SEPA Compliance - The Tip of the Iceberg
The single euro payments area (SEPA) is now a reality. SEPA Credit Transfers (SCT) and their mandated operations are now in production, and with the new amendments the market is seeing a glimpse of life in the post-SEPA era. For many, confidence is high and the ability to deliver against a mandated change is now proven. Looking forward, all focus is now on the SEPA Direct Debit (SDD), long seen as the more complex of the instruments, and therefore a bigger challenge. But the question should be asked: is it the SEPA rules and their implementation that presents the challenge, or is it the need to adapt to a changing competitive environment?
Some banks may be viewing their SDD compliance project as a ‘tick in the box’ exercise. Taking such an approach means that the timeframes, activities and perceived challenges involved are viewed as straightforward compliance exercises. However, beneath the surface lies a larger and more fundamental challenge in determining the most effective means of fulfilling compliance and operational obligations, while at the same time, remaining competitive, harnessing profit and, at a minimum, protecting existing market share. Indeed, maintaining the bank’s operational efficiencies and ensuring that the ‘hard won’ business to date is not lost in the process is a challenge in itself. A challenge which is only compounded by the many issues which the reality of SEPA will bring, such as:
All of these represent significant issues for banks and cannot be taken lightly.
It is fair to say that SEPA ‘compliance’ is just the tip of the iceberg but, as we know it, it’s far too easy to focus solely on the all too obvious ‘tip’. More relevant is the lack of visibility, knowledge and understanding of the currents and perils of sailing in uncharted waters. Banks, or any organisations embarking on compliance projects, have the guidance of the rulebooks and the experience of other projects, but are still in uncharted waters as the post-compliance map is still undefined. This should not be seen as a barrier but as a real opportunity to forge ahead and to develop new initiatives through projects and services to ensure that the ship remains afloat, is strategically well-positioned and on course. Banks must be ready to face the challenges and storms that can arise and embrace these through efficient and focused solutions.
What are the challenges? Firstly, the operational and business requirements are significant for the SDDs. The complexity of the instrument itself, and the mechanisms that are required to manage, for example, exceptions (returns, refunds, and refusals), need careful consideration, design and planning. Profitable payment processing, in light of pinched margins as a result of SEPA, will rely heavily on high rates of straight-through processing (STP) and the automation of exception handling. Inefficient processes will hamper competitiveness and growth – and in some cases a bank’s survival in the post-SEPA arena. Banks must seek best practice solutions, which not only tick the compliance boxes but also bring efficiency through automation and support for efficiency in manual processes. Beyond this, new products and services must be considered primarily to meet customers’ existing expectations, but also as a means of revenue generation and competitive advantage.
Across Europe, customers will expect, at a minimum, parity of service between a bank’s SEPA offering and the existing national scheme. Banks must be aware that some national schemes have in effect already set benchmarks well above basic SEPA rulebook compliance, and thus simple compliance will not cover off customer expectations. As the scheme evolves over time, it is likely that the benchmark for SDDs will not be rulebook compliance, but in fact a culmination of the best national scheme standards currently available in Europe. Some banks will rise to the challenge and offer such cutting-edge services, threatening the market share of banks with less competitive offering.
What must banks do to protect themselves? Simply put, banks must see SEPA as strategic and align their SEPA project with existing overall business strategy. With a competitive cycle set to sweep the European SDD landscape, market leaders will begin to offer advanced services that will increase competition in the market, alter market share dispersion and ultimately lead to a growth in scale and revenue. However, this is not a realistic or achievable goal for all and banks must decide now on their competitive strategy for SEPA, be it an innovative leadership approach, a protective deployment option, or some may choose to exit the payments market entirely and remain competitively focused in other areas.
Looking towards the future and to the new and emerging SDD market, not all banks will take the same approach and nor should they. Banks of all sizes can make a successful transition with the correct approach providing it is realistically aligned with their own set of resources and capabilities. For some it may be wise to withdraw from this area and focus on other products, or to offer a basic service and couple it with other stronger products. In general, it may be that banks will fall into one of three categories:
Regardless of current size, revenue or positioning, all banks must start to see SEPA as strategic. They must determine their approach by looking at the market as a whole – the forerunners who are already emerging, the standards of existing national schemes, customer expectations, as well as the resources and investments available. Banks must determine what is realistic and achievable for them. Ultimately success will be determined by a combination of factors, such as the sophistication of a bank’s chosen solution, ongoing resource availability, strategy, approach and implementation, as well as the bank’s flexibility and communication strategy.
As banks start to consider their solution options, whether it is to build in house, buy a vendor solution or plug into an ASP or hosted solution, it is imperative that this decision is made with the future strategy of the bank in mind and with a long-term perspective.
For those weighing up the option to build-in-house, the high costs involved as well as the ongoing commitment required for maintenance and future development must be considered. Given the ongoing commitment required to maintain SEPA systems, specialist vendor solutions presents an attractive option. They can offer banks advanced services beyond their build capabilities, quicker deployment and time to market as well as early communication of their services to their customers.
For smaller banks, the option to employ the use of an application service provider (ASP) model would have many advantages such as the potential ability to offer services equivalent to those of larger competitors without having to build. However, the bank’s ability to differentiate itself is limited, with less control and general lock-in with the chosen provider, and so it is imperative for banks to choose their ASP provider carefully at the outset.
The awareness of SEPA compliance is certainly at the forefront of many an institution’s mind. What is now critical is to think ahead and be ready to deliver post-SEPA. Many institutions are ready to meet the deadline, or are well advanced with their SEPA programme. However, if they step back to review their work now, they will see the bigger opportunity to capitalise on their new-found payments capability and offer a greater service to the customer. Ultimately, banks must consider how their current approach will position them strategically post-November 2009.