Preparing for SEPA - Organising for Change
Globally, payments are undergoing structural and irreversible change. Paper volumes are declining, electronic volumes are increasing, technology is changing, Internet and mobile channels are in demand and customers are expecting more. In Europe, the single euro payments area (SEPA) is catalysing payments change by breaking down national boundaries.
To address this change, banks and corporates have a critical imperative to set up the right payments organisation and governance – to make the right decisions now and to make changes to IT, operations and commercial propositions in an efficient and effective manner.
In September 2006, Accenture published research conducted among 47 European banks and processors, who, in summary, told us that for SEPA:
This research is now several months old, but it indicates that many banks do not yet have the right organisation structure in place for SEPA. However, there are banks both inside and outside the eurozone that are starting to change how they organise their payments operations. For example:
These are the types of payments governance and organisation structures being put in place by leading banks, which point the way forward for others under SEPA.
Key factors for organisation and governance are a bank’s starting position, the decisions it needs to make and its level of ambition for the payments business.
SEPA changes need to be applied across the bank, and will often be repeated in different business units. It therefore makes sense to have a central programme to make these changes to avoid duplicated, inconsistent or conflicting effort. If payments are already centrally managed across retail and corporate business units, then it should be an easy step to manage SEPA changes centrally. If not, and many banks do not have a central payments organisation, then a central organisation should be considered. Even if culturally a bank prefers to devolve change to its business units, it should still consider (as many have done for Basel II) centralised programme governance, and centralised development of common and critical components such as data and rules definitions.
To implement changes for SEPA, decisions that banks need to make include:
A bank’s ambition level for payments is reflected in the type of operating model it chooses for its payments operations. Typically, there are three distinct payments operating models:
These three factors should be core considerations to create an effective organisation and governance structure for SEPA; one which is tasked with taking the bank from its starting position, making the key decisions and driving it towards its chosen ambition.
Banks should do two things – centralise their SEPA change programmes and structure their organisation to drive payments innovation.
Centralisation of payments change is essential if the same SEPA changes are to be replicated across different business units, and across countries where banks have multi-country operations in Europe.
In cross-bank payment initiatives where change has been decentralised, lessons can be learned which support the centralised alternative, e.g. one bank with retail, commercial and asset management business units in multiple countries, attempted to implement Financial Action Task Force (FATF), Office of Foreign Asset Controls (OFAC) and anti-money laundering initiatives separately by each business unit. Each interpreted the requirements differently, decision-making across the business units was poor, and often gridlocked, and implementation was slow and expensive.
Now, the bank has centralised all payments change work. Regulatory changes are the top priority and are decided on and implemented centrally for all business units. Revenue generation and cost cutting changes are the next priority – for these, the business units define the requirements, but the central organisation prioritises them and implements them. As a result, faster and better decisions are made, and implementations are quicker and less costly than before.
Currently, many banks appear to be driving SEPA programmes either from their retail or wholesale operations, with some driving it through the IT department. In our research, 26% of respondents had appointed a SEPA ‘tsar’ to co-ordinate SEPA change across the bank. This may give the impression of centralisation, but in reality it is not. Changes will still be implemented in business and operational silos, and there will come a point when they need to be tested together – at this point, the end-to-end payment process flow will be tested, and, in the absence of a holistic design process driven from a central change programme, it is unlikely to work operationally or technically first time, if at all without major rework.
The second action banks should take is to structure the organisation to innovate. There may be similarities between the euro conversion programme and SEPA, which banks can draw on for their SEPA programmes – but there is one key difference: for the euro, there was little imperative to innovate. With SEPA there is – it is a major market disruption where existing revenue streams will disappear, but customer demand, although changing, will remain.
To replace revenues, banks must innovate and develop new products and services that meet the needs of their customers. Sceptics of the merits of payments innovation should take a look at Paypal (with revenue of over US$1bn p.a. growing at 41%), Google Checkout, Obopay and others. Existing new product development groups tend to be focused on lending and savings products and often have little experience of developing payments products – they are not the route to payments innovation in a bank. Instead, to be winners in the SEPA world, a dedicated new payments product development group for corporate and consumer payments should be considered.
The corporate sector is still forming its plans in preparation for SEPA. It is possible that there will be two approaches, one driven by the ability to collect money efficiently, the other driven by the ability to manage money efficiently once collected.
In the first category are the pan-European retailers and distributors who collect hundreds of thousands of payments across Europe every day, and have separate mechanisms for each of the many national payment systems that currently exist, e.g. mobile phone operators collecting monthly subscriptions or pharmaceutical companies collecting payments from retail outlets. These companies can achieve cost savings and efficiencies through rationalising their direct debit, credit transfer and POS collection mechanisms.
Companies in this category will need to co-ordinate their changes to SEPA across several departments – financial operations and treasury at a minimum. Customer services and product development may be affected as well, e.g. to offer discounts for using SEPA direct debits, or to plan entry to new countries to expand the customer base. To drive this change, these companies will need a central SEPA role.
Companies in the second category are not likely to require much change nor to co-ordinate change across the business. Typically, payments in these companies are controlled through a central treasury function. This function will see some benefit from reducing the number of bank accounts it operates and from simplified cash management, but they are likely to handle the SEPA changes as a business-as-usual project within the department.
The good news for corporates is that banks are listening to their needs – in our research, 75% of respondents believe the focus of new SEPA-related propositions and products should be on corporates and merchants. A key part of the SEPA roles in banks and corporates will be to work closely together to co-ordinate and implement change.
Successful execution of the migration to SEPA will be critical for banks, and for corporates with substantial, multi-country, billing and collection operations. Innovation will be a key factor in creating and growing payments revenue streams for banks, and for providing corporates with the services they demand.
Both execution and innovation require strong governance and organisation structures to facilitate large scale and effective change. Where this change is pervasive and common across the organisation, centralised control and accountability to implement it is the best way forward.