Bank Strategies for SEPA
All banks operating in the European payments business have had to consider how best to prepare for the introduction of the single euro payments area (SEPA) and this has been an ongoing challenge for almost two years. While many have confirmed their plan of action, others have yet to decide on which strategy to take. The latter is not an envious position due to mounting pressure from the European Payments Council (EPC) as well as European and local authorities, who are actively monitoring banks’ preparation for SEPA.
SEPA has not been an overnight phenomenon so why are some banks not as prepared for the January 2008 deadline as one might expect? There are two valid reasons for this.
First, the key decision for banks with regard to SEPA is whether or not they want to continue to process their payments themselves. One of the consequences of the introduction of SEPA is that banks must charge their customers the same price for cross-border payments (currently this is for payments of €50,000 or less) as they do for domestic payments, which has dramatically decreased banks’ revenues. As a result, many banks cannot justify the business case of staying in the payments business and making the required investment in their infrastructure and operations to comply with the new SEPA formats and products. We must appreciate the fact that the decision to outsource its payments business is a difficult one for any bank, as it relates to such a fundamental part of the business, and it is inevitable that this would be a long and complicated process.
Secondly, while many banks have confirmed their strategy for SEPA, they have faced delays due to technology and IT issues, such as unexpected difficulties in implementing the new SEPA XML formats in time for January 2008, as well as the changes made at the EPC level that have also affected their preparation. For instance, it was only June this year that the EPC announced officially that banks not only had to be able to receive payments by January 2008 but they also had to be able to send SEPA-compliant payments. In addition to achieving reachability by next year, banks also faced the challenge of preparing their systems and IT to send payments in time.
For those banks that still face uncertainty in terms of their preparation and strategy for SEPA, a valuable option is to partner with an insourcing bank who can alleviate the burden of becoming SEPA compliant. But what does outsourcing your payments business entail and what should banks look for in an insourcing partner?
An insourcing bank offers other banks who want to move out of the payments business one point of entry (from an operational standpoint) where they can access all payments products and services – both SEPA and non-SEPA. It is important to note that SEPA is one component of the payments business and, therefore, banks don’t just need a SEPA service provider but a partner who can manage their entire payments business.
If a bank decides to outsource their payments, the benefits are rooted in the fact that they do not have to make any grand scale changes to their operations and systems in order to become SEPA-compliant – this becomes the responsibility of their partner bank. The bank customer simply sends their payments to the insourcing bank, which converts them into the required formats and sends them on to the applicable clearing house. If a bank wants to use the insourcing bank’s SEPA products, they need to assess their channels and conduct format/connectivity testing. How long this process takes depends on the back office and IT department of the customer bank.
A further significant point is that SEPA will trigger the consolidation of banks in Europe and so banks that wish to outsource their operations will start concentrating their business with just one service provider – and it is the quality of customer and sales support that will determine whom banks decide to do business with. Customer expectations are increasing so, for example, while before the introduction of SEPA, banks were satisfied with seeing sales managers from their partner banks once or twice a year, they now expect visits at least once a quarter. They also expect organised training workshops and regular information on latest developments within the market from their service providers. Banks that insource will have to transform their relationship with customers in order to improve their service levels and develop more of a partnership with them.
The SEPA discussion to date has focused on the impact on European banks, but it is also important to consider the impact of SEPA on banks outside Europe who make payments in and out of Europe. How are they preparing for SEPA?
Large global banks will open up branches within SEPA and serve their clients in the region via a provider who offers SEPA services. At the other end of the scale, banks that are not big enough, or have decided not to open up an entity in Europe, will have to use a service provider based in Europe. In this case, the section above describing the benefits of using an insourcing partner bank is very much applicable. Before SEPA, most European banks were interested in receiving the profitable payments business of banks located outside Europe. Post-SEPA, only a limited number of European providers will be left to offer payment services to these banks; hence, banks outside Europe should choose their service provider carefully.
As a consequence of SEPA, the international bank account number (IBAN) and bank identifier code (BIC) is another important consideration for non-European banks. Indeed, because of SEPA, European banks are required to use IBANs and BICs on their domestic SEPA credit transfers as their standard account number on transactions and therefore banks outside Europe will also be required to provide an IBAN or BIC in order to ensure the straight-through processing of the transaction.
More education about the impact of SEPA is needed among banks outside Europe, as many still believe the IBAN and BIC requirements do not affect them. Banks outside Europe are starting to pay more attention to SEPA, however, and this is reflected by the fact that sessions about SEPA have been held from the non-European bank perspective at various industry conferences this year.
For European banks, the challenge is whether they want to stay in the payments business or outsource to a partner. The advantages of outsourcing are clear and the case becomes stronger as the market consolidates and those banks that remain focus more on customer service in order to survive and prosper. Banks that insource must differentiate themselves at the service level, for example, by enhancing both customer and sales support. This means ensuring they have flexibility within their systems and channels as well as the ability to provide real-time information on transaction flows.
For non-European banks that do not have an entity in Europe, our advice is that they should rationalise their euro clearing and choose a euro clearer that is really focused on payments within their overall banking strategy. If a bank decides to set up an entity in Europe, it will also have to decide whether it is used for SEPA payments as well.
While some uncertainties still remain as the banking industry moves closer to the first SEPA deadline in January 2008, there is no doubt that the banking landscape will look very different post-SEPA. And, in order to remain profitable in an increasingly competitive landscape, each bank must choose the right strategy going forward.