Recognition Due for Business Drivers of SEPA
The launch of the single euro payments area (SEPA) Credit Transfers (SCT) in January 2008 generated considerable hype, yet only 3.9% of current credit transfer volume is SCT transactions, as of May 2009. The next stage of SEPA’s implementation – SEPA Direct Debits (SDD) – will come into effect in November alongside the Payments Services Directive (PSD). This will see the scheme take a more complex turn and subsequently increase its reach due to the sheer scale of SDDs’ demands. However, despite the November SDD deadline giving SEPA more clarity and weight, current trends suggest that volumes are still likely to remain low. Indeed, it could be several years before all domestic payments are converted to SEPA instruments. As a result of this vague horizon, even the European Central Bank (ECB) has called for a migration end date to be set.
The payments industry needs sight of this full SEPA finishing line if it is to willingly participate in the long-distance race, rather than simply skimming each hurdle as it comes. Currently, banks are taking a quick fix option, rather than embracing a long-term strategy for gaining competitive advantage through a modern, flexible and compliant payments architecture. By instigating a migration end date, the EU and the European Payments Council (EPC) can give this scheme the support it deserves because, ultimately, SEPA is a positive step towards truly opening up commerce across Europe.
There has been considerable debate around the technical implications that SEPA creates. In reality, the underlying reasons for resistance towards it are the lack of incentive for banks to change and the cultural differences involved. With as little as 2% of current payments traffic being cross-border, it’s easy to understand the lack of momentum. Furthermore, each individual European country is comfortable with its own payments environment. For example, France still makes regular use of chequebooks and Germany has a loyalty to cash, while Finland is averse to direct debits. These countries may all be in the eurozone, but it doesn’t mean they’re going to behave in the same way, hence the lack of enthusiasm for SEPA proposals.
With little support so far for SEPA at a country, corporate and consumer level, banks are struggling to identify strong business drivers and are therefore taking a minimal approach to compliance. Nearly all of the 4,500 banks active in payments across Europe are able to offer SCTs, yet many have simply implemented tactical fixes to legacy systems to tick the relevant regulatory boxes. As a result, most will now have to implement yet another system for SDDs.
The nature of direct debits is inherently more complex than credit transfers and each European country operates its own charging structure for these. Complying with SDDs is therefore substantially more taxing for banks than it was with SCTs. With the November deadline looming, many will now be looking for the sticky tape they can apply to existing infrastructures to enable compliance. While understandable given the time constraints, this approach will only go so far, since dated systems are not designed to cope with shifting regulations like SEPA.
Quick fixes for SEPA add further to the existing complexities, inefficiencies and operational costs and risk in the payments space. To be in a strong position to comply with SDDs and convert all domestic payments to SEPA instruments, banks must account for the bigger picture – considering the short-, mid- and long-term future in their strategies and technology migration plans. SEPA represents a fundamental change to the dynamics of the payments market and visionary banks should use it to revamp their own payments operations and expand market share. While a slow starter, the regulatory pressure for SEPA is mounting and the business drivers will come to the fore.
Corporate awareness of the value of rationalised euro services is rising significantly, especially with the launch of SDDs. Utilities companies in particular are realising how SEPA simplifies their payments processing and the subsequent cost savings they can reap from this. When applied to literally millions of direct debits sent each and every day, corporates can gain considerable leverage from their banks. This will lead to the consolidation of payment providers, which means banks that fail to deliver competitive SEPA offerings will quickly find themselves losing business. Institutions that can offer a range of value-added services for SDDs will be best placed to win corporate favour.
In an even more powerful position than corporates to drive SEPA volumes are governments, which initiate more payments than any other organisation. For example, if the French government converted its pension payments to SCTs, SEPA volumes would substantially increase – further incentivising the market and creating awareness. By getting behind SEPA themselves, governments can support the banks, rather than simply imposing the regulation.
Regarding the consumer’s influence on SEPA’s success, while this mustn’t be overlooked, it’s unlikely that this group will generate much demand, given that credit or debit cards are typically their payment vehicle of choice. Furthermore, for online transactions, consumers are increasingly selecting PayPal or similar payment methods. Even though SEPA was originally designed to put the consumer first, corporates will certainly be the banks’ priority.
Another strong revenue generator for tier one institutions is through providing outsourced SEPA services. In the face of growing infrastructure investment costs, many smaller banks are choosing to outsource to larger ones that have achieved economies of scope and scale. Tier one institutions equipped for high volumes and high levels of STP rates can therefore transform their advanced SEPA capabilities into a profitable business.
With clear business cases for SEPA – albeit mid- to long-term ones – it should no longer be treated as a costly burden. Banks should see this as an opportunity to gain a competitive edge and ultimately increase payments revenues. It’s time to start afresh with a clean sheet of paper, using SEPA as a catalyst for technology leadership.
The costs of running and maintaining separate payments systems can no longer be justified. By implementing an overarching and centralised payments infrastructure that handles both SCTs and SDDs, banks can reduce the cost of compliance and scale their operations as business needs evolve. A system that spans multiple regions, currencies and languages brings standardisation and economies of scale. Such a solution should provide connectivity to the post-SEPA clearing and settlement landscape. Furthermore, with the rules around SEPA continuing to evolve, it’s important that systems provide the necessary flexibility to effectively adapt to forthcoming changes.
In parallel, the EU and EPC must define the SEPA end game – the migration end date – rather than keep shifting the goal posts. Until then, each country will continue to run both SEPA and domestic operations, which is inefficient both in terms of operations and cost. Outlining the full conversion to SEPA instruments will ramp up its chances of success and support the banks in creating a stable and transparent payments environment.