AOS: The SEPA Value Add for Banks and Corporates
The financial services industry is facing greater scrutiny from shareholders, customers and regulators as a result of the credit crunch, and the subsequent losses reported by the majority of the big financial institutions across Europe. What isn’t yet known is where the inevitable budget cuts will have the greatest impact. One area that has been under discussion in the press is banks’ investments in IT.
Unfortunately for many banks, the tide of legislation and regulation rolls on regardless of problems in the industry, and they have no choice but to do whatever is necessary to comply.
For banks in Europe, one key process that must continue through any financial difficulties is their single euro payments area (SEPA) activity. In January 2008, the first regulation deadline passed, that of SEPA Credit Transfers (SCTs). Banks did what they needed to so that they could meet the necessary requirements and timescales, but now that it has come and gone they can take the time to actually sit back and look at their SEPA offering as part of the bigger banking picture, and try to establish how they can actually make money out of these new capabilities.
This involves the banks going out to their corporate customers and encouraging them to migrate to the SEPA instruments, rather than waiting for the corporates to come to them. Banks need to educate their customers about the benefits of SEPA, something that has been sorely lacking to date. One key message that is likely to resonate with corporates is the savings that they will be able to make through the new, harmonised payments market and the corresponding reduction in payment costs, and improved cash flow. This will enable them to conduct business anywhere in Europe as easily as they currently do within their national borders. Unfortunately what isn’t yet clear is how these benefits will actually be delivered.
A significant barrier to corporate adoption of SEPA is the fact that it is seen as a bank-to-bank framework. In addition, the actual bank-to-corporate arena is competitive, rather than co-operative, and so the banks have not yet advertised what SEPA services they will be offering, and how much they will cost.
The reason that migration to SEPA is taking longer than initially hoped is the fact that there is no deadline for countries to stop using their existing legacy systems, which means that some have not even defined their migration plans. This makes it even harder for the banks to make the business case and move their corporate customers to SEPA.
In any competitive market, companies know that to win and keep clients, they need to add value to their services. This is no different in the world of SEPA, where banks need to demonstrate what additional services and benefits they can offer their corporate customers to convince them to migrate to the new SEPA instruments. These added extras, which complement the SEPA framework, are referred to as additional optional services (AOS).
By differentiating one bank from its competitors, and by helping establish the business case for corporates to migrate to SEPA, AOS can deliver significant benefits for the banks and help them get over the hurdle of increasing SEPA adoption. They also provide an additional revenue stream for the bank through tools such as e-invoicing, integrated treasury propositions and supply chain tools.
Unfortunately, as is all too often the case, implementing AOS isn’t straightforward and there are many considerations for banks before they launch their offerings. As the bank-to-corporate space is viewed as competitive, there are no collaborative guidelines on the implementation of AOS and how banks could co-operate to make them work effectively. This means that banks, while wanting to remain competitive, must find a way to ensure they can still deliver interoperable payment systems.
Despite the best efforts of many to get SEPA up and running and widely used across Europe, the fact that there is no deadline for the end of legacy systems, risks some banks simply delaying the roll out of new systems, and relying on their legacy infrastructure for as long as possible.
Gertrude Tumpel-Gugerell, from the executive board of the ECB, goes as far as suggesting that AOS may actually be a threat to SEPA due to the potential to keep the national orientation of payment systems. If this happens then there is the risk that we will end up with a situation where corporates can receive one service in their own country and another in the remaining SEPA countries – the so-called mini SEPA.
Despite the difficulties around establishing SEPA AOS, the benefits they can deliver both banks and corporates are significant. The banks have a differentiator in a competitive space, a revenue stream, and a way of demonstrating a real business case for their customers. And the corporates are the ones to ultimately benefit from the cost savings and the wider range of services available when they move to SEPA.
Financial institutions wanting to launch AOS for their customers need to ensure that they have got the efficiencies within their own operations to support them. They should have streamlined and consolidated systems for processing high levels of payment transactions, as well as delivering a consistent customer experience across all channels. Banks must not handle SEPA within yet another silo to meet compliance – it must be integrated into the core, end-to-end payments system as part of a wider strategic approach to payments processing. This will give them the solid foundation they need to develop cost-effective AOS.
As SEPA becomes a strategic tool for banks, AOS will be an essential part of their offerings. They will deliver additional revenue and help ensure that the investment that banks have made in their SEPA solutions delivers the necessary returns, as well as helping convince corporate customers of the value that SEPA can provide.
The European payments industry should monitor AOS closely, to ensure that the competitive nature of the bank-to-corporate space does not result in the development of systems that aren’t fully interoperable. It is still early days so there is time for the necessary definitions to be established.
Banks have a challenge ahead of them. Regulations have insisted that they put the systems in place for SEPA, but they now have to convince their corporate customers of the benefits of migration. This is the role that will be fulfilled by AOS. To make this work, and ensure their place in the future European market, banks have to make the investment now in putting the right strategic systems in place to underpin their future developments.