The final piece of the puzzle

The Single Euro Payments Area (SEPA) is a good idea in theory, but getting to the point where the impressive theoretical benefits become a reality is proving to be a long, painful, messy process, with the initiative delayed repeatedly by political, legal and commercial problems that have exacerbated the technical challenges.

Pieces of the puzzle
The first part of the project, the SEPA Credit Transfer (SCT) scheme, began operations in January 2008. As of July 2010, just short of 4,500 banks in 32 countries – providers representing more than 95 per cent of payment volumes in Europe – were offering SCT services for Euro payments, according to the European Payments Council (EPC). But European Central Bank (ECB) data from May shows that SCT accounted for only 8.1 per cent of credit transfers in Europe.

The second strand of the initiative, SEPA Direct Debit (SDD), has entailed more complex and expensive changes than did SCT, creating an entirely new payments method to replace direct debit schemes across Europe. As of July 2010, according to EPC figures, 2,831 banks have signed up, but ECB data showed the share of SDDs as a percentage of total direct debit volumes had only reached 0.06 per cent by May 2010.

SDD will get a significant boost on November 1, after which point all banks across the EU must be at least “reachable” for SEPA Core Direct Debit as mandated by the EU Regulation on cross-border payments. “One thing holding corporates back today is the knowledge that there isn't anything like full coverage among the banks,” says Simon Newstead, head of market and business strategy within global transaction services (GTS) at RBS. “Corporates want to be able to reach all their customers through SEPA if they're going to use it. So November 1 is a critical milestone.”

The missing piece
But while it seems that all of the pieces are in place and all set to go, the industry’s slow take-up of SEPA’s strands must be addressed. SEPA's sluggish progress is largely due to the absence of political and regulatory pressure forcing financial companies and large corporates to act. Considering the wider financial events of the past two to three years, the complex political, legal and regulatory circumstances and a forgivable desire to avoid running dual payment systems for any significant length of time, their caution is understandable. Surely only a mandatory end date for migration will be sufficient in overcoming this caution?

Jean-Pierre Arens, payments director at Logica’s Global Products Business, believes the practical and political barriers to setting end dates are starting to disappear. “The main payment operators are taking on the infrastructure needed to run [SEPA],” he notes. “The way the EU Presidency is now structured with a two and a half year term instead of a change every six months gives us a more stable environment to take decisions for the medium term. And the main reason not to do it – the economic crisis – is partly behind us.”

The Payment Services Directive (PSD) is also now well on its way to being implemented in national law across the EU, adding another important element to the legal infrastructure supporting SEPA. The establishment of the SEPA Council, which held its inaugural meeting in June and will now take responsibility for monitoring and supporting SEPA migration, should also help.

Following calls for an end date from influential figures at the ECB, the European Parliament, the European Commission and the Economic and Financial Affairs Council (ECOFIN), in March 2010 the Parliament passed a resolution calling for the Commission to bring forward legislation for an end date, and we should be looking at a draft SEPA regulation by the end of October 2010.

“That is the critical thing now needed to start moving from the limited adoption we’ve seen so far to full migration,” says Newstead. “There’s a general lack of business case to take full solutions to market until it’s clear that SEPA is irreversible and will happen to a set timetable. That certainty will trigger investment in SEPA solutions like the e-mandate capability, the e-payments capability or mobile payments.”

Up to this point, says Newstead, too many banks have dealt with SEPA as a compliance requirement or a tactical basis rather than looking at it as a strategic solution. “But knowing there is an end date and that eligible traffic will move to the scheme and customers will be lining up to use those services changes the game. The challenge is drafting a regulatory proposal acceptable to the vast range of stakeholders. The wording is absolutely critical to make sure it doesn’t have a string of unintended consequences.”

So far, things have not gone quite as smoothly as might have been hoped. A scathing article by Gerard Hartsink, chair of the EPC, appeared in its July newsletter, castigating the Commission’s Working Paper on setting end dates for using an “essential requirements” approach, which effectively encourages the establishment of competing payment schemes, rather than promoting the standardisation which is really the central point of SEPA. The planned legislation, he wrote, “would effectively derail the entire SEPA project... The legislative act now envisaged ... may very well reflect the Commission’s desperate attempt to accommodate different parties pursuing different goals.”

Even if an effective regulation does emerge, when will those end dates actually be? “We will push for [an SCT end date] by the end of 2012 and [SDD] maybe a year later,” says Ruth Wandhöfer, EMEA head of payments strategy and market policy at Citi Global Transaction Services. “You could hope for the end of 2012 for SCT, if everything goes plain sailing, but it’s very difficult to predict, because there are a lot of different forces negotiating.”

Making it fit
Before the financial crisis battered the markets, a number of major banks had been making significant investments in SEPA, in readiness for supplying white label services to smaller companies. “From the very beginning a number of large banks have seen opportunities to create new business, the likes of Deutsche Bank, Citi and HSBC,” says Logica’s Arens. “Then we hit the financial crisis and everything faded away, because business priorities for the financial sector changed. But now the crisis is a bit further behind us, most of the larger banks are seeing new opportunities to bring in a market share-winning SEPA platform.”

But for most other banks and the corporates the long-term benefits of investing in SEPA are still seen as insufficiently attractive to justify the costs. “It’s a chicken and egg problem,” says Dieter Prang, senior vice-president and managing director, Fundtech EMEA Frankfurt. “The banks say ‘why invest? We have no customers requesting these services’. The corporates are saying ‘The banks can’t offer us the services and we can’t run dual infrastructures’. The move towards SEPA can only start when the payments are created, within the public sector, corporates and the private sector. The banks can’t generate volumes by themselves.”

His colleague, George Ravich, executive vice-president and chief marketing officer at Fundtech, believes everything could change if corporates began to understand the potential benefits of solutions such as e-invoicing. “Corporates need to see the value of [SEPA] if they are going to have to change their ERP infrastructures,” he says. “It’s hard to see the value at the moment, but improving liquidity, visibility and cashflow: those are real needs in the marketplace now that have become more important since the financial crisis began. Corporates want better tools for liquidity and cash management. Something like electronic invoice presentment could be a great catalyst.”

Pulling it together
Once up and running SEPA could offer banks and their corporate and public sector customers huge efficiency gains through consolidation of systems and processes. For example, over the past 18 months Experian Payments has been working with Citi to provide the bank’s corporate customers with automated International Bank Account Number (IBAN) and Bank Identifier Code (BIC) conversion and validation for SEPA payments, for customers initiating payments to and from the SEPA from anywhere in the world as well as 31 countries inside the SEPA itself. Experian checks, validates and converts existing account numbers to the IBAN and BIC standard in bulk, so reducing transaction costs and improving straight through processing.

Citi’s Wandhöfer believes the SEPA message is now getting through to corporates and that they will respond well to the change being forced upon the banks in November. “You’ve got SMEs, who don’t do so many cross border payments, doing a ‘wait and see’; and consumers will do the same unless their bank tells them to use the IBAN,” she notes. “But the larger corporates are already centralising businesses, building shared hubs and treasury services.” Further impetus may yet be provided by public sector organisations across Europe, although they have also been slow to adopt SEPA.

Once SEPA does enter the mainstream, those banks that have not already done so will need to decide whether to invest in systems of their own or to use white label offerings from larger banks or other infrastructure providers. “I think that debate comes into sharp focus once you have certainty over the end date,” says RBS’s Newstead. “All those banks will need fully operational solutions.”

Those that do invest in their own solutions will also have to decide whether to replace existing applications or to adapt and/or integrate legacy systems. “Many banks are still hamstrung by legacy systems,” says Colin Kerr, industry solution manager for payments on the Microsoft Worldwide financial services team. “The approach we take is around using XML standards internally as a new payments infrastructure then to start providing that same connectivity capability to their largest customers. That means they don’t have to do wholesale application replacement within the SEPA deadline.”

One of Microsoft’s partners is global transaction banking solutions provider Fundtech, which has developed its Integration Suite for payments for this purpose. “We saw banks that were not able or willing to convert to completely new products and that they had legacy products and sub-systems everywhere,” says Fundtech’s Prang. “In many ways, SEPA is more an integration challenge than a processing challenge.”

The full picture
Once these fundamental elements are in place, the next phase will be the development of solutions that add value to SEPA services. “The challenge will be figuring out the right technical solutions that allow banks to offer additional value-added solutions like e-mandates and e-payments,” explains Newstead. “It hasn’t been an issue up to now, because there hasn’t been enough volume, but that will change.”

Is the end in sight at last? “We’ve just got to clear the remaining legal hurdles, then end dates can be set and that will spur the process on,” says Richard Blackett, commercial director at payment specialist Direct Debit Limited. “Everyone can see the benefits. We just need more pressure. It’s political muscle that’s going to achieve this.”

Fred Bär, managing director of Euro services at Vocalink, believes we are reaching a tipping point. “As the burden of running two systems becomes a reality it will become clear that the process is irreversible,” he says.

In other words, as the sticks hit the banks and corporates to force investment in SEPA, the carrots it offers – the efficiency, savings and commercial benefits – will finally become tangible, and theory will at last have a chance to become reality.

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