Finding SEPA's Value for Corporates
While credit issues are the hot issue facing the banking sector, this doesn’t mean that the preparation for the single euro payments area (SEPA) has come to a complete standstill. Indeed, in the same way that the corporate world is cost and reward driven, thereby directing a great deal of effort towards optimising the value of assets, reducing the cost of liabilities, minimising risk, lowering operational costs and maximising returns, the same is true for banks. This is especially the case when you consider the prediction that SEPA will contribute a loss of up to 60% of traditional bank payment business revenues. You might suspect that this would cause panic as compliance deadlines loom whereas, in reality, some teams are busy complying with the basic requirements, while others are taking a more strategic view.
SEPA is an initiative of the European banking industry, led by the European Payments Council (EPC), in response to the ‘Lisbon Agenda’ of the European Commission in 2000 and the subsequent 2001 EC Regulation 2560/2001, which harmonises fees for cross-border and domestic euro transactions. Its goal is to eliminate the national differences in payment instruments and processing infrastructures in Europe to improve efficiencies and thus reduce costs for all parties involved.
This should lead to reduced transaction costs, faster fund flows and easier access to common standardised information, as payment instruments and processes across Europe are standardised. It should also be possible to reduce the number and complexity of banking relationships and to centralise financial and liquidity management via the use of common instruments. SEPA should also provide the right environment for new added value services which enable financial services organisations to leverage the benefits of e-invoicing and improved receivables management.
It’s worth remembering that SEPA was started, not by banks or by businesses, but by politicians expecting that the EU should emulate the US and have common efficient payment processing. However laudable, to achieve the objective of a standard price and standard format requires that multiple national clearing houses follow a route to extinction, despite the fact there is not yet, and indeed there is unlikely to be for some considerable time, a single currency market.
With some exceptions, common corporate views are that SEPA is a ‘bank thing’, ‘banks are dealing with all this’, or even ‘there is nothing I need to do’. Some have quite rightly described SEPA as an ‘optional revolution’ because corporations are not required to comply and therefore, need to be convinced or encouraged to do so voluntarily, in order to extract potential value.
It’s a difficult transition, as, over the years, businesses have found ways and means appropriate to their needs of making payments and managing their positions using local formats and protocols. Some use channels through multiple banks, often based upon proprietary systems that are ‘comfortable’ to use. With no deadline for them to stop using local formats and mechanisms, it is no surprise that the, ‘if it ain’t broke, don’t fix it’ mentality presides.
There are clear opportunities to achieve value but this requires time and effort by managers whose main priority is day to day management of the business. The benefits need to be calculated and validated by each business.
The result therefore, is a general ‘wait and see’ approach from corporations, as the recent ‘World Payments Report’ highlights. This is also true of the public sector, despite the fact that it could provide 29% of the payment volumes needed for a critical mass of SEPA-compliant credit transfers and direct debits. This, and the fact that corporations and the public sector are not obliged to respond, make it unsurprising that a considerable number of banks are responding defensively and aiming to achieve the minimum SEPA requirements only.
Clearly some banks, typically large institutions with a history of cross-border payments activity and related business services are taking a different and more strategic approach to SEPA and seeking to exploit commercial opportunities by providing white-label payment services to other banks and/or payment traffic translation services. They are also working to define and deliver new revenue and margin generating products and services to capitalise on the opportunities that SEPA provides.
Surely all this change and the potential loss of bank revenue will impact the customer, be they retail or corporate customers? There is a strong likelihood that banks will seek new revenue sources, which are likely to be acceptable to customers, providing new and real value is being offered, but there is also likely to be resistance from customers to any attempt to charge for activities that customers view as an internal bank issue.
Two key elements of standardisation clearly and properly relate to accurate addressing of payments and inclusion of accurate reference information. There should be little justifiable resistance to requests from banks to their customers to update their international bank account numbers (IBANS) and bank identifier codes (BIC). This will then be held on a database for all European business counterparties. Nor should it be a surprise if banks seek to apply financial penalties should customers fail to use accurate data and thus create a need for message repair and such like. Organisations should also be assessing the use of, and improving the accuracy and content of, dedicated reference fields and structured remittance information. This will improve their data matching and the quality of information throughout the financial chain. However, it is also incumbent on banks to accurately and completely pass this data through to recipients – an activity which is commonly inconsistently handled.
SEPA is driving the appropriate investigation of core processes and infrastructures with which we have all become comfortable and, in many cases, complacent. Increasing incidences of declining trust in the banks’ handing of information needs to be addressed. There has also been a growing acknowledgment by banks and their vendors, backed up by customers, that much of the STP in the financial sector is ‘via a bank’s front door to its back door’ and not via the complete process which involves ALL parties. There is a difference between being efficient, often doing the wrong thing well, rather than finding an optimally effective solution.
A challenge and opportunity for banks is to calculate the ‘value of uncertainty’ and decide if they will respond defensively, thereby potentially risking loss of business, or if they will invest a little and/or perhaps work with another institution to at least hold market position or to aggressively invest in a strategic SEPA product set. The consequence will be to identify and deliver new revenue earning services to offset the losses inherent in SEPA being imposed by the political machine.
The challenge and opportunity for corporations is to decide if, when and how, to exploit the inherent benefits created by the core intention of SEPA and seek to find more cost and risk effective solutions for their financial operations and management.
I believe that SEPA will be a catalyst for the transformation of global and not just European businesses over time. In this context we are most definitely not just referring to banking but the business of commerce as a whole.
There is a real opportunity and need for corporate customers to develop a much louder voice. In fact, they need to be more demanding of the banks as their customers, so as not to allow the banks to slow SEPA’s progress to suit their own timetable. Corporate customers should be pushing hard for the improved trading environment that SEPA will bring.
It is in the best interests of corporate customers to ride the banks hard and not shy away from being a loud dissenting voice of the banks’ inadequacies, when appropriate. It might sound bullish but it doesn’t need to be confrontational. In fact, the measure of the banks’ maturity and recognition of the value of SEPA as an agent of change will be borne out by their responsiveness. Therefore, there is a great opportunity for corporate customers to develop a new open partnership with banks, as well as other parties who will drive this transformation, which will enable the real value of SEPA to be extracted.