SEPA: The Value of Payments Processing Outsourcing
With the introduction of the single euro payments area (SEPA), banks have had to take a long hard look at the technology infrastructure and systems they have in place in order to assess their payments processing capabilities going forward in the post-SEPA environment. It is fair to say that many regional banks, predominantly in Western Europe, have legacy technology and systems that are unsuitable for today’s requirements, certainly from a maintenance and risk management perspective.
Up until the launch of the SEPA credit transfer (SCT) in January this year, many banks have simply made tactical changes to their systems, such as temporary fixes or manual overrides, in order to ensure they would be able to cope with SCTs from day zero. While this option will suffice in the short term, it will prove ineffective and costly in the long term. Banks are now moving into the next phase of SEPA preparation by conducting comprehensive strategic assessments of their payments processing capabilities and infrastructure. One of the critical decisions they will need to make as a direct consequence of SEPA is whether to outsource their payments processing or maintain it in-house.
It is common knowledge that the revenue banks derive from payments has reduced substantially and that it is a volume-driven business – without the right volume, it is just not cost-effective for any bank. Thus, for a number of banks, outsourcing their payments processing will be the most effective option because their return on investment will not justify the cost and effort required to become SEPA compliant in-house.
There can be a social stigma attached to outsourcing though and, in order to make the right strategic decision, many banks will have to overcome any preconceptions of outsourcing and the perceived loss of control. Traditionally, when we talk about outsourcing, we think about shared service centres where functions that are not considered to be business critical are outsourced, which by definition underpins the perception that important functions are kept in-house. Banks want to be seen to as capable, operational players within the payments business and this can be equated with retaining processing capabilities in-house. This emotional tie could, however, jeopardise their chances of becoming truly efficient and ultimately competitive in the post-SEPA environment.
Sub-scale providers who do not process the volumes necessary to justify SEPA investment should not think of outsourcing as undermining their capabilities and therefore disregard it. From the end-user’s perspective, as long as their payment is processed on time, efficiently and cost-effectively, they will not be concerned about who actually processes that payment. A bank can still be a successful partner and build strong client relationships without retaining payments processing in-house.
In addition, SEPA covers new territory, which means that SEPA payments processing is not yet embedded within the infrastructure of many banks. This means that segregating the SEPA flow could be much easier given the fact that there isn’t a legacy environment. For instance, SCTs and SEPA direct debits (SDD) are processes that banks could manage more effectively if they were segregated from other components retained in-house. This is another key advantage for the outsourcing process as a whole.
The golden rule when it comes to outsourcing is to always make sure the process to be outsourced is in order before it is handed over to a partner. There have been numerous examples of banks and corporates outsourcing an inefficient process with expectations that the insourcing partner will be able to rectify those inefficiencies, as well as manage the function. This does not work in practice and is likely to cause the outsourcing partnership to fail. The first step is to always make sure the process in question is already functioning effectively before it is outsourced.
The next fundamental step in the outsourcing process is choosing the right partner. The cultural fit between organisations within an outsourcing partnership has become increasingly important. For instance, a large European bank that we have partnered with to process their SDDs as of November 2009 chose us because of the cultural fit between our organisations, which enabled open and candid discussions about progress going forward. The insourcing bank will also have their own expectations and criteria that will help them decide whether they want to partner with certain banks or not. Without trust and a real understanding of each organisation and its business model, the project will not achieve long-term success.
In addition to the cultural fit, banks should also be vigilant about choosing a partner that already has SEPA compliant systems and operating models in place. At Deutsche Bank, for example, we are now in a position to partner with other banks and increase our payments volume based on the investment we have progressively made in our operations and infrastructure. Significantly, there must be a technical fit between the partnering organisations, and a modular approach to wholesale solutions is appropriate because every partner will be different. We have various applications within our toolset that integrate between components and support different file formats and protocols, for instance. Having a robust service model in place and ensuring that both organisations are properly integrated – not just at a technical processing level but across the business – will also help support the end-user and maintain high service levels.
This is certainly one of the major components of a solid outsourcing partnership – full integration of the customer service model between the organisations. In fact, a truly successful partnership will not only maintain but enhance customer service levels. This requires the insourcing bank to have online access to data on client transactions, such as the status of transactions and service enquiries, so that any problems can be dealt with swiftly and seamlessly. Outsourcing is not just about processing the payment; it is also about managing everything attached to that core service.
Finally, it is important to note that while investment has been made by many banks to date, SEPA requires a degree of future proofing and a commitment to ongoing compliance. The introduction of IBANs and BICs is a prime example of this – when they were introduced, all banks had to upgrade their systems to be able to handle them. Further changes are likely within the European environment and banks need to be ready and willing to adapt and invest as required in the coming months. A bank that decides to outsource will benefit from the investments made by their outsourcing bank partner, which minimises any time, money and resources required on their part in order to comply with SEPA. At Deutsche Bank, while we have worked with software vendors to implement around 60% of our technology and infrastructure for SEPA, about 40% is proprietary technology and intelligence that we will continue to invest in going forward.
European banks are currently at different stages of the technology cycle in their preparation for SEPA. As stated earlier, banks must now take a strategic approach to this task and the next 12 to 18 months will be critical, as banks think hard about their operations and processes. In addition, while banks have coped well with the introduction of IBANs and BICs, as well as other changes around the SCT within their electronic banking systems, the launch of SDDs will be more challenging. The SDD is not just about the transformation of back-end processing but also managing front-end applications and the impact on the client interface. Banks need to ensure they have a robust technology infrastructure in place to handle the upcoming complexity of the SDD and, for many, an outsourcing partnership will be the best way to handle this.
There have also been announcements of joint ventures recently where certain banks have decided to partner and join their processing capabilities. A joint venture is a challenging prospect, however, and the organisations will face the same issues as those in an outsourcing partnership in terms of integration, etc. If we consider the position of two sub-scale providers, who perhaps have legacy technology in place, trying to develop this into a processing hub and robust technology platform could be difficult. There have been some successful stories of joint ventures though and cases where sub-scale providers have partnered and subsequently gone on to build out the business elsewhere.
The underlying message in all of these developments is that banks who are sub-scale providers have recognised the fact that joining forces with other financial institutions is a wise choice in order to prepare for SEPA, ultimately to reduce delivery risk and to reduce the overall investment needed. All European banks need to make some important decisions in the next six to 12 months to ensure they are really ready for all upcoming changes – outsourcing should certainly be on the agenda.