SEPABank StrategyHarnessing the Service Opportunities of SEPA

Harnessing the Service Opportunities of SEPA

The World Payments Report 2007 confirmed the fact that payments are big business for banks in Europe. The report says that 20 of the largest banks processed approximately 30 billion transactions in 2005, representing around 45% of Europe’s total volumes.1 With the introduction of the single euro payments area (SEPA), there will be a substantial shift in volumes (increasing) and revenues (decreasing) by 2012. Banks in some parts of the market could see payments revenues decline by up to 62%.

With the largest European payments regulation ready for rollout this month, there is growing concern among banks about whether the incremental revenues generated by SEPA will justify the IT investment. This is a valid concern, particularly because none of the countries in the eurozone are expected to achieve the critical mass of SEPA payments before 2010. In fact, SEPA directly challenges financial institutions’ revenues and intensifies competition without any reduction in operational costs.

While banks are assured of the long-term benefits of SEPA, there is an immediate impact on revenues. As of this month, additional revenue received through differential services will abate, thereby increasing financial pressure on banks. The situation with direct debits is even more challenging. Many countries in the eurozone have more efficient direct debit schemes than those that will be introduced by SEPA. On top of losing revenue due to standardisation, banks in these countries will have to offer schemes that provide less value-added services than those provided by the proprietary schemes. Furthermore, some of the features of SEPA direct debits, such as mandate security and migration, B2B schemes and handling of interchange fees, have yet to be addressed to the satisfaction of European banks.

The uncertainty of revenues, coupled with increasing IT costs has forced organisations to explore new ways of increasing revenue from SEPA. Given the aggressive timelines, banks are inclined to consider outsourcing options in order to comply with requirements. The World Payments Report reveals that 58% of banks already plan to, or are, outsourcing all or part of their payments activities in the next five years. There is a huge market for SEPA support services for banks, which are already SEPA-enabled, either fully or partly. Medium to large banks, which do not have a business case to vindicate IT investment in SEPA-enablement, can also embark on the service side of SEPA. This article focuses on the differential service opportunities offered by SEPA for credit transfers and direct debits.

Recognising SEPA Opportunities

With approximately 27 billion electronic transactions being processed each year and payments services accounting for 33%2 of banking revenues; the benefits of providing payment related value-added services are definitely real and encouraging. SEPA volume growth varies by country and non-bank stakeholders may move up the value chain. Banks must act now, if they want to pursue a strong market position in the SEPA transactions processing business.

PE-ACH connectivity and settlement services

While a number of organisations, such as EBA, Equens and VOCA, have agreed to build a SEPA processing structure, more developments are expected. As multiple PE-ACHs will exist in future, a routing process that determines which PE-ACH to use plus actual transmission of the message is bound to become an important function. Besides connectivity services, banks can also provide settlement preparation and exception processing services, which are extremely important for effective cash management, credit risk management and monitoring of booking status. Services of bundling and de-bundling will have a huge demand, as most of the processing structures in banks are not capable of interpreting messages that contain multiple groups or multiple batches with different execution dates. Given the volume of transactions, this makes an excellent business case.

Message conversion services

According to the EPC029-063, although SEPA mandates UNIFI XML formats in the bank-to-bank space, there is no such format requirement in the customer-to-bank space; customers can send information in any format. The cost of interpreting legacy formats and converting them into UNIFI XMLs as mandated in the bank-to-bank space is costly. Besides the cost of creating this functionality, understanding the complexity of requirements and file types may be a daunting task, given the stringent project timelines. Moreover, banks have multiple back office processing systems that likely to be affected by SEPA. For instance, handling of R-transactions requires changes in the back-office message interpretation systems. Re-engineering these systems in order to handle SEPA transactions call for additional capital outflow. Banks that have the functionality of converting proprietary messages into those required by the PE-ACH and vice-versa will benefit from this opportunity.

SEPA compliance checks

SEPA will greatly affect corporates who perform frequent cross-border transactions. Although corporates are interested in taking advantage of the lower cost and standardisation offered by SEPA transactions, most consider compliance with SEPA as being the responsibility of banks and have, therefore, not invested in SEPA compliance. Corporates that fail to observe SEPA formats and standards, however, will be liable to pay penalty charges. This not only causes unnecessary delay in settlement but also results in high repair cost. Banks can carry out SEPA compliance checks on behalf of corporates in order to help them avoid penalties. Transactions received in an interchange can be separated into SEPA transactions and non-SEPA transactions. SEPA-compliant transactions will be processed and sent to PE-ACH(s) in dedicated connections. This service is particularly important for those institutions and corporates who are unaware of SEPA’s impact on their operations.

IBAN-BBAN-BIC stripping services

SEPA mandates that account numbers must be in IBAN format for both the ordering and beneficiary party. In the case of direct debits, debtor account and the creditor account must be an IBAN. As result, changes are required in the delivery systems as well as the back offices for receiving and interpreting account numbers. For instance, retail clearing in France does not accept account numbers in IBAN format and Belgium does not accept IBANs for domestic payments. If account number required by the back offices is a BBAN, the functionality to strip a BBAN from an IBAN is required. Similarly, if a BIC is not reported in the incoming messages, enrichment services can be used to look up the appropriate BIC on the basis of the IBAN, in order to comply with the SEPA requirements in bank-to-bank space. Such services identifying and reporting account numbers in the appropriate format (IBAN or BBAN) according to the requirement of the end-receiver (clearing house, back office or customer) can be charged at a nominal fee.

SEPA urgent payments

From the banks’ perspective, there is a noticeable shift in terms of categorising payments as high-value/low-value to categorising them as urgent/non-urgent. There is some speculation about the likelihood of the EPC launching a priority payments scheme where payments can be processed in approximately four hours. If information is not provided to the satisfaction of the protocols, straight-through processing will be significantly hindered. Organisations with SEPA implementation experience will definitely have an advantage, should there be any formalisation of such scheme. Banks that have the infrastructure to provide this service will get a bigger share of the market for urgent payments.

SEPA enrichment services

In addition to the enrichment of incoming messages with IBANs and BICs, banks can also provide other enrichment services. R-transactions report SEPA specific status codes and back office systems that already have a developed tracking system may not be able to interpret these status/error codes. The service of converting SEPA standard codes into back-office proprietary codes can aid the tracking of booking information. SEPA also requires the stating of mandate information for direct debits. Most customers have a manual process of inserting mandate information every time a direct debit is initiated. For creditors who have multiple mandates across multiple locations and customers, any error in stating mandate information results in unnecessary rectification costs. The service of mandate lifecycle management and e-storing of mandates is an attractive proposition; and coupled with the management of R-transactions, this will reduce the rectification time significantly.

Reporting requirements

Reporting starts with the effective handling of information received from the clearing house, logical interpretation of data, generation and timely routing of reports. With the presence of multiple delivery channels, status messages, back offices and report types, there is an urgent need for an effective, timely and dependable reporting management system. Although SEPA is a harmonisation project, there are certain issues that are yet to be addressed. For instance, the handling of central bank reporting (CBR) for balance of payments purposes is unique countries-wise across the EU. This requires compliance with country-specific business rules and customising the solution per country is costly for both banks and corporates. Banks should aim to provide flexible and scalable solutions to address this issue.

Other areas

The EPC has highlighted the opportunities for electronic payments and mobile payments. SEPA online payments will certainly benefit customers who will be able to make payments for their purchases using their bank’s Internet banking system. With the EPC encouraging competition, banks will now go head-to-head with non-bank players where corporates will be able to choose either banks or payment institutions to settle their transactions. Although banks believe that payment institutions will not be ready for this due to regulatory issues, they certainly expect a challenge from payment institutions. The EPC is seriously contemplating the electronic payments proposition. There is a market to be tapped and banks that rollout services quickly will have an edge over others.


Organisations should realise that SEPA is much more than just the harmonisation of euro payments; it has also created opportunities for providing differential services. The income from these services can accelerate the return on investment from IT costs and organisations should leverage their ‘early’ SEPA enabled structures. It goes without saying that the creation of such services depends on internal communication and the support of internal stakeholders. Banks that have previous experience of SEPA projects should re-visit SEPA documents, such as the EPC rule books and the new legal framework, in order to identify revenue opportunities, instead of considering them merely as compliance checklist.

1World Payments Report -2007 by Cap Gemini

2 World Payments Report -2005 by Cap Gemini

3SEPA Data model, version 2.2, approved on 13th December 2006 (EPC029-06)

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