How are Banks Preparing for SEPA?
The results of a research report last year1 revealed that European financial institutions are positive about the single euro payments area (SEPA) and believe it will provide opportunities for those banks that move quickly. Financial industry regulators have suggested that banks are lagging behind in their preparation for SEPA compliance deadlines of 2008 and 2010, and have admitted that there are challenges in the adoption of compliant infrastructures and systems.
Despite the challenges that SEPA presents, 79% of European banks admit it is a positive exercise. One respondent from a Tier 1 bank said: “We do not consider SEPA as a mere mandated infrastructure project, we consider it as a real opportunity to innovate our products and services, to win new markets and generate new incomes, to build new profitable relationships and to improve efficiency. SEPA will create the conditions for enhanced competition in the provision of payment services. It will also generate, through harmonisation, more efficient payment systems, which will deliver tangible benefits for the economy and society as a whole.”
Another Tier 1 bank said: “The overall assumption from banks is that both consumers and corporations will benefit from the single European market. However, multi-country corporate customers will benefit the most. The benefits for individual customers will be from increased efficiency and transparency.”
Banks see advantages for their customers in the new payments structure and agree that SEPA answers the rising consumer demand for harmonised banking and the pressure from corporate customers seeking standardisation as they look to centralise their treasury services.
Financial institutions have also identified the need for a more harmonised approach in relation to the competitiveness of European financial institutions in the world market. A respondent from a Tier 2 European bank said: “There are too many different systems in Europe. If we aim to compete with top nations of the world like the US then there is a need for consolidation and standardisation of systems across Europe.”
Italian banks are particularly positive with 90% of the respondents approving a move towards greater harmonisation, while 90% of banks in the UK think that SEPA will enable them to expand their opportunities geographically.
Financial institutions foresee considerable opportunities in the new payments structure but are aware that SEPA compliance requires considerable infrastructure investment, with the cost of SEPA estimated to reach US$7.2bn by 2010. There is no doubt about the price tag attached to SEPA compliance. But banks are only just waking up to the opportunities it presents. If they are flexible and agile, they can reap huge rewards that will more than cover initial investments.
Seventy-four per cent of banks interviewed in the research report think SEPA will create new business opportunities. These range from the expansion of business to new geographies, to the provision of new SEPA products and services, as well as management of the financial supply chain for corporate customers.
When asked to specifically identify where these new opportunities might arise, 40% of respondents identified greater efficiency, relating to cost efficiencies, automation, STP, more streamlined processes, and the ability to offer value-added services.
Respondents also identified the opportunity to expand into new geographical areas as financial borders become irrelevant, particularly in countries that were too difficult to enter prior to SEPA. Financial institutions are also looking forward to providing new SEPA products and services.
Payments already represent a third of banks’ total operational costs, but contribute to only 10% of their overall profitability – and SEPA is going to drive down revenues even further. More than 60% of banks are hoping to generate cost savings predominantly through higher STP rates rather than by reducing the cost of maintenance of existing systems.
Despite these opportunities, banks are still in the early stages of SEPA planning. With the first deadline only one year away, most banks should be well into the design and specification phase. However, the survey found that banks are still at the discussion stage and have barely nominated payment tsars. This is unfortunate as fast movers will be best positioned to take advantage of this more open and harmonised market. The winning strategy for any given bank will largely depend on its starting position. Every bank will have to formulate commercial strategies focused on better customer services.
Banks need to start an impact assessment now for all their payment activities, across their European operations, if they want to benefit from the future business opportunities that will be available to early adopters.
SEPA aims to harmonise the payment products and services offered by banks in the EU, in terms of format, fee structures, and IT platforms for processing transactions. SEPA introduces uniform schemes for all countries in the eurozone, requiring all retail cross-border payments up to €50,000 to be treated as national payments.
The new payment order will dramatically reshape the industry where national borders become irrelevant. Banking institutions will need to reduce operating costs by at least 25%, but will also need to generate new revenue streams supported by flexible infrastructures. The majority of banks interviewed thought that many institutions will lose out and disappear in this new European banking order. This point was illustrated by a representative from a Tier 3 bank who said: “Small organisations will have to make huge investments since they do not have the huge customer databases, and this will affect their economies of scale. They will not be able to compete with large banks.”
The research suggests that while banks do agree that there are new opportunities, “most people are unaware of the complexity involved in implementing SEPA,” according to a representative from a Tier 1 bank. Accordingly, half of the respondents suggested that they would be looking to a third-party provider to meet their SEPA requirements. More than 40% of respondents expected to have to replace their existing payment systems/applications, a third of which expected to use the help of a third-party vendor.
Interestingly, 20% of respondents don’t foresee cost savings resulting from SEPA. According to Financial Insights, banks need to reconsider their buy/build strategy, in view of the recent developments and increased maturity of vendor solutions.
It is clear that SEPA will result in drastic changes to the European banking industry. Interestingly, while banks are positive about the new payments structure, they are yet to take the necessary steps in preparation for the 2008 and 2010 deadlines. This is unfortunate given the numerous opportunities that exist for early movers on SEPA compliance. Banks need to move quickly if they are to enjoy the opportunities but also survive in the marketplace.
This article is based on a research report commissioned by i-flex solutions conducted by Financial Insights from June to July 2006. Seventy European banking institutions were interviewed to discuss the implications of SEPA on their payments operations and its impact on banks’ business strategies.