Achieving the Real Benefits of SEPA
The concession was granted as it became clear that many payments in Europe would fail in the absence of such an extension. This focus examines whether the revised date of 1 August 2014 enabled full SEPA compliance for credit transfer and direct debit instructions to be achieved. In addition it examines what this means for the realisation of the envisioned SEPA benefits.
Has Full Compliance been Achieved?
On 1 August 2014 the six month grace period for migration to SEPA instruments in the euro area ended and the European Central Bank (ECB) issued a press release announcing the completion of one of the largest financial integration projects in the world. According to the ECB, SEPA has been successfully implemented for credit transfers and direct debits in the euro area. In addition, the EC’s vice-president, Michel Barnier, stated on 1 August that “completing the migration of payments to SEPA today is a real success.”
Over half of the countries in the euro area used the grace period to complete migration of the large volumes in their community, according to the ECB fact sheet on regulation No 260/2012. The other euro countries reported completion on 1 February 2014.
Actual figures are not yet available, but the figures presented by the ECB indicate that the majority of payment service providers in the euro countries will have completed the migration to SEPA instruments by August 1 2014 in the interbank space*.
The percentage of SEPA credit transfers (SCTs) and SEPA direct debits (SDDs) as a percentage of the total volume of credit transfers and direct debits had increased to over 95% by the end of June 2014:
Still almost all countries have exceptions however:
As long as transitional arrangements are in place, migration is not complete and the level playing field is not yet established. This is also caused by the fact that individual banks have their own distinct implementation of SEPA. For example, the way optional fields in the ISO 20022 XML format are handled can differ from country to country and from one bank to the next. This also applies to validations, handling of reject or return messages (R-messages) and subsequent transaction reporting.
Completion of migration to SEPA today means that most credit transfers and direct debits are now processed as SEPA payments. This has been a ‘technical’ migration of existing formats and local schemes to SEPA formats and schemes. The real benefits of SEPA, as envisioned by the EC, have yet to be realised.
To What Extent have the Potential Benefits of SEPA been Realised?
Let’s first evaluate the potential benefits for corporates. Replacement of local payment types and formats by SEPA standards has resulted in a considerable reduction of complexity, and hence cost, for corporates operating in multiple countries. However, the local flavours in the use of formats, local payment instruments and local preferences (such as the emergence of the optional COR1 scheme as the de facto standard for domestic direct debits in Germany, Austria, Spain and the CORE scheme for cross border direct debits to and from these countries) still result in considerable complexity within the SEPA scope.
If a corporate delivers payments to a bank in Germany and switches to a bank in France, it will probably still face changes in the way it has to deliver payments. This also applies to bank-to -customer reporting, including the migration to eXtensible markup language (XML) reporting.
In addition SEPA represents only part of the total payment volume of large corporates, which must also deal with urgent payments, local domestic payments in currencies other than euro and non-euro international payments. So although SEPA represents a significant simplification, quite a lot of variety remains.
SEPA makes possible a consolidation of current accounts into a single account for the entire euro area, allowing for a rationalisation of bank relationships, reduction in the number of bank interfaces, simplification of cash management structures, reduction of account maintenance fees and lower liquidity requirements. Such a step is far more complex and has far greater business impact than migrating to SEPA formats and payment products. Few corporates have taken this step as part of their SEPA migration strategy.
Another potential benefit of SEPA is the reduction of complexity – and hence cost – through standardisation of reporting formats. But for many corporates a de facto standard for reporting already exists in the form of MT940 and while that format has its limitations, the benefits of migrating to XML formats (mainly a richer and better structured data set enabling improved reconciliation) are less compelling and don’t seem to justify putting migration high on the corporates priority list.
SEPA also held the promise of increased competition among banks. Shopping for best service and/or price within the eurozone has become much easier for large corporates, although most have yet to take advantage of this.
What about the Potential Benefits for Banks?
Standardisation of message formats between banks has resulted in less complexity, translating to lower costs for banks operating in multiple countries in Europe. Still also in this domain there is considerable variety in the actual use of the XML message formats.
SEPA should increase competition among clearing settlement mechanisms (CSMs): However, like banks, CSMs have created their own specific flavours and have differences in the number of clearing cycles, settlement reporting, cut-off times and processing windows. This makes it complex to use multiple CSMs and to switch to another CSM. Although banks have the possibility to switch CSMs, most banks have simply opted for their traditional local or regional processor.
In theory, SEPA can bring cost reduction through payment system consolidation: However, many banks still run multiple payment systems in parallel. Some of the legacy systems are also used for other purposes (e.g. processing of international non-SEPA payments) and can’t be decommissioned yet. Because of the migration to SEPA, the volume of international payments has dropped sharply – often resulting in an increase of processing costs per transaction for international payments. Large European banks have already started rationalisation programmes, or are investigating this.
The standardisation brought about by SEPA should allow for innovation in payment services: Little progress has been made in this area so far. Few banks have been able to offer innovative value added service. Also, innovation has resulted in mostly local solutions such as electronic invoicing (e-invoicing) and e-mandates in local communities.
In short, both banks and corporates have focused on a compliance-driven technical migration approach. Realising the potential benefits has, in most cases, not been their first priority.
Stabilisation of SEPA processing and repairing the short cuts taken to meet the migration deadlines still require a lot of effort. Both banks as well as corporates would benefit from a further harmonisation of the ‘standard’ formats. The Common Global Implementation (CGI) initiative could contribute to such an improvement.
The migration to SEPA is not completed yet. The non-euro countries have yet to follow by February 2016, just like domestic niche products and local waivers. We foresee a SEPA2 development to streamline SEPA processing after 2016.
As a next step corporates are likely to benefit most from consolidating their current accounts and rationalising their banking relationships. Consolidation of accounts and further harmonisation of standard formats also make it easier for corporates to negotiate a better deal with their bank.
In addition to further development of the SEPA standards for credit transfers and direct debits, the EPC, together with the Cards Stakeholders Group (CSG) published the SEPA cards standardisation (SCS) volume, ready for market implementation.
SEPA as a platform for innovation has rarely been accomplished with few instances of innovation like virtual accounts. Other evolving features such as real time payments have not been delivered.
In July 2013, the EC published its proposal for a revised Payment Services Directive (PSD2). ‘Access to the account’ by the inclusion of third-party payment providers within the PSD is a key feature of PSD2 and forces traditional payment service providers (PSPs) to rethink their strategy.
Instead of just complying, account servicing PSPs should start to focus on an innovative and daring approach to come up with attractive propositions to the payments market in order to stay in the game. If not they face a real risk of only having the cost of processing large volumes, with low or zero margins.
*ECB Quantitative indicators