SEPABank StrategySEPA’s Impact on Payments Outsourcing for Small Banks: A Case Study

SEPA's Impact on Payments Outsourcing for Small Banks: A Case Study

Starting with the single euro payments area (SEPA), European harmonisation and ongoing regulatory pressure have driven banks to reconsider their payments processing strategy. For a small bank in the Netherlands, this resulted in the strategic choice to withdraw their entire relationship with the local (Equens) clearing house and continue as an indirect participant instead. Although common in many other countries, such as Belgium, an indirect participation model does not exist in the Netherlands other than for subsidiaries and their parent companies. This article looks at the background of the decision to do so in the context of the ongoing sourcing discussion.

Is Payments Processing Still Core Business?

Many banks currently struggle with this question, particularly now that revenues are dropping, and regulation and new developments require significant modifications in the payments architecture. For these reasons, sooner or later they will have to choose which way to go: invest in rebuilding a fully integrated and future-proof payments process, or step out of the arena and concentrate on the more profitable banking products. A well-known slogan supports the latter choice: “If you’re not in there for fun or profit, what are you doing there then?”

Large banks

For large banks, the situation is different, as they simply cannot afford to outsource their payments processes. For them, a single provider cannot support the complexity of their payments processes, through all channels and instruments from cheques to e-invoicing, let alone guarantee minimum processing times.

Forced into a corner, some large banks – mostly international network banks – try to make the best out of the situation by strategically positioning themselves as a payment service provider in order to increase the leverage on their (expensive) payment platforms and to reduce costs per payment by insourcing (parts of) the payments process for smaller banks. As their systems already support all payment instruments and channels that smaller banks use, the insourcing operation should not be a complex one. If large banks really invest in their systems’ connectivity, they should be able to offer a plug-and-play concept that can be easily adopted by smaller banks.

And there are other interesting benefits for the large bank:

  • Insourcing also improves the large bank’s inhouse clearing and settlement percentage, resulting in less dependency (and lower costs) of clearing houses.
  • Preparing the systems and organisation for a commercial insourcing operation also improves the quality of the internal payments process, because the service level agreements (SLAs) with outsourcing banks simply require a guaranteed service level. The business model, therefore, develops in the direction of improving and developing the bank’s own payments processes while being financially supported by outsourcing banks.
Small banks

Smaller banks are confronted with a completely different situation: low volumes of payments that require several expensive systems to maintain and new regulatory requirements that have to be adhered to. If small banks really start calculating the costs of these systems, using a total cost of ownership (TCO) calculation, then it soon becomes clear that, from the viewpoint of cost reduction, outsourcing is an interesting and cost effective alternative. If only well-known technical formats for interfacing payments are used and a direct connection is possible with the core banking system, then the complexity of the architecture of the small bank can be reduced considerably. For most small banks, the question is not if but when to start a payments outsourcing project.

To Outsource or Not to Outsource?

Although many types of outsourcing are possible, and hence some arguments are not always valid, management of small and medium-sized banks should consider a number of categories in favour of outsourcing: economic, political, IT, external developments, marketing and risk.

The difficulty is that some of these arguments can be quantified, but others can’t. As a result, to outsource or not soon becomes a matter of politics because it takes courage to cut payments – traditionally a bank’s core business – loose.

Apart from the arguments in favour of outsourcing, there are also confusing factors that need to be addressed. These are developments and circumstances that further ‘blur’ the playing field, such as:

  • Perennial contracts with external parties – the future costs of which cannot be regained.
  • Lack of usable management information on which the decision can be based. Specifically when there are different locations (or several countries) involved, all with their own way of collecting management information, a lot of ‘educated guessing’ has to be performed.
  • Most insourcing parties do not offer a solution that is 100% acceptable for the smaller banks. Propositions are incomplete and the large insourcing bank is unwilling to make a change because of one small bank requiring a certain amendment.
  • Which part of the payments value chain is suitable to be outsourced? Is it the routing of payments, part of the payment engine, the clearing and settlement, the complete payment platform (with or without IT-staff), or even the complete business unit responsible for payments? For most small banks, there are too many scenarios to be worked out in sound business cases. Hesitation and indecisiveness, therefore, rule the day.

A Case Study in the Netherlands

Recently, in the Netherlands, a small bank outsourced its payments processing to a large bank. SEPA payments, cross-border as well as domestic, are routed indirectly via a bank rather than having a direct connection to the clearing house. Now the bank is looking at expanding the relationship by outsourcing additional payment services.

The bank can be seen as a real pioneer in the Netherlands having withdrawn it’s direct connection to the Dutch central clearing house (Equens) and by re-routing all of its payment flows to a different, large bank. The large bank offers this ‘clearing representation’ as a new service, resulting in a considerable cost reduction for the small bank.


An important reason to outsource was a strong reduction of costs per payment by creating a different pricing model that better fit their bank characteristics and transactions volumes.

This was achieved by cancelling the direct connection to the Dutch clearing house. The payments that were formerly routed to the clearing house are now presented to the clearing house as the large bank’s payments. The small bank is no longer charged for the fixed annual fees, which were by far the biggest component of the bill.

In the future, the intended outsourcing of the SWIFT platform will result in a further reduction of the costs-per-payment. A second reason for outsourcing was to deliver a future-proof payments process, ready for SEPA, PSD and increasing compliance demands without making all investments themselves. A third reason was to secure the future of payments processing within the bank by entering into a partnership with the large bank, enabling the small bank to rely on the expertise and services of the large bank. New, innovative payment products and services will be available to them directly from this partnership.


It did not take long for the large bank and the small bank to find each other. The large bank was already looking for a first mover among the smaller banks – it had a solid proposition and a customer friendly approach. Mutual trust was an important factor throughout the project.

The approach was to take it step by step: at first only the routing of payments was switched over to the large bank; and then product after product was taken care of – first SEPA payments, being the most urgent product to outsource, followed by cross-border payments and finally domestic payments.

The large bank now functions as the fixed external processor of almost all of the payments of the small bank. No longer is there a direct connection between the small bank and the central clearing house in the Netherlands.

What’s next?

Now that the re-routing is complete, the possibility of outsourcing other expensive components in the payments process, such as the SWIFT platform, will be considered. The perceived end goal, or the last phase of the project, would be a generic payments pipeline, which would leave the small bank almost completely resilient to:

  • New releases of (outsourced) payments systems.
  • Payments format changes (due to new SEPA rulebooks, PSD requirements and SWIFT updates).
  • New compliance regulations (by passing on extra payment information to the large bank and letting them figure out a way to meet compliance regulations).

In the future, the role of the large bank could go as far as a complete payment factory for the small bank.

Expectations already met

Although the outsourcing project is only half finished, the small bank has concluded that expectations were met and the partnership has already started to pay off. Additional services are being discussed (like pre- and post transaction screening) and the large bank is ‘guiding’ the small bank by offering services such as SEPA Credit Transfer (SCT) initiation, which will not require any action on the side of the small bank.

Even if no specific measurable indicators were agreed upon, both banks are happy with the new situation and the chosen path.


Outsourcing payments is a topic that has been discussed and promoted in many articles over the past few years, but few banks have actually take steps to move forward. The hesitation probably lies in the difficulty to do three things:

  1. To choose from many possibilities what part of the payments process should be outsourced
  2. To present a sound business case.
  3. To present a logical and understandable outsourcing plan based on mutual trust.

Without consensus on these three decisions, senior management will not be persuaded to choose outsourcing.

The example presented here shows that large banks can make small banks ‘happy’ in this respect, although current offerings do not go as far as complete plug-and-play. But if a feasible concept is chosen and a step-by-step approach is followed, then outsourcing of payments can become a success, with a sound business case for both parties involved.

The small bank’s benefits are clear: costs are considerably reduced, it has a future-proofed payments process, and a large bank with a lot of expertise and additional services can serve as its partner, reducing uncertainties and risks in the payments domain.

For the large bank, an important step has been taken to improve the leverage of their payment engines. They are now ready for other banks to follow the same route. Who’s next?

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