SEPABank StrategySEPA – Catalyst For Necessary Change

SEPA - Catalyst For Necessary Change

For Austrian banks, the introduction of the single euro payments area (SEPA) poses a number of challenges. The domestic payments infrastructure is already well organized and based on a low cost model, but it is not compatible with SEPA and therefore needs transformation. Austrian banks have the task of achieving this and also turning the introduction of SEPA into an opportunity for Austria.

The Austrian Payments Strategy

In the late 1970s, Austrian banks (dependent on the domestic market) started building the domestic infrastructure for payments. Today, domestic payments are as cheap as possible and prices for cross-border transfers, which are primarily used by corporates for their import/export businesses, are higher. (Cross-border payments for private customers are rare.) Retail infrastructures such as cash dispensers are free of charge for Austrian customers while float earnings, as part of the revenue stream, are used to cover production costs.

The payments industry is a sellers’ market with banks developing products to fit the needs of their customers in terms of functionality and price. Electronic banking was introduced to the market and a single window option was set up for corporates using the multi-bank standard (MBS), which allowed the speed of processing a payment order to be measured for the first time.

The SEPA Vision

When European banks came together early in 2002 and formulated the white paper for SEPA, they were still digesting the shock of Regulation 2560/2001 (also known as the Price Regulation) and interpreting future challenges in different ways. The headline of this SEPA vision said ‘Regaining the Initiative’ and banks started the complicated and cumbersome process of self-regulation. This has forced banks into making important decisions about consolidation, such as whether to outsource, and this affects more than 7,000 banks – not an easy task to undertake.

It took the European Payments Council (EPC) nearly one year of internal consolidation, accepting competitors as partners in this change process and understanding the change itself where infrastructure will no longer serve as the differentiator in the European payments business. Once the structure and content of each individual working group was established, progress started to be made.

The development of SEPA from vision to reality was influenced and formed by many stakeholders with different interests. There are parties with regulatory power, i.e. the European Commission and the European Central Bank, which are compelling and motivating banks to make changes and the EPC, which produced the rule books, clarified the way forward by balancing the different interests of its members, regulators and the Euro Banking Association. There are also the interested stakeholders who are waiting to formalise their business opportunities and the end-users who must accept the new dynamics of the European payments infrastructure.

SEPA Becomes a Reality

Parallel to the EPC working programme, Austrian bank representatives started an internal awareness campaign to convince their superiors to change existing payment strategies and formulate new ones. In order to support these activities, the Austrian banking community established the Austrian Payments Council, which operates as a shadow of the EPC and converts European decisions into reality for the Austrian market.

SEPA projects have also been set-up and are now operative, IT personnel are actively involved and provide their input and, most importantly, the necessary budgets have been agreed. What is not yet certain, however, is the broad acceptance of new products and structures by customers and, above all, the role of public authorities that should act as the front-runners and support stakeholders in the migration to SEPA.

SEPA’s Role as Catalyst

Looking back and analyzing the overall change process, the political demands of the European Commission, the pressure of the European Central Bank and the clear requests of lobby groups of corporates and retailers, now appear more positive than they did at the beginning of the process. Existing differentiation in infrastructures generates little difference in the market but leads to high and long running IT costs for European banks.

Banks themselves started a change process but before SEPA this was only in certain segments. In terms of the speedy execution of payments instructions, electronic banking and real-time information were introduced, thus supporting the general need within today’s society for online information. Austrian banks changed their proprietary format but they were alone in doing so compared with their counterparts in Europe.

But this was not enough and too country-specific. To support the European economy, there was the necessity to unify the fragmented markets across Europe and to unify the basic procedures of payments. However, it is true to say that while a customer might not directly ask for and buy a SEPA credit transfer or direct debit, they will be very interested in the functionalities of a payment post-SEPA:

  • Payments will be transported in a guaranteed time span.
  • Payments will be completed from originator to beneficiary.
  • Payments will have no change in the principal amount.
  • Payments will be transported in a commonly agreed format using business English for all applications using XML.

All this would not have been possible if politicians had not forced European banks into moving towards one concentrated approach based on commonly agreed changes in European infrastructure.

SEPA will act as a catalyst for necessary change in many ways:

  • Payments will be ‘industrialized’ – as the infrastructure level is harmonized, the product level will become more competitive. Payments will be more innovative and customer-focused. We have to concentrate on standardised flexibility, standardisation for cheap production and flexibility to answer market needs.
  • Consolidation will be accelerated – SEPA projects will force banks to think about their payments strategy. As a result, banks will either outsource or insource payments activities and both decisions can be a win-win situation. For example, while the outsourcing party reduces their processing costs dramatically and can concentrate on their customer business; the insourcing party achieves scale due to additional synergies.
  • Customers will be part of the product development process – payments will become a buyer’s market. Customers (primarily corporates at the beginning) are increasingly interested in payments and are willing to voice their concerns and interests at an early stage. Banks are well advised to use this additional input and develop products with their customers.

Conclusion

After the shock of the Price Regulation and the fact that politicians threatened to – and did – intervene in free market practices, SEPA has been regarded as a necessary evil to comply with regulatory demands.

In making SEPA a reality, some hidden advantages have been achieved in this process, which banks and customers expected for a number of years, but were not achievable in individual countries due to cost considerations. Finally, at the start of the migration phase to full SEPA – having read numerous articles and cost projections of consultants and having spent nearly five years in discussions about necessary changes and formulating new strategies – it is time to concentrate on the benefits of SEPA and its important role as a catalyst in the European payments market.

Politicians, thinking decades ahead, forced European banks to align their three-to-five year business plans with the European picture, formulated at the Lisbon Summit in 2000. And banks, for the first time, are acting as self-regulators and organizing the European payments infrastructure in a new way, supporting their customers to compete in the European and global environment.

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