The single euro payment area (SEPA) is almost upon us and the finance industry is preparing for the challenges posed by the transformation. There can be no doubt that SEPA is a disruptive event for the payments industry – arguably the most disruptive event in the retail payments market since the invention of card payments. Yet the dawn that appears in January 2008 promises a bright future. All companies and individuals doing business throughout Europe may see business volumes increase dramatically as new international trading opportunities emerge.
Businesses and consumers will benefit the most from SEPA. They can now expect to see advanced services from banks across Europe competing with global banks to provide enhanced capabilities across SEPA. Companies will demand greater speed and a comprehensive range of banking services that cross borders. Banks will need to provide new and innovative services, improved cash flow, lower costs, real-time cash management and the widest possible reach.
Banks face difficult choices, particularly when there are many drivers influencing their SEPA strategy. Not only must they provide a SEPA Credit Transfer service from January 2008 and SEPA Direct Debits in 2009, they need to reach across 31 countries, reliability and timely delivery of payments, low costs, low impact customer migration plans and effective risk management controls, before they consider meeting the increasing demand for value-added services. Banks are dealing with increased operational and technology costs to run SEPA and non-SEPA systems in parallel while ensuring full compliance. Technology is part of the solution but also part of the problem, with the increasing cost and complexity of integration and maintenance of legacy platforms. However, we must remember that SEPA is designed to increase competition, and as in any competitive environment, the benefits will not accrue equally to all. Those banks with the ambition to win new business through differentiation will be early to market, and have significant competitive advantage over those banks that merely seek to comply.
A recent study by the European Central Bank (ECB) estimated the economic cost of SEPA to Europe’s banks. It examines three scenarios: (a) SEPA coexistence, in which SEPA payments are simply added alongside existing national payment schemes; (b) ideal SEPA world, in which all national payments become SEPA payments; and (c) eSEPA, in which the vision of a suite of next generation services become available in the next few years. According to the ECB’s analysis, banks expect to lose an average of 10% of their revenue in the coexistence scenario and 3% in the eSEPA scenario. However the latter will see their costs falling by up to 7%. This therefore means that the average bank will see a decline in revenues without a commensurate decline in costs, unless they offer services that ensure increased acquisition or new revenue streams.
Despite this threat, many banks continue to see SEPA as a compliance issue rather than an opportunity. Through our conversations with over 150 banks in the past year, we found that banks can be characterised along two axes: geographical spread and strength of SEPA strategy. This highlights four basic strategic approaches to SEPA: comply, defend, grow and conquer (see figure 1).
Unsurprisingly, the vast majority of banks are in the lower left quadrant wishing only to comply with SEPA requirements. In fact it is fair to say that the majority see SEPA as a compliance issue. Of the remaining banks, only a very small number are progressing ‘conquest’ strategies with slightly more looking at ‘growth’ or ‘defence’. Those banks that go beyond compliance will embrace the opportunities SEPA brings to control costs through additional services that automate, centralise and increase efficiency, including payment exception management, payment instruction repair and integrating multiple payment types and currencies into a single pipeline for payments. Some banks may struggle to determine which space they fall into, but more advanced businesses are clear about where they want their banks to be.
To compete, banks must offer advanced features, such as corporate access to the payment processor and direct debit management services. In addition, customers want their banks to embrace a vision of eSEPA by offering a comprehensive range of next-generation services, such as e-invoicing, e-billing to consumers, mobile and real-time payments. VocaLink has already identified some of these opportunities and is introducing them as value added services within its new pan-European CSM.
The majority of banks that are adopting a ‘grow’ or ‘conquer’ strategy are working in partnership with the limited number of Europe’s more functionally rich processors. For many, going it alone does not make commercial sense and they understand the need to find partners to succeed. So, it is perhaps ironic that the new competitive landscape created by SEPA also lends itself to increased cooperation.
With the challenges SEPA poses it is not surprising that different banks are responding in different ways, and the right back-office solution needs to address all of their concerns. In today’s competitive environment it won’t be enough to play safe and merely comply with SEPA. Those who embrace it will survive.