The SEPA Challenge
Progress towards the single euro payments area (SEPA) has been painfully slow. It had originally been hoped that market forces and the perceived benefits of SEPA would be enough to move the end-user to adopt the new SEPA payment instruments. But it became obvious about two years ago that the expected take-off was not going to be achieved, not least because there was no discernible business case in what the corporates saw and were being told about SEPA. Even banks eventually came to the view that legislation, benign or otherwise, was required, and that is now about to happen.
The fact remains, however, that the setting of end-dates for the migration from legacy instruments to the SEPA ones should not absolve banks from providing and articulating a sound business case to their corporate customers. At the very least, corporates must be able to see that they are enabled by SEPA to cut their operational costs for payments.
Many multinational companies have already created payment factories in Europe and have deployed SWIFT connectivity, both of which have to some degree diluted their direct reliance on the banks’ payment and cash management systems. The adoption of SEPA into their processes should provide the ability to increase the benefits of these investments, but the current constraints on further expenditure demand a strong business case to justify any more investment.
In short, the corporates must be able to derive improvements in the cost, quality and speed of their payments by a full adoption of SEPA. The costs are principally the banks’ fees for managing and processing the corporates’ transactions, and the corporates’ own internal financial and supply chain operations. At the most basic level, the commoditisation of payments from SEPA that ensues and their standardisation should assist enormously in reducing the current costs.
The other side of this particular coin does imply, however, that the fee income of the banks from their payment business is set to be irretrievably reduced. Their challenge therefore is to offset the obvious decline in basic payment revenues by offering value-added services to their corporate clients by which they may generate new revenue streams.
Once the tipping point is achieved such that the corporates’ own costs are reduced more than the increase in bank fees from utilising the new value-added services, then a significant number of corporates will migrate over to SEPA ahead of the looming deadlines, so that they can realise the efficiencies they crave and can avoid the parallel running of legacy and SEPA processes. Those companies that will await the end-dates before making a move will do so with equanimity knowing that cost savings will eventually be delivered.
The value-added services that the banks should be looking to offer will improve efficiencies in the corporates’ payment operations by such things as increasing the straight-through processing (STP) rates, eliminating costly manual errors, automating reconciliation, and generally reducing the working capital required. In this latter respect, the cost and general scarcity of liquidity is no longer an issue solely for the banks themselves – a knock-on effect is being appreciated in the corporate space as well, thus requiring enhanced capabilities on the part of the banks and their corporate clients
Some examples of the value-added services that banks can develop and offer include the reporting of timely, accurate and full payment information in flexible formats. Ultimately, this level of detail about payments provides corporates with an unprecedented chance to fully understand the status of all their payments at any one time. This can not only aid the cash and liquidity management of the corporate but can also lead to greater automation of processes, which can minimise costs.
In addition, banks might also offer comprehensive analysis of payment information. By doing so they can ensure the highest STP rates are being achieved. Clearly, this cuts the need for manual intervention, cutting the risk of errors, improving efficiency and minimising costs.
Offering a ‘least cost’ routing of payments service is also an option. For those payments that are not time-sensitive, there is no need to expend resources on rushing them through. Again, this can cut costs for corporates. This can be accompanied by efficient processing of non-SEPA cross-border low value payments. The use of the International Payments Framework Association’s ISO 20022-based format can bring SEPA-like efficiencies to other international payments. Finally, banks may consider extending SEPA-based initiatives, such as e-invoicing, to their corporate customers. By doing so, they can bring benefits to other areas of the business.
It is safe to say that neither the supply side (the banks) nor the buy side (the corporate end-user) can escape the need for investment engendered by SEPA. It’s a long and winding road that has got us to where we currently are. But with legislation now on the cards, both banks and corporates need to consider their next steps, the challenges – and perhaps more importantly – the opportunities SEPA presents. What can justify this additional cost for all parties is the new revenue for banks and the increased efficiencies for corporates. It really can be that simple.
With the legislated end-dates for migration, SEPA is effectively being forced onto the market come what may. In that context, it makes sense to optimise the response from the banks and their customers. SEPA can bring enormous benefits – it just needs determination on both sides to realise them.