SEPA: Industry Targets for Year-end 2008
28 January 2008 was a milestone for the European payments industry, as it witnessed the launch of the single euro payments area (SEPA) – the pan-European initiative to standardise cross-border and domestic payment flows into a single scheme. Nine months since the launch of the SEPA Credit Transfer (SCT), the new file format for mass euro payment transactions, initial teething issues have been addressed and there is industry consensus that that the new processes and infrastructure are working well.
Today, over 4,300 banks are reachable for SEPA, which means they are able to accept payment instructions from their clients in the SCT format – an impressive figure representing more than 95% of total payments volumes in Europe. A smaller number have attained full sender capability but full functionality should be achievable for all by the end of the year. Furthermore, our statistics highlight a 25% increase in volumes between June and July, which indicates the growing momentum among clients in adopting the new SEPA instrument. We expect a more substantial increase over the rest of this year and throughout 2009.
The SCT has met market expectations in terms of volume though this was moderate in the first few months and mostly limited to cross-border transactions. The similarities between SCTs and legacy credit transfer schemes have allowed many institutions to implement the first stage on their existing infrastructures. More recently, many corporates have started to convert their domestic account identifiers to the international bank account numbers (IBANs) and bank identifier codes (BICs) – a significant pre-condition for the wider use of the SCT – as well as national payments. Conversion tools are being developed in many countries and this will accelerate the increase in volume significantly.
While the successful launch of the SCT is a great achievement, the industry has still some way to go before SEPA will be judged to be an overall success. The next stage in the implementation process will be the introduction of the SEPA Direct Debit (SDD), which will bring on board high-volume retail organisations with millions of transactions. Following the launch of the SDD, bank customers will be able to arrange direct debits to pay companies with bank accounts in any of the 31 European countries participating in SEPA.
The SDD is a much more complex instrument compared to the SCT and there are outstanding issues that still need be resolved in order to ensure its introduction in November next year. A crucial issue for the regulatory bodies is ensuring that the Payment Services Directive (PSD) is implemented on time and in a consistent fashion across the eurozone so that the legal foundation for the launch of the SDD scheme is provided.
The good news is that all member states have committed to implementing the PSD so that it will come into force on 1 November 2009. There are two key elements affecting the SDD: authorisation of a payment and return rights and periods. Importantly, there is actually little contention with regard to either of these issues so they are likely to be implemented fairly painlessly.
A bigger hurdle for the change over in some countries is the mandate migration and the European Payments Council (EPC) issued a paper in June where it acknowledged that this was one of the major challenges regarding the SDD. A solution that will be accepted by all markets participants is vital and we expect pragmatic solutions to this problem to evolve over the next months in those countries where the legacy direct debit mandates cannot be used under SEPA rules.
Importantly, the banking industry has made a firm commitment to the launch of the SDD in November 2009 and this was re-affirmed at the EPC’s plenary. In addition, the European Commission and the European Central Bank (ECB) recently encouraged the EPC to move ahead with the launch of the SDD scheme and provided their guidance on the issue of multilateral interchange fees. These declarations from the EPC and European authorities underpin their confidence in addressing the uncertainties around the SDD. It has also provided the market with the much-needed affirmation that the SDD will be launched within the stated timeframe.
Fundamentally, SEPA will only truly be judged a success once a critical mass of domestic transactions has migrated across to the new instruments. While the delay until the end of 2009 of the introduction of the SDD may have made the original 2010 target for full SEPA migration unrealistic, regulators and financial institutions need to work towards avoiding any further delays.
The real challenge here will be continuing to make the case for SEPA to a corporate audience that has shown some reluctance towards the initiative. While many of the larger multinationals have been able to see the potential benefits from the early stages – cost savings through greater operational efficiencies and further centralisation potential, to name but a few – there are corporates that are yet to be convinced that SEPA will yield any tangible benefits for them.
The encouraging message we receive from the corporate market is that everybody considers the creation of a harmonised payments area as a necessity in meeting the objectives of harmonised euro financial markets. Despite some practical criticism of the details, which are inevitable in such a huge harmonisation effort, we have not heard anybody question the initiative as such and the medium-term benefits are acknowledged by corporates of all sizes. For example, SEPA provides business potential for the mid-cap market simply by creating a collection instrument applicable across Europe facilitating access to markets abroad. Also mid-cap corporates should not underestimate the cash management and operational efficiencies they can benefit from as a result of SEPA, such as improved reconciliation due to the new data contents. In addition, compared to large multinational firms, SEPA migration will generally be less complex for small and mid-cap companies who have simpler infrastructures in place and often use standard modules in their financial processes that are made SEPA compliant by the system providers.
Crucial to engaging this group will be wrapping up the outstanding issues and uncertainties surrounding the initiative as soon as possible. As discussed, a great deal of progress has already being made in this direction: tools for converting domestic account numbers to the IBAN/BIC format are being developed in many countries, and work is ongoing in resolving the remaining issues around the SDD. While these measures will without doubt ease some of the difficulties associated with migration, corporates should seek to be proactive in taking into account the positive impact of SEPA on business practices beyond the payments space, such as liquidity and working capital management.
Public authorities must also play their part in encouraging wider adoption of the SEPA instruments. There are still those that are taking a ‘wait and see’approach but some are now taking proactive strides forward. A state pension fund in Germany, for example, has recently changed its application procedure for pensions so that applicants can only apply for pensions by providing IBANs and BICs, which means, as a consequence, they will use SEPA to pay their pensions. If more public sector bodies give such a clear endorsement of SEPA instruments, this would certainly improve the perception of the initiative.
By the end of the year, the industry must have resolved the outstanding issues in order to drive adoption of SEPA among the corporate community and instil greater confidence in the long-term success of the initiative.
The PSD is undoubtedly a challenging piece of legislation, and while the areas that affect the SDD are a focal point right now, there are several other areas of contention that also need to be dealt with. Central bank reporting requirements, for example, are one such area. The inconsistency in the current rules on reporting cross-border payments has been an issue for some years and the SEPA initiative has created an ideal opportunity to level the playing field by removing these burdensome requirements all together. The existing rules can certainly be costly for both banks and their clients, while the idea of cross-border reporting seems somewhat anachronistic in a payment area that is by definition local and operates using a single currency.
The industry must also face the fact that while the PSD will come into force in November 2009, in reality the exact final version as it will be implemented in each country will remain unknown until mid-2009. As a result, to a certain extent, in terms of their strategy and implementation, banks have to work on assumptions about what the interpretation of the PSD in each of the countries will be. There is a risk that this might undermine the objective of harmonisation that the PSD seeks to introduce but we expect the EU commission to play an important role in ensuring that the PSD’s implementation happens in a standardised way across Europe.
Banks and corporates must also have a clear view of what SEPA means to them by the end of the year. Corporates must first ask themselves strategic questions, such as how they want to set up their financial structures in Europe and what role SEPA plays in this. Second, from a technical preparation perspective, they must consider what it really means to become SEPA compliant and include this in their 2009/2010 project planning.
Banks too need to make some significant strategic decisions and these choices will be much more challenging with the direct debit than with the credit transfer. The SDD will necessitate fundamental infrastructure changes, raising difficult decisions for many banks during a time when budgets for internal investment are likely to be restricted. Institutions, such as Deutsche Bank, will gain an advantage in this respect having made upfront investments in a new, centralised SEPA infrastructure catering for both instruments, as well as having developed a coherent strategy in the run up to implementation. This strategy takes into account the long-term implications of SEPA for best practice in treasury management, while also allowing clients to capitalise on the benefits available on day one.
The overall picture for SEPA is a positive one when we look at developments within the industry as a whole. There is the necessary commitment from the banking industry and regulators to the deadlines agreed for the SDD and PSD. The vendors are breaking down technical barriers and developing tools to aid transition. Public authorities are taking a more proactive role as frontrunners in the adoption of the new instruments, while corporates are starting to look more closely at what SEPA really means for them. With this momentum and continued energy, the harmonised payments landscape that Europe wants will become a reality.