The SEPA Business Case: An Alternative Bank Approach
A lot has been written about the business cases within individual banks for SEPA implementation and no doubt much work has already been done on this. The general thrust for most banks is along these lines: ‘there is no positive business case, but there is a regulatory/mandatory imperative and that forms the justification for our investment programme’.
This article suggests that this type of thinking is overly simplistic and can lead to the wrong strategic choices. A more sophisticated assessment, which truly matches the financial impacts to the strategic situation of the bank, will provide far more insight into the correct investment approach. (The question of whether there is a business case for SEPA from an overall societal perspective is not addressed in this article.)
For most banks, essentially the small- and medium-sized banks, the calculable financial impact of SEPA is ‘negative’ as a result of three factors:
In this situation a ‘negative’ business case means that future profits will be less than if SEPA was not happening. However, most banks view SEPA as a regulatory driven mandatory change, so SEPA related investments are justified as a cost of remaining within the banking industry. This seems an entirely sensible perspective.
The next logical step is often something like ‘because the business case is negative and the only justification is regulatory driven mandatory change, then the correct investment approach is to minimise implementation costs’. The rationale is that the bank is not going to earn a decent return on this investment so it should minimize the investment. A slightly more detailed approach can be to minimise both implementation and operating costs. However, both these approaches are overly simplistic and, in many instances, could lead to the wrong decisions.
To understand the problems with the business case approaches set out above, it is necessary to clarify the objective of SEPA investment decisions for banks. This should be to maximise the (net present) value of the business lines, which rely on payment types affected by SEPA. For most banks this will include their retail banking, cards, business banking and treasury services franchises. The diagram below helps explain this and also illustrates what a ‘negative business case’ really means in the SEPA situation.
Given this framework, it becomes clear that the key issue for banks is to develop, select and pursue a strategy, which maximises the value of their payments reliant-business lines in a SEPA world. In some ways the reduction in value from a non-SEPA world, the ‘negative business case’, is a red herring. More valuable strategies than ‘minimize investment costs’ may be:
1. Selective investment in customer offerings
Make selective enhancements to information related functionality for direct debit and direct credit systems at the same time as building basic SEPA compliance, in order to improve customer offerings in the business banking and treasury service franchises. Only build basic SEPA compliance at lowest cost for cards systems.
2. Investment in in-source payments
Invest in a programme to upgrade systems in order to build the capacity and capability to in-source payment types affected by SEPA.
3. Accelerate migration from cash and paper
At the same time as building basic SEPA compliance, and while customers are forced to change their payment behaviours by SEPA, invest in systems and proposition changes to accelerate moves from expensive paper and cash payments.
This approach may sound complex and theoretical to some but this merely reflects the real life complexity facing payment managers today. As an example, the role of payment operations in supporting a number of business lines is a complex fact of life in banking. Although, to be honest, any bank should understand and be able to model the economics of these supporting relationships, regardless of SEPA.
As a second example of real life complexity, many payment managers are currently worried about losing competitiveness and customers to larger banks who are already planning to invest beyond the minimum compliance level for SEPA. The revised business case approach suggested here provides a clear framework for thinking about alternative strategies to combat this competitive threat.
Some banks may be restricting their options to prosper in a SEPA environment by focusing on minimising investment because of the ‘negative business case’ situation created by SEPA. Developing and assessing alternative strategies to maximise the value of their payments reliant business lines is more complex, but far more likely to result in the best outcome for the bank.