As the EU moves towards making its
unification a practical reality, many complex challenges seem inevitable along the
way. European banks in particular are in the throes of considerable concern as they
transition to the Single Euro Payments Area (SEPA).
As a part of the larger European
Union harmonization project, the SEPA initiative for a Pan-European infrastructure
envisages the creation of a ‘euro area’ in which all payments are domestic; where
the current differentiation between national and cross-border payments no longer
exists. SEPA affects all aspects of electronic payments, including card payments,
credit transfers and direct debits, thus impacting banks, processors, and their
consumer and corporate customers.
The broad aims of the SEPA project
To improve the efficiency of cross-border
To level the playing field by developing
standardized instruments, procedures and infrastructures
To foster substantial economies
To increase surveillance of electronic
money while encouraging its use over cash
To be user friendly by reducing
costs of electronic money and of payment transactions across the EU
The direct fallout of this legislative
initiative is that payment banks throughout the 31 countries designated under the
Eurozone are under strict pressures
to ensure partial compliance by 2008 and full
SEPA functionality by 2010. A move of such critical process and migratory complexity
demands significant investments in technology.
Challenges of a Changing Environment
Several potential threats lie along the journey towards SEPA readiness.
Up till the SEPA initiative, banks and markets were able to generate substantial
revenues from the transfer/ settlement of ATM / card bills, standing orders and
direct debits that form an overwhelming portion of cross-border payments. These
payment products currently account for 40% to 60% of the total revenue of banks.
But SEPA promises to radically alter
the dynamics of European banking. These institutions stand to lose a significant
revenue stream, while also being called upon to invest heavily in transitioning
to a new platform with no clear definition of how those investments can be re-appropriated.
A recent survey by Accenture suggests
that banks are reporting much higher estimates of investment costs and fear that
business and technology resources will be stretched as a result. According to the
survey, 40% of bank respondents said they expect to invest between €11 million and
€50 million for ACH-type capabilities over the next five years, and 34% said they
expect to spend in the same range for card-processing systems. Noel Gordon, managing
director of Accenture’s Banking practice in Europe, Africa and Latin America believes
these results can be extrapolated to indicate a total spend by Europe’s 90 largest
banks of more than €3 billion over the next five years.
A systemic crossover of this nature
is not really feasible in a single phase, if business continuity is to be maintained.
Thus, many financial institutions are attempting to counter the spiraling cost investments
and pressing deadlines with interim (two year) solutions. But this is also a potentially
expensive route unless these temporary solutions can be seamlessly adapted and expanded
upon to support full compliance by the 2010 deadline.
While the SEPA project does bring
up some pressing concerns for banks in the short term, there is general consensus
that these are essential growing pains that, once surmounted, will offer excellent
and even necessary long-term opportunities all round.
Apart from making payments cheaper
for Europeans, SEPA will also foster greater competition
among banks. They will
benefit from substantial efficiencies by choosing among competing suppliers offering
a range of solutions and operating across borders. This should also open newer vistas
in sharing development costs and software products and ultimately benefit both consumers
and the banking industry.
But as national infrastructures give way to a unified European one, many industry
observers are of the opinion that SEPA will push consolidation within the payments
processing space to the point where weaker players will have to drop out and newer
players will face great difficulty in penetrating the market.
The players that ultimately thrive from the SEPA project will be those that:
Are creative and innovative in entering new markets and generating fresh ways of
Are able to think ahead and build new profitable customer relationships
Develop income generating value added services on the platform of electronic payments
and card services
Tap the opportunity to grow revenue around ancillary banking services like delivery
of payment-related information
How IT can smoothen this process
The transition and the architectural approaches necessary to achieving SEPA compliance
can only be effectively managed with a robust technology component. IT can play a critical role in initiating and driving this movement, influencing key phases
Accessing readiness for SEPA and prioritizing future necessary actions
Strategic planning and analysis of gaps by estimating needed resources, system changes,
data capture and storage implications
tools for project, vendor, data, application and system
Testing for quality and compliance in an efficient and cost effective manner
An effective technology component will also
help banks make the transition seamlessly
by designing and re-structuring existing legacy systems to support uninterrupted
operations. It can also offer top-level integration with third party verification
systems and secure communication between consumers and
Specifically as regards payment processing, a comprehensive IT payments solution
for SEPA can offer banks an integrated solution that supports the high-throughput
capabilities needed for this initiative. With it, financial institutions can effortlessly
manage payment capture, enrichment, routing and settlement of bulk and individual
real-time payments in a variety of configurations.
Other aspects of processing like funds control, risk and approval, foreign exchange
rate calculations, black-list checking, and liquidity control can also be seamlessly
managed in workflows configured by the banks. Finally, the solution can assist with
the key transition from a country-specific ACH environment to an environment where
one or many Pan-European Automated Clearing Houses (PE-ACHs) exist.
Most respondents from major European banks who participated in the Accenture survey
agreed that they see SEPA as more of an opportunity than a compliance requirement.
More than 57% of executives said it is a “project that delivers long overdue harmonization,
standards and improved efficiency.”
Though strict timeframes and changing business dynamics are threatening bottom-lines
and operational models, the SEPA project promises to reward forward thinking and
innovative players. Banks that can leverage comprehensive IT solutions engineered
towards the SEPA transition at the earliest are bound to enjoy ascendancy in the
banking environment post 2010.