SEPACSMSEPA is Not the Only Important Payments Development

SEPA is Not the Only Important Payments Development

If you are involved in the payment space either as a provider, corporate treasurer or payment specialist, the main topic for discussion and industry debate has in recent years focused on the single euro payments area (SEPA) and its implications. Clearly SEPA is a major initiative and one that the EU is right to promote, with its core aims of faster settlement in the EU region, provision of single or at least interoperable settlement systems for card, direct debit and credit transfers and a desire for lower transaction costs. These aims are of course sensible and welcome, although the timeline for practical implementation is too long and the process arguably too complex.

However, for those companies and individuals that wish to move funds around the EEA region, the relevance of the underlying settlement system is not the most important factor. By the time of full SEPA implementation, some or all of the end result will have been achieved by competitive pressures or by the perceived threat of SEPA. In fact, SEPA could actually result in higher overall charging structures or two tier service offerings from banks. As the world becomes a single business environment via free trade agreements, more freely moving capital flows, increased communication, more online interaction and more countries and companies participating in global commerce, the benefit of a single settlement system for the EU is not necessarily a solution to a company’s wider payment needs. For those managing and effecting payments on behalf of their companies, the need is generally for more sophisticated cash management and payment products. At the retail level, the need to collect payments from consumers is also very important and for online businesses, speed of execution is paramount, hence developments such as IDeal in the Netherlands, the Faster Payments initiative in the UK and the growing popularity of Paypal and debit cards. By the time of full implementation, the SEPA aim of next day settlement for cross-border transfers could almost become outdated for online retail and consumer payments and once a faster service is available, take-up generally follows for the rest of the market.

In meetings with banks across the EEA, local settlement systems are usually discussed, including how they work, the timelines and the costs involved. The answer is not always clear-cut as some countries have multiple payments options. However, in the EEA there has and continues to be bank consolidations, system improvements and integrations that have resulted in a smaller number of networks, connecting more people with more common practices. In the UK, our domestic standard settlement system is appalling (although about to change with Faster Payments) but in most of the EEA, next business-day settlement is fairly common and new offerings are constantly emerging. In fact, some, such as Poland and Turkey, have same-day settlement capability as standard offerings. The demand for faster payments existed before SEPA, and although SEPA may have brought forward initiatives, the market would have forced change.

The cost of SEPA to banks and settlement houses in building this new world will be very high, and so it is hard to conceive that the outlay will not in some way be recovered from consumers and corporate customers. When you talk about the cross-border EU element, there are already services provided by the major banks via their banking networks or in combination with SWIFT that allow corporate customers to tap into messaging services that themselves link to local banks and the ever improving domestic settlement services.

In many ways the core concept of SEPA already exists, although access may be restricted due to set up costs, administration fees and barriers to entry, such as the need for volume in each market. In fact there are also companies that provide this linking of domestic settlement systems as a packaged service. At higher payment values, SWIFT already provides an efficient settlement service and, although expensive, it can be relatively cheap as a proportion of the potential value being transferred. Will a new enforced cross-border settlement system actually provide tangible benefits to those companies and consumers that effect payments, or will it just create additional costs that need to be recovered in some way or another i.e. by banks and their shareholders, consumers or corporate customers? It could be argued that the linking of many existing settlement platforms, liberalization of the payment market and maximizing of cash management services by banks and non-banks could actually have met the same goal at a lower cost and in a shorter timeframe. The consumer market for money transmission has become just as competitive and new providers are focusing on reduced FX charges, reduced transaction costs, more efficient means of settlement and execution on a global basis. Although provision of payment services and competition in this market is likely to further accelerate.

The European banking sector and the related parties will have spent vast sums bringing their payment and cash management products in line with the aims of SEPA and the European Commission. During this time the sector has also had to deal with a huge reduction in fees and increased competitive pressures. These pressures will increase in the years to come. It seems likely that banks will seek ways to mitigate this cost and some of those measures can already be seen. The view and experience to date is that cross-border payment volume will continue to increase significantly and the transactional costs post SEPA (i.e. excluding development costs) will reduce. This will offset some of the pain resulting from reduced pricing, however, in my view it will not be enough. It is quite possible that domestic transaction pricing and cross-border pricing within the EU will start to witness a convergence. The Financial Times recently reported that the average cost of a cross-border payment in the EU had reduced from €24 to €2, a massive reduction and further reductions are likely. But as SEPA comes to pass, banks could quiet rightly point out that they are moving to a position of subsiding domestic and cross-border settlement in the EEA, especially as settlement timeframes shorten, the ability to use free funds (balances in settlement) and a continued erosion of FX revenue as more members join the euro. Therefore, domestic transaction pricing may increase (and domestic volumes for a bank can be very large) and the cross-border element may decrease less than might be expected, resulting in maintenance of the status quo for the banks. Pricing will also appear in other forms such as access to use fees, monthly management fees and minimum balance requirements, already a feature of some bank offerings. Also we have already seen draconian charges for payment instructions that require repair for incorrect formatting or wrong SWIFT codes/IBAN numbers, increased pricing for payments tagged as urgent and even pricing for collection of items that used to be free.

In terms of cash management services, SEPA itself will do very little to enhance these services. This part of the payment process is often more important to those executing and managing payments than the underlying settlement system or the price (within reason). However good the settlement system may be, the means by which corporate customers access those systems can often be much more important to their day to day operations and efficiency. The sort of features a corporate requires include simple integration tools, easy enquiry functions, the ability to net across countries, the ability to generate notifications to interested parties, real-time balance and status reporting. Some cash management products incorporate these functions today but the more functional and high specification end of the market does have barriers to entry, including cost and entry level requirements. There already exists a difference between the cash management and support services that can be accessed by a large global company than those available to a smaller company.

A piece of European legislation that could have greater long term significance to the corporate payment market, both domestic and cross border, is the recent Payment Directive. Although formal structures and implementation may not take place until 2009, this Directive puts greater trust, brings more credibility and more product options to those non-bank entities providing payment related services. It will offer a real alternative on payments provision to the corporate and consumer sector and is likely to bring further innovation to the payment arena, keep pricing down, driving product quality forward and generally allowing much wider access to high quality cash management products. These companies will also focus on a much wider geographic offering in a one stop shop. Although the detailed proposals are still to be defined, it is likely that payment institutions will come under the remit of the Financial Services Authority. As organizations they will have certain minimal capital requirements, have their management and ownership scrutinized and their working practices and procedures reviewed. These organizations will be able to offer payment services, join settlement systems, issue debit and e-wallets and generally participate much more actively in the consumer and corporate payment markets.

Although SWIFT and the current banking community will still be the optimal route for managing and processing high value items and managing large liquidity balances, the banks will still retain control of large parts of the payment process and the resulting balances, with the payment institutions working with banks and acting as an aggregator and manager of smaller and medium sized companies. The role of these new institutions will evolve but will generally use technology and a lower cost base to bring payment validation and management tools, more user friendly products, develop more bespoke cash management services and generally manage client relationships. On the same basis that companies are multi-banked, it will be in companies’ interests to develop multiple payment relationships to allow them to tap into a wider range of service offerings and increase efficiencies.

To those involved in effecting cross-border payment and collections, it is of course important to keep up to speed on SEPA but, by looking outside the traditional cash management providers – i.e. banks, there are some new and often quite exciting products that can be accessed. These include local collection methods if your business has local consumers or suppliers and where there is a need for low cost and efficient settlement for payments across a wider geographical area. Also for the smaller and mid-corporate sector where access to some banks’ cash management products is either too expensive or not available, these alternative providers may be able to provide products that achieve the same end result but at lower cost.

As for SEPA, it is a good idea but a single settlement system across the EU region is only one part of the payment picture when compared to the global nature of businesses and the need for high quality cash management and payment execution products. Also some of the key aims of SEPA will already have been achieved before a truly single European settlement system is live and operational, so maybe the benefits and effects for the corporate sector may not be so important, although it undoubtedly will bring a massive change for the banking sector and may result in further consolidation within the sector.

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