

With regard to transaction fees for electronic payments, Belgium is relatively inexpensive. If opening up the European payments market does not result in the best quality at the best price everywhere, SEPA will increase the costs for Belgian SMEs. More competition should never result in a price increase! UNIZO is aware that there is a major role here for not only European but also Belgian competition authorities.

SEPA’s success largely depends on whether SEPA will deliver a qualitatively equivalent or better product in the field of electronic payment – at the same or lower price – not only for consumers but also entrepreneurs. This should be valid for all types of entrepreneurs, large or small, operating in the international or domestic market.

Scenarios for SMEs Post-SEPA

Scenario 1: SMEs will only suffer disadvantages from SEPA.

The time when the self-employed only operated around the local market square has gone forever. However, the fact that the self-employed and SMEs are pursuing the largest possible ‘market’ as they can does not mean that they also operate internationally. A considerable number of self-employed people and SMEs hardly operate at an international level at all. Many SEPA advantages are intended in the first place for internationally operating companies. UNIZO welcomes these advantages but also requests attention for local and national active enterprises that, in the worst-case scenario, could be confronted with the additional cost of SEPA.

Scenario 2: SEPA is often compared to the introduction of the euro – but on a larger scale and even more far-reaching – therefore, SEPA requires at least as much communication with the self-employed and SMEs.

The introduction of the euro was a more tangible concept for consumers. In addition, with the introduction of the euro there is the perception that more attention was paid to guidance and communication, for instance the General Commissariat for the euro, than for the introduction of SEPA. From January 2008, citizens, companies and authorities should have the opportunity to use European instruments as well as national transfers and standing orders, and the technical barriers to cross-border acceptance of cards at sales terminals and ATMs should have disappeared.

The European and national banking sector, European authorities and the national central banks have been working on the preparation of this project for several years now; but only a few know what SEPA is and what change it entails. The choice of Maestro (instead of Bancontact/Mister Cash) is only linked to SEPA by a minority of the self-employed and SMEs. The National Bank of Belgium calls SEPA ‘a social story’⁴ and UNIZO fears that this has not been sufficiently noticeable so far.

Scenario 3: It is not just the financial world that has been trying for years to convince SMEs about the advantages of electronic payment. Taking the worst-case scenario described above would mean that all these efforts would have been wasted.

For years now, attempts have been made to (successfully) convince SMEs of the added value of electronic payments. Not only do consumers want to be able to use electronic payments, there are also security reasons and economic arguments support electronic payments. A higher price for offering electronic payments might affect SMEs’ decision to adopt them. SEPA should promote electronic payments if the price is too high it could have the opposite effect.

SMEs who have been convinced by electronic payments will again start to consider cash payments as an alternative to electronic transactions, and SMEs who still have to be convinced will continue to swear by cash payments. SEPA has to become the ultimate driving force behind persuading SMEs who are not yet convinced to switch to electronic payments. This can only happen by offering more high-quality products at better prices.

Scenario 4: In Switzerland, Austria and the UK, the transformation of the existing national payment scheme led to higher tariffs for SMEs and higher prices for consumers without a better service for either.

For UNIZO, such a scenario is unacceptable. For every company, competition has to lead to the most efficient and most secure payment system at the best price. UNIZO would like to co-operate in realising this ultimate payment system, but will not agree with a payment system that corresponds to the average of the current European payment market. UNIZO sees the possibility of SEPA if it pursues the best payment system, not if SEPA only strives to equal the European average. Replacement of national payment systems by a more expensive international system will not result in the increased competitive power of the European economy pursued by the Lisbon Agenda.