The Impact of SEPA in Portugal
The single euro payments area (SEPA), one of the top priorities that came out of the Lisbon Agenda, aims to ensure that any euro payment carried out by any credit institution within the European Union, Norway, Iceland and Liechtenstein or Switzerland – but mainly euro area – is subject to a uniform set of standards, rules and conditions and can circulate as easily, quickly, securely and efficiently as in national markets today.
SEPA is a political goal more than an economic need. A political goal because it emerged based on the European Union (EU) and Economic and Monetary Union (EMU) principles, namely the intention to build up an open market, to promote free competition and to create a single payments market, following the introduction of the euro as a single currency. It is not an economic need because the volume of cross-border payments across Europe is not relevant: in Europe the average is about 3% of all payments and in Portugal they are even less, representing only about 2%.
Nevertheless, SEPA will reshape the European payments landscape and, consequently, the Portuguese system. Thus the implementation of SEPA requirements for the Portuguese financial market has already started and is expected that it will meet the established deadlines. To undertake this strategy, the existing formal interbank structure named CISP (payment systems interbank co-ordination commission) was nominated responsible for the definition and approval of the Portuguese SEPA migration plan.
Also, CISP’s previous organisation was restructured in order to mirror the European Payments Council’s structure and, besides an executive committee, a secretariat and a general support department, it is composed of five major working groups (cards, credit transfers, direct debits, cheques and link to TARGET2) and two cross working groups (cross-border payments and interbank fees). Its board members are Banco de Portugal (chairman), the five major Portuguese banks, the Portuguese Banking Association and SIBS (the Portuguese financial system automated clearing house).
It is thought that SEPA implementation in Portugal will not be overwhelmingly complex, as SIBS, the fifth biggest ACH in the Europe 15, operates as a service provider to banks and its customers across the entire payments value chain.
SEPA will allow customers to make cashless euro payments to any beneficiary located anywhere in this area using a single bank account and a single set of payment instruments, namely SEPA credit transfers, SEPA direct debits and SEPA cards payments. There will then be no difference between domestic and cross-border payments. The plan defined by the Portuguese Banking Community to provide and allow the migration and implementation process to SEPA, foresees that SEPA products will begin to be provided to customers as early adopters from January 2008 and that national schemes will be in place, at least, until the end of 2010.
It is relevant to frame these three realities in Portugal with statistics. Figures from 2006 show that there were almost 54.6 million electronic credit transfers (representing €74.9bn), direct debits totalled 71.3 million (€9.8bn) and Multibanco, the Portuguese card system, reached 1.29 billion transactions (€61bn). This year, both non-card and card payments are increasing in volume and in value.
The implementation of the SEPA credit transfer scheme in Portugal is on schedule and customers will be able to carry out SEPA compliant credit transfer payments from January 2008. In the first phase, both current and SEPA schemes will coexist, preserving the actual level of service offered to the market in terms of quality, security and functionalities. A date to discontinue the current scheme has not yet been agreed.
The implementation of SEPA direct debits in Portugal will not be in place in 2008, due to the delay on reaching consensus on the payment services directive (former new legal framework), with its publication on the Official Journal of the European Communities finally expected for the end of this year. Even so, there is already a cut-off date – November 2008 – for its transposition to EU members’ internal juridical frameworks. While this regulation is not very important for cross-border credit transfer, mainly because this type of payment is well established in the market, it is mandatory for cross-border direct debits. Hence, the estimation for the start of the direct debit scheme is January 2009.
Finally, on the topic of card payments, Multibanco will become SEPA cards framework compliant, basically in order to allow cardholders to do cash withdrawals and POS payments in the euro area, according to common rules, only restrained to merchants’ acceptance. To pursue these goals, SIBS has selected the third scenario of the SEPA cards framework, which means that all cards will be co-branded with both a national and an international scheme, and will explore bilateral agreement opportunities, such as the Euro Alliance of Payment Schemes, to turn Multibanco totally SEPA compliant. The current Multibanco scheme has more than 60 functionalities available at ATMs and 30 at the POS, but, for now, only cash withdrawals and POS payments are considered SEPA transactions, which mean that not all functionalities will migrate to the future SEPA Multibanco scheme.
Accenture recently conducted a survey in order to understand how senior bank and payment executives view the changing European payments landscape. Its scope encompasses ACH and card payments and it should be emphasised that Portugal was not one of the countries involved.
The research confirms that SEPA will result in enormous change not only to banks but also, in a wider point of view, to the European payments industry. Banks expect a significant impact on products, with an initial focus on the corporate sector, and an increased supply of competitive payment processors.
On the other hand, one of the main conclusions of this survey is that SEPA will cost Europe’s banks significantly more than expected. Almost 40% of banks and processors plan to replace legacy payments platforms and the scale and complexity of change around SEPA is overloading banks’ and processors’ IT developers and restricting investment in new product innovation.
Concerning business and technology-related initiatives, large banks estimate that their total cost could be between €50-70m. Averagely, the survey concluded that each European bank will spend about €45m with SEPA.
It is presumed that this investment will be lower to Portuguese banks, due to higher sophistication of the Portuguese payment system and because SIBS contributes to the general efficiency of the Portuguese banking system through the provision of technological payment solutions, allowing a high level of cost rationalisation.
SIBS, as a payment platform, will provide a set of services not only to facilitate and minimise banks’ compliance activities, but also to expand the range of options available to the banking community. Therefore, in order to reduce implementation efforts, banks will be able to send payments to SIBS that will ensure the technical connection, format conversion, validation, routing, processing and offer other value-added services (additional optional services). This means that banks will preserve current interfaces since SIBS assures conversion to SEPA formats.
For banks, it is crucial that they take the necessary provisions to become SEPA compliant concerning the contractual relationship with their costumers, to incorporate changes in their IT systems in order to collect additional data and process new technical features (e.g. use of IBAN and BIC) and thus assuring the deliver of all remittance information to the beneficiary.
The Portuguese payment system offers a broader set of services compared to other European countries and is already aligned with functionalities required by SEPA. This fact will mitigate the impact and transformation related to the Portuguese market. However, it is threatened by a possible decrease in the services supplied, because the required standardisation may reduce the number of functionalities available to banks and their retail and corporate customers.
Despite all SEPA advantages (such as more competition, lower prices, higher STP levels, processes and information standardization, etc.) its core services are not as prolific as those in the Portuguese system. For example, it is actually possible to re-load transportation tickets or to purchase train tickets in ATMs (Multibanco scheme), to ask for information related with the bank account number or to do a request for a return by the ordering bank (Portuguese credit transfer scheme) and to manage direct debit mandates in ATMs or web portals or to do a reversal only by the overcharged amount (Portuguese direct debit scheme).
In the Portuguese case, the challenge is to preserve the set of functionalities already provided by the Portuguese payments system to domestic costumers, hence maintaining the excellence and effectiveness of the service.