SEPA: Implementation Challenges
There is little doubt that we are at a critical point on the road to the single euro payments area (SEPA). At the same time, its introduction is likely to have a significant impact on the banking industry because, not only is there likely to be a huge bill in creating payments infrastructures that conform to the new eurozone clearing and settlement systems, but there will also be a squeeze on a major source of current revenue.
Put these together and one might anticipate that banks and their technology suppliers would be well underway to putting in place systems and processes to ensure compliance, and so address this ‘double whammy’ of increased cost and loss of revenue. Yet the reality is that there is still huge uncertainty throughout the industry, with more questions than answers.
So, what should banks be doing to address the underlying drivers behind SEPA, in order to at least maintain, if not improve, their competitive position?
One of the primary objectives of SEPA is to make cross-border payments for individuals and businesses no more expensive than the equivalent domestic payments. By common consent, this will benefit consumers and corporate customers, who will almost certainly see a marked reduction in bank charges. Yet for the banks themselves, this represents more than just a reduction in revenue: they will also incur implementation costs as their current payments infrastructures, originally set up to meet the needs of each individual member state, are forced to move to a pan-European model.
Recent research on behalf of First Data International involving senior European banking executives confirms that 70% of banks believe that self-regulation and market forces should be enough to deliver the SEPA initiative. Equally, however, 73% expect the EU to legislate to ensure compliance by the target date of 2010, due to concerns over whether or not the industry as a whole is fully committed.
Despite the fact that the idea of SEPA has been in development for about four years, there is still a belief that communication has been inadequate, with barely half of respondents understanding SEPA requirements in detail. Perhaps unsurprisingly, most respondents also see SEPA in terms of cost, rather than the opportunities that opening up the market in this way might bring.
There remains some uncertainty over timing: similarly, much detail still needs to be put in place including, for example, penalties for non-compliance. Yet, in common with most regulatory developments, forward-thinking banks are already ‘ahead of the game’ in planning to meet its broad demands. As Chris Skinner, of financial services consultancy TowerGroup, puts it: “Some banks are now starting to move on from the ‘is there a business case?’ debate to implementation planning and positive efforts to exploit the benefits of SEPA.”
Other banks, by contrast, have yet to react, with some challenging latest analyst estimates that the combined impact to the industry of implementation costs and revenue loss could be as much as US$15-40bn.
In one sense, SEPA is simply accelerating a trend towards driving cost reduction through process efficiency that is already underway. I would argue, therefore, that banks should focus on – and respond to – what is already known about SEPA in this broader industry context, rather than hold back and wait for the finer details of the specific regulation itself to be put in place.
For there is much that can, and should, be done in order to improve competitiveness and at the same time stay ‘ahead of the game’ in meeting the anticipated imperatives of SEPA.
This is best addressed by asking the right questions and developing appropriate strategies in response. For example, just as in the credit card sector before it, the payments industry is likely to undergo major consolidation, with the likelihood of a handful of ‘super payment processors’ emerging to serve the rest of the banking industry.
For the majority of banks, therefore, the implications of outsourcing core payments processing must be seriously considered. And further, as this part of the business becomes increasingly commoditised, how can individual banks differentiate the rest of their offering?
In undergoing such transition, it may be instructive to learn from the earlier experience of the credit card operators. And here, though the impact on costs may be similar, the potential for differentiation in the wholesale banking sector in particular is likely to be greater, as a result of the closer relationship with each corporate client – and the ability to add value by individually packaging and managing a much broader product portfolio.
Furthermore, it is not only possible but also crucial to tie in the client this way, as increased commoditisation makes it easier for them to ‘shop around’ and deconstruct the supplier’s offering, picking off individual products and service providers based on price alone. At the same time, for those banks choosing to outsource payments processing, there are also implications for the provider and correspondent bank in ensuring that customer service is not compromised.
In planning for SEPA, the question of mitigating costs in maintaining profitability is especially important. And here, the ability to maximise straight-through processing (STP) rates – reducing exceptions handling through rules-based business process management – is likely to have a dramatic impact on operating costs.
Much has already been achieved in the area of process automation, with STP rates typically running at around 90%. Yet the cost to a bank in dealing manually with the 10% of exceptions is high: not only is it labour-intensive but also time-consuming. As a result, it also has the potential to impact negatively on customer relationships and risk incurring interest charges and claims for compensation.
With exceptions or investigations handling, manual processes typically deliver results of variable quality, whatever rules or procedures are in place. Similarly, existing systems may lack essential visibility, making it difficult for staff to see the financial benefits or liabilities of those transactions being processed. By flagging up the potential outcomes early on, banks can minimise any negative impact and focus their best resources on the most costly problems.
So how might this be implemented in practice? Undertaking an operational walk-through of the key processes to establish what is actually happening ‘on the ground’ is a vital ‘must do’. The activity can then be charted diagrammatically, so that everyone can visualise, understand and make informed decisions around the changes required at any stage of the end-to-end process. This will also highlight manual interventions and interconnections between systems.
There are significant gaps in the market’s knowledge of what will be needed – and by when – to achieve SEPA compliance. Yet, by adopting existing technologies and processes, which address broader issues around improved operational efficiency and customer service, banks will not only optimise their overall competitiveness but also be better placed to meet any demands placed on them as more pieces of the SEPA jigsaw fall into place.