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 are:

	To improve the efficiency of cross-border payments
	To level the playing field by developing standardized instruments, procedures and infrastructures
	To foster substantial economies of scale
	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

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.

Emerging Opportunities

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 income
	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 by:

1. Accessing readiness for SEPA and prioritizing future necessary actions

2. Strategic planning and analysis of gaps by estimating needed resources, system changes, data capture and storage implications

3. Implementing management tools for project, vendor, data, application and system integration

4. 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 financial institutions.

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.

Conclusion

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.