The Road to SEPA: Building Opportunities
In six months, banks in the eurozone, as well as other European banks offering payment services in euros, will have to start offering single euro payments area (SEPA)-compliant services. By 1 January 2008, these services have to be in place and all non-compliant products must be removed from the market by the end of 2010. While the emphasis to date has been on the new direct debit and credit transfer products, the SEPA deadlines also apply to cards where the requirements are much less precisely defined and definitions are still evolving.
The aim of SEPA is that consumers and businesses throughout Europe will be able to make payments in euros across borders as efficiently and safely as they can domestically. Most importantly for the customer or business, making a payment across a country border will take place in exactly the same way as if the transaction was settled within his or her own country. This will mean that payments across Europe should all use the same instruments and be rated equally on both cost and speed of settlement. This will benefit people who work or own second homes in another country as well as businesses that trade extensively within Europe.
This change will require significant investment by the banks within SEPA in order to meet the requirements of the legislation. Organisations that process payments on behalf of other businesses are also affected, and for these companies it is not just cross-border payments that have to be made SEPA-compliant. The reduction in prices that banks and processors can charge for making this kind of payment will, in some cases, represent a substantial drop in revenues. Any investment that is made in SEPA compliance will have to deliver an equivalent level of cost savings to cover this loss of earnings, or other areas of banking services will have to be made more expensive in order to cover the shortfall. As additional charges for previously free services will not be popular with consumers, banks, acquirers and processors will also need to begin offering extra value in order to differentiate themselves in an increasingly competitive market.
The Payment Services Directive (PSD) that underlies these changes applies across all channels, and most banks find that a ‘channel-independent’ approach to delivering services is an important part of a SEPA strategy. The PSD was completed in April 2007, and will now go on to be ratified by individual governments within the EU.
The SEPA Cards Framework requires the use of open standards, such as ISO 8583 or XML messaging, and support for EMV. Since the new generation of XML-based standards is still being developed, the best available option is to use ISO 8583 messaging throughout. New ISO 8583-based standards are also under development. While the UK, France and Luxembourg have already completed the move to EMV, other countries in Europe all have a long way to go to convert their entire infrastructure over to support these standards. Any project to support EMV compliance should also take into account the need to build in flexibility to meet forthcoming SEPA-driven requirements.
Introducing payments that conform to this open standards approach requires careful thought, both from the banking institutions that are rolling out the new services and the customer organisations that will be using these new standards. Transferring existing customers to using the new standards will require a great deal of effort, as understanding needs to be built up and the cost implications of transfer are considered.
The biggest impact of SEPA is forecast to be the greater level of competition across Europe for handling customer payment requirements. On top of this are the costs of producing products and services that are compliant with the framework. The drop in revenues from customers inside the country has the potential to be replaced by other, international customers and services. Acquisitions can be made across borders and costs reduced compared to other local providers. This will potentially lead to a greater level of choice for organisations such as retailers: payments can be acquired in areas where lower operational expenditure and bills offset the additional set-up costs of being SEPA-compliant, and lead to long-term savings.
Like any major change in IT systems, SEPA has to be planned for and managed. Being able to simplify existing systems and remove additional costs will be one important part of the overall shift that all banks and processors will have to go through. This should then cover the reduction in available revenues that these organisations can generate in future. New interfaces will have to be provided in order to meet these demands, and some banks are viewing this as a reason to shift across to a new approach to processing payments. The overall approach that any organisation has to take is to view these requirements for change as an opportunity to streamline systems, rather than a burden.
Strategically, banks may view SEPA as an overhead or an opportunity, and the same is true of the IT project that will support the organisation’s compliance with SEPA. Combining any work to support EMV into the overall SEPA project instead of running separate projects is one way to improve efficiency as well as accelerating a bank’s EMV migration and allow it to meet the SEPA requirement for all payments to be EMV-compliant by 2010. This flexibility of interfacing and channels will also be a core part of any approach to meeting the needs of SEPA.
On top of this, there are other opportunities to reduce the costs of implementing and running SEPA-compliant services and products. An example of this includes core banking systems that run on proprietary hardware and software, which have been in place for many years. These systems have high running costs associated with them, as the number of people with the skills to manage these installations has decreased. Moving to open systems such as Microsoft Windows or Linux is an opportunity to reduce the level of costs associated with running the payments infrastructure. This does not have to be a complete replacement: the existing core banking systems could continue to process payments, while the newly required interconnects and additional services can be hosted on more cost-effective, open systems-based applications and servers.
Treating cross-border payments in the same way as internal payments does potentially open up a wider market for processors and banks: handling credit payments at the most cost-effective location, regardless of where this is within SEPA will be a large potential market for the future. Having the systems and services in place to take advantage of SEPA will be the biggest challenge for European organisations during the rest of the year, but also the biggest opportunity.