SEPA: Are Banks Ready for Change?
The introduction of the single euro payments area (SEPA) heralds a fundamental change in the history of the banking industry. The EU has mandated that by 2008, low-cost, Europe-wide credit and debit instruments must be available to all citizens and businesses in 29 countries. By 2010, everyone should be using them.
SEPA goes beyond previous change programmes because it affects the entire financial community including the European Central Bank, national central banks, automated clearing houses, wholesale and retail banks as well as every banking customer – roughly 20 million corporations and 472 million individuals.
SEPA does not regulate the existing payments market but introduces a deep-seated change within it. What is more, it requires this change to be made in what seems like an impossibly short timescale.
Implementing SEPA is very different from previous cross-border payment related initiatives, such as Visa or SWIFT. It aims to deliver operational readiness between different parties at all levels, from national banks to individual customers, in one go. The industry has been denied the luxury of organic growth over a period of years. Instead, it is faced with two absolute deadlines of 1 January 2008 and the end of 2010.
As we approach the end of 2006, the eurozone community should be well advanced with their SEPA preparations. Steps to analyse payments value chains, identifying specific SEPA challenges and formulating the most appropriate and documented SEPA plan should have been completed. By now this should have been turned into practical steps to ensure compliance and, where possible, realise fresh opportunities.
In order to be confident SEPA payments processes will work effectively and support the delivery of the right services to customers, timely testing of these processes will be an essential component of implementation plans. Testing also represents a significant proportion of the costs of IT projects, as getting it right can lead to significant cost savings.
LogicaCMG commissioned Coleman Parkes Research Limited, an independent research company, to undertake a survey among the major banks across the eurozone, but including the UK, to establish the core issues within the market.
The research focused on the practical issues that must be addressed in order for successful implementation to be achieved as well as the banks’ approach to migration and exploitation of opportunities that may arise from SEPA. One hundred and one of the top 500 eurozone and UK-based banks took part in the survey, answering a series of detailed questions over the telephone.
Testing was identified as a particular concern among the banks surveyed. About 69% of all banks questioned said that testing the systems against SEPA requirements by the end of 2007 is very important, 23% said it was fairly important, and 71% said that it was important to test the systems with those of clearing houses and other banks during the same period. On the surface, this is encouraging as there is clear recognition that testing is important. A co-ordinated testing strategy provides the banks with the opportunity to reduce the total cost of achieving SEPA compliance and also to approach SEPA deadlines with confidence.
However, a major contradiction, indicating that many banks may be paying lip service to the issue, is the fact that only 13% have a fully documented action plan focused on testing in full operation. A further 42% of banks are just developing the plan for testing their systems and 29% admit they are just starting to think about the testing issue – too late to have effective testing prior to the end of 2007. Therefore, although testing is acknowledged as being important, many banks are not yet underway with it.
A closer look reveals the fact that banks are even further behind than would appear to be the case initially. Only 45% of banks have a designated person in charge of testing and 31% plan for them to be in place in the next 12 months. Only 22% have access to a centralised test facility, 35% plan to have access and one quarter have a detailed test methodology in operation, while 36% have one planned.
This indicates that banks have put testing on the back burner and are now waking up to the fact that it is an important issue and one where action needs to be taken. But will they take action in time?
The plans to start the testing phase for SEPA also highlight a critical issue with regard to timing. Too few banks are setting out on the testing road allowing sufficient time to cover all of the processes involved in SEPA compliance.
Focusing on software only, as opposed to full process testing, is a risky approach because problems may only be recognised late in the day, when IT systems have been fully implemented, rather than at the outset when it is easier to affect change. About 14% of banks will start the testing phase within the next three months but 61% will leave it to beyond six months – leaving little time for their processes to be checked rigorously, amended and verified. Either the industry does not see testing as important or banks are simply underestimating the amount of time that it will take to complete the testing phase.
Perhaps as a means of clawing back time and also ensuring that the processes are well tested, around half of all banks would be willing to work with a third party to meet their testing needs. This, they feel, will provide them with the ability to use a defined and proven methodology, allow them to meet the SEPA deadlines (the key issue) and provide access to a re-usable test approach.
The accreditation of SEPA compliance of payments software products is also considered to be a major step towards meeting the deadlines and ensuring that implementations are speedy and appropriate. Almost half of all banks agreed that it is very important that software products are SEPA accredited and a further 31% felt that it was fairly important. Accreditation will therefore provide the safety net for many as they race around trying to make up for lost time, putting in place action focused, remedial plans to meet the deadlines that to date they seem to have failed to take sufficiently seriously.
SEPA will happen, but few banks have put the appropriate processes and people in place to be sure of meeting the 1 January 2008 deadline, and even fewer are considering the longer-term challenge of migration. While most organisations have a team in place to facilitate the move to SEPA compliance, few have a board level sponsor and less than half of companies have set aside a real budget for SEPA, so teams are working in isolation with little funding.
Around 40% of banks admit that they are concerned about making their first payment and rightly so, as not enough will start their testing phase in the next three months to allow them the confidence to know if their systems work.
Banks that wait before discussing SEPA implications with customers, before developing new SEPA-inspired products and services and before securing the necessary and specialist resources for migration and testing, will find it hard to retain and grow clients and to ensure the deadlines are met. Those that act quickly may not only reduce costs and risks but also gain competitive advantage over their competitors.