SEPA: Banks Must Act Now or Pay Later
The European banking industry’s fixation with the issuance of the single euro payments area (SEPA) end-date regulation – which promises to deliver a clear deadline for migrating domestic payments instruments on to SEPA standards – has induced a state of paralysis in many banks’ efforts to become SEPA-ready. Certainly, migration rates two years into the project – 20.5% for SEPA Credit Transfers (SCTs) and a very limited 0.1% for SEPA Direct Debits (SDDs) – remain disappointingly low.
The majority of financial institutions remain too focused on SEPA deadlines and the obstacles that prevent them from meeting their obligations. Yet it is time to take a look at the bigger picture. Undoubtedly, SEPA is creating new rules and business models that will reshape the market and force all participants to re-establish their market position.
Banks must therefore regard SEPA as a strategic concern, rather than just a regulatory one. Certainly, those that concentrate their energy and resources on deadlines instead of strategic objectives will ultimately fail to grasp the chance to improve services to their customers and, subsequently, risk losing European payments market share to new entrants more attune to the opportunities that can be derived from SEPA.
Of course, while offering huge rewards, SEPA migration is not without its costs: training of staff, administrative costs and heavy investment in technology with the capacity to support SEPA payment instruments, to name but a few. For those banks unable or unwilling to shoulder those considerable costs, finding a suitable global banking partner with the technological expertise and SEPA know-how to help them devise strategies, deploy payments solutions and ultimately ward off competition is, therefore, key.
While the absence of a defined deadline has been the main driver behind the banking industry’s lack of urgency to migrate over to SEPA payments, the eurozone crisis has exacerbated this impasse. Understandably, many banks’ priorities have turned to rebuilding their balance sheets rather than enabling SEPA payments.
Yet doubts about the future of the eurozone have gone as far as to give credence, in some circles, to the suggestion that the SEPA vision may not even come to fruition. What the industry must realise, however, is that the term ‘financial crisis’ does not exist in the SEPA environment – the move towards standardised payments will go full steam ahead regardless of what happens with the eurozone. As such, adopting a ‘wait and see’ approach is at best misplaced, and at worse, dangerous to banks’ long-term futures.
As the SEPA tipping point rapidly approaches, a bank that has adopted this reactive approach will find itself increasingly isolated. In all likelihood, most of its payment competitors will have already migrated to SEPA, and many will have ceased to support legacy national instruments. As a result, it may be compelled to conduct a hasty migration in order to transact payment business – with heavy associated costs.
A lack of proactivity on the SEPA front will also prove harmful for any bank attempting to acquire new cross-border business in Europe. And existing clients that are expanding internationally are also likely to become disillusioned with their bank’s inability to provide efficient pan-European payment support.
What is more, when European lawmakers do finally set an end-date, many banks will be surprised by how little time they have to become SEPA-ready. For those that fail to heed the warnings and, at the very least, put in place a strategy for migration, it may be too late. Should the end-date be confirmed at February 2014, every financial institution will have a transition phase of just 24 months to handle all payments in the SEPA format. There will be no extended warm-up – just a short, sharp cut-off.
Banks should therefore be speaking to their clients, informing them of what SEPA payments are and what they mean now – educating them on such things as how they can centralise direct debit processing and drive improvements and efficiencies in their treasury and cash management operations. Failing to start this strategic process now could result in reputation damage and potentially loss of customers’ goodwill and their business.
Certainly, banks that regard SEPA solely as a compliance exercise are vulnerable to the ambitions of competitors that view SEPA as an opportunity to grasp significant market share in the payments space. And this competition no longer comes simply from banking institutions – SEPA lowers the barriers for market entry, encouraging non-bank payments institutions to enter the market. Money operators, for example, are subject to capitalisation requirements of just €50,000. For banks, on the other hand, capitalisation requirements run to millions.
As such, the potential greater threat comes from innovative and consumer-focused non-bank institutions, which will be naturally drawn towards the high-value, high-margin SEPA revenue streams. Those banks which leave themselves open to this threat will be forced to operate in the least profitable parts of the SEPA payments value chain – the compliance and settlement areas.
As the market realigns itself, banks must respond to this threat. By taking the opportunity to review their payments operations as a whole, banks can become more efficient, lower their operational costs, and vastly improve the quality, value and breadth of services they deliver to the market. Indeed, many banks support an incredible number of different payments systems. SEPA offers them the opportunity to consolidate many of these systems, simplifying the number of processes and resources involved.
Given, the complexities of becoming SEPA ready, choosing a banking partner with the expertise to advise on wider SEPA strategy and adoption, as well as enabling the migration itself, is vital. While some banks may wish to acquire their own proprietary systems to process payments in-house, outsourcing SEPA migration to the right bank with the technological capabilities to offer efficient SCT and SDD services can minimise costs and risks, as well as negate the ongoing system maintenance to comply with SEPA upgrades.
What is clear is that SEPA will make the market more competitive than before, forcing banks to renew their payments strategies. Essentially, banks have two choices: they can either accept SEPA migration as a necessary evil, or instead embrace it as an opportunity to transform their business, drive innovation and respond to clients’ needs.
The emergence of such institutions as PayPal on the payments scene has opened banks’ eyes to the importance of customer service, and a ‘payments experience’. New entrants to the payments space have undoubtedly laid down the gauntlet – make payments simpler, easier to understand and to leverage, or lose business.
Certainly, leading global banks have the expertise and experience to advise on the most appropriate SEPA strategy for an organisation, as well as its optimal timeline. In addition, they are able to manage the migration and subsequent operation of SEPA payments in a highly efficient manner that is also transparent to clients.
It is vital that banks heed industry warnings. The consequences for those that do not is best summarised by Thomas Egner, a director at Commerzbank and Commerzbank representative at the European Payments Council (EPC) plenary, who says: “Given that there are numerous institutions in the market that regard SEPA as an opportunity to win marketshare, banks that delay their SEPA migration may find themselves unwittingly helping others achieve that objective.”