Dealing with SEPA - challenges and opportunities
Over the past seven years, the European Union (EU) has been working towards a single scheme to govern payments made within the eurozone. The single euro payments area (SEPA) covers 31 countries and aims to deliver a framework within which all payments are treated equally, whether they are made within one country or between countries. However, this goal represents a massive test for organisations across Europe, both in terms of the technology to support the payments infrastructure and the business processes that it will affect: all organisations will face greater levels of competition, but also have more opportunities to grow the overall volume of payments that they process.
Within the EU, the euro is the official currency of 13 countries. It is also used by businesses and financial organisations in countries that have not yet adopted the euro, such as the UK. SEPA has been conceived in order to make payments more efficient across the EU. It will ensure that all transactions made between organisations are treated equally, regardless of country borders.
The benefits of SEPA include tighter integration between payment systems across Europe, as well as increased harmonisation of legislative frameworks across the countries involved. The overall aim of SEPA is to deliver better services for consumers through increased competition, more efficient processing of transactions, and greater transparency of service levels and pricing.
This is an admirable political aim and is designed to facilitate the movement of goods and services within the EU. However, actually co-ordinating the different networks that exist in different countries is another story. Each member state has their own payment regulations and a multitude of different settlement timeframes, operational processes and pricing models to consider.
Delivering the common payments environment is therefore a massive undertaking for all the organisations involved, particularly given the timescales that the European Commission and the European Central Bank have put in place. 2010 – just two years away – is the final deadline for all payment systems to meet the SEPA guidelines and the phasing-out of non-compliant products.
There are a wide number of organisations that will be affected by the introduction of SEPA. From financial services providers such as banks to the overall payment schemes and processors, there will be an enormous impact on both the business models in place as well as the IT required to meet these processes. For banks, the biggest impact is that organisations will no longer be able to charge for handling cross-border payments, thus reducing their revenues. This drop in revenues is in addition to the cost of complying with the new legislation.
The SEPA framework rollout has not been helped by the slow progress of the Payment Services Directive, which is the European Commission’s framework to govern how payments should be processed within and between member states. This was finalised in April 2007 and will now have to go through member state parliaments in order to be ratified. Included in the Directive is a series of common requirements for providers of payment services to ensure that all transactions are processed transparently, as well as a set of uniform rights and obligations for both users and providers of payment services.
SEPA has faced a large amount of criticism, mainly from the larger banking organisations that are affected by the new guidelines on cross-border payments. This has been focused on two main areas – lack of a business case for the rollout and the short deadlines that organisations are faced with. Many banks are unhappy that SEPA-compliant products have to be on the market before the laws on how payments should be processed can actually be ratified by the member state governments.
The biggest concern though is the overall cost of complying with the new regulations. With the loss of existing revenues from cross-border payment processing, many organisations are looking at the substantial changes that will be required for compliance with SEPA with some trepidation. The longer-term benefits of compliance include speed of transactions and making the overall business of payments easier, but this does not apply to the vast majority of transactions that banks will process on behalf of their customers. Costs may have to be raised across other services in order to meet the shortfall in revenues.
From an IT perspective, SEPA will require a large investment in order to change existing architectures, as well as new hardware to deal with the services that are being rolled out. Taking the time to examine existing business processes now will reap dividends in the longer term, as it will show where initial investments made now can potentially remove overheads in the future. Undertaking a gap analysis will show where this investment is required, which areas are already compliant and which areas can be prioritised.
One of the first opportunities for companies to benefit from SEPA is the creation of a new payments handling organisation: the payment institution. This category of organisation is designed to handle smaller levels of payments compared to the larger processors and banks. A payment institution can provide payment services as well as other services linked to payment processing, such as foreign exchange or access to payment systems for clearing and settlement purposes.
However, these organisations will not be allowed to take deposits from customers or provide other services that would require a level of scrutiny in the same way as banks. Fees paid by the organisation’s customers would need to be separated from the money being transferred or other funds being processed. Although the payment institution would be subject to less stringent regulation and corporate governance than a bank, the type of business activities that it could take part in are fundamentally more niche applications and would rely on providing a level of personalised customer service, rather than economies of scale. For these new organisations, or new arms of existing institutions, availability of IT systems will play a crucial role in meeting these customer needs.
Payment processors will also be able to benefit from the wider market opportunities created by SEPA. These organisations supply specialised payment fulfillment services to retail banks, card issuers, merchant acquirers, and corporations. SEPA will potentially allow processors to extend their reach across the EU member states through infrastructure development, partnerships or joint ventures, but this will also require development of common standards and potentially investment in new systems.
A select number of processors already offer their services across a number of EU member states, including back-end billing systems for both card issuing and merchant acquiring operations. SEPA is leading to increased standardization in the market, and this could translate into greater overall opportunities for entering new markets and more processors covering multiple countries. As a common infrastructure is developed, these processors can achieve greater economies of scale and therefore expand the overall payments market.
Banks of all sizes will also be able to expand their businesses in the wake of SEPA. Both the retail and corporate sectors will be able to expand the range of services that are on offer through using the additional flexibility that SEPA is designed to give.
Retail banking currently tends to be focused on individual country markets and very few banks address the overall European market. The advent of SEPA may change this: the acquisition of Abbey by Spanish bank Santander, and the acquisition of Dutch bank ABN Amro by the Royal Bank of Scotland consortium are evidence that the retail banking market is consolidating across European borders. This cross-border consolidation will help banks deal with the costs of complying with SEPA, as well as providing greater economies of scale when it comes to payments. These moves will lead to the possibilities of banks offering services in a number of countries, not just those where they have physical offices.
Managing this potential entry into new geographic markets will have to be carefully planned: aside from the IT and availability issues of providing a service without a physical branch to back them up, there are financial and cultural implications to consider. Moving into a new market will require a substantial support operation that is available around the clock and has good understanding of local banking requirements. This may be best approached via partnership arrangements or by outsourcing. In the future, if a physical presence is needed then further alliances could be struck with organisations that supply other services to local communities, such as post offices or supermarkets.
Corporate banking is another key market with significant opportunities for development. Multinational enterprises need to move funds on a daily basis to pay their suppliers, collect revenues, and ensure they minimise their transaction costs. Currently, corporations require relationships with multiple banks in different markets and a huge number of bank accounts to meet these demands. Because of the management involved, corporations incur significant administrative costs in operating and managing these various accounts.
As SEPA comes into effect, there is the opportunity for banks with suitable geographic coverage and services to provide these large multinational organisations with a one-stop banking service. As organisations move to having one master banking relationship, quality of service and speed of response will become key differentiators: availability of systems and meeting service level agreements will therefore be critical areas of investment for banks that move over to this business model.
The retail sector is also going to be affected by the move to a single payment area. The biggest area of change will be for those companies with operations in multiple member states, such as larger supermarkets or retail chains. Instead of having multiple relationships with acquirers in each territory, the retailer can enter into a contract with a single acquirer across SEPA. The acquirer in turn will be able to leverage scale economies from the merchants’ total European business and pass these savings back to the merchant in terms of reduced pricing or increased incentives.
The new payments environment will provide a wider choice of payment service providers: instead of being locked to those organisations in the same country, retailers can shop around to get the best deal for getting payments processed. In future, the move to common processes and acceptance of payments will mean that processors will be able to offer their services across Europe. In this environment, the quality of service and speed at which payments can be processed will be critical to a processor’s success in the longer term.
For the man in the street, SEPA will mean that he is able to use a payment card at a point of sale (POS) and ATMs across Europe without any additional charge being incurred, as well as transferring funds between accounts, and making online payments to and from virtually any person or business with a bank account in Europe. Behind this, however, a fundamental shift in both business practice and infrastructure is required from all organisations involved within the processing of payments. Because the deadlines over how quickly payments are processed are much tighter, this will lead to a greater level of competition around the market. Availability of the IT systems that support payments processing will therefore be a key competitive differentiator for the future, along with the ability to provide innovative services.
In order to deal with the challenges of SEPA, banks and corporate organisations are already planning their response. The right mind-set across the organisation is as critical in this situation as any investment in new technology. Treating SEPA as an opportunity to create new services and revenue generating opportunities will be crucial to ensure the organisation is successful, not only in meeting the requirements of SEPA but also in the business environment that SEPA will create. With the rise in competition across Europe that the move to a single payments market will lead to, the infrastructure and availability of payments systems will be a crucial part of company strategies around SEPA.