Dealing with SEPA

Over the past seven years, the European Union (EU) has been working towards an ambitious scheme to govern payments made within the Eurozone. The single European payments area (SEPA) covers 31 countries and aims to deliver a framework within which all payments are treated equally, whether they are made in a single country or between countries.

This represents a massive test for organisations across Europe, both in terms of the technology to support the payments infrastructure and the business processes that it will affect: all organisations will face greater levels of competition, but also have more opportunities to grow the overall volume of payments that they process.

SEPA aims to deliver tighter integration between payment systems across Europe, as well as increasing the harmonisation of legislative frameworks across the countries involved. The aim for SEPA is to deliver better services for consumers through increased competition, more efficient processing of transactions, and greater transparency of service levels and pricing.

Actually coordinating the different networks that exist in different countries is another story. Each member state has its own system of regulation for payments and a multitude of different settlement timeframes, operational processes and pricing models to consider.

Delivering the common payments environment is therefore a massive undertaking, particularly given the timescales that the European Commission and the European Central Bank have put in place: financial institutions and payment processors will have to bring SEPA-compliant products to market by January 2008, while 2010 is the final deadline for the phasing-out of non-compliant products.

From financial services providers such as banks to the overall payment schemes and processes, there will be an enormous impact on both business models and IT systems. For banks, the biggest impact is that organisations will no longer be able to charge for handling cross-border payments, thus reducing their revenues. This drop in revenues is in addition to the cost of complying with the new legislation.

THE CHALLENGES AHEAD

SEPA has faced criticism around the lack of a business case for the roll-out and the short deadlines that organisations are faced with. Many banks are unhappy that SEPA-compliant products have to be on the market before the laws on how payments should be processed can actually be ratified by the member state governments.

The biggest concern is the overall cost of complying with the new regulations, and organisations are looking at the substantial changes that will be required for SEPA compliance with some trepidation.

There is speculation that charges may have to be raised across other services in order to meet the shortfall in revenues and changes required within banking systems. However, these can lead to better business processes.

SEPA AND PAYMENT OPPORTUNITIES

The new payments environment will provide a wider choice of payment service providers: organisations will be able to shop around to get the best deal for getting payments processed.

The move to common processes and acceptance of payments will mean that processors will be able to offer their services across Europe, while there will also be greater levels of consolidation within the industry. In this environment, the quality of service and speed at which payments can be processed will be critical to success in the longer term.

One of the first opportunities from SEPA is the creation of a new payments handling organisation: the payment institution. This category is designed to handle smaller volumes of payments compared to the larger processors and banks.

A payment institution can provide payment services as well as other services such as foreign exchange. These new organisations will help expand the overall payments market, offering niche services and filling gaps that other, larger organisations cannot afford to target.

BANKING IMPLICATIONS

Banks of all sizes will also be able to expand their businesses in the wake of SEPA. The banking market falls into two categories: retail and corporate. Both of these sectors will be able to expand their range of service offerings through using the additional flexibility that SEPA is designed to give.

The advent of SEPA will lead to cross-border consolidation of banks, which will help deal with the costs of compliance as well as providing greater economies of scale when it comes to payments. Banks can potentially offer services across a number of countries, not just those where they have physical offices.

Managing this potential entry into new geographic markets will have to be carefully planned: aside from the IT and availability issues of providing a service without a physical branch to back them up, there are financial and cultural implications to consider. Moving into a new market will require a substantial support operation that is best approached via partnership arrangements or by outsourcing.

ONE-STOP CROSS-BORDER BANKING SERVICES

The corporate banking market has significant opportunities for development following SEPA. Multi-national enterprises need to move funds on a daily basis to pay their suppliers, collect revenues, and ensure they minimise their transaction costs.

Currently, corporations require relationships with multiple banks in different markets and a huge number of bank accounts to meet these demands. Because of the management involved, corporations incur significant administrative costs in operating and managing these various accounts.

As SEPA comes into effect, banks with suitable geographic coverage and services can provide these large multi-national organisations with a one-stop banking service. Having one master banking relationship will reduce costs for corporates, while quality of service and speed of response will become key differentiators in meeting customer demand. Availability of systems and meeting service level agreements will therefore be critical areas of investment.

The retail sector will also be affected by SEPA. The biggest impact will be on companies with operations in multiple member states, such as supermarkets. Instead of having multiple relationships with acquirers in each country, the retailer can use a single acquirer across the SEPA zone. The acquirer in turn will be able to generate scale economies from the merchant's total European business and pass these savings back to the merchant in terms of reduced pricing or increased incentives.

WHAT WILL SEPA REALLY MEAN?

SEPA is causing a fundamental shift in both business practice and infrastructure for organisations involved in processing payments. Organisations will own greater shares of each customer across Europe, rather than dealing with payments in a certain country.

Because quality of service will be crucial to winning new business and keeping existing customers happy, availability of payment-processing systems will be a key competitive differentiator for the future, along with the ability to provide innovative services.

Banks and corporations are already planning their response to SEPA. The right mindset across the organisation is as critical in this situation as any investment in new technology. With the rise in competition across Europe that the move to a single payments market will lead to, the infrastructure and availability of payments systems will be a crucial part of company strategies around SEPA.