The Dawn of Sepa

At the start of this year, the Single Euro Payments Area (SEPA) started making life a whole lot easier and less costly for CFOs using euro payments for trading across EU borders. Europe’s banks have invested heavily in the technology and structures to help this happen, even though they stand to lose their cross-border fees and will be able to sit on funds for less time. Yet, the side that really stands to gain from SEPA, the buyers, seems to be hardly batting an eyelid, unaware in some cases that SEPA even exists.

Gerard Hartsink, chairman of the European Payments Council (EPC), which has overseen the development of SEPA, says that some important customers are still missing. "It is not widely known, but four years ago, my colleagues and I at the EPC opened the dialogue with consumers, corporates, SMEs, different professional bodies and the public administration. We knocked on the doors of those guys several times asking for their ten key points for SEPA. We then sent reminders. In the end, only the European Association of Corporate Treasurers gave us a response."

Hartsink accepts that some large corporates may have been addressing the SEPA issue directly with their banks, which in turn could have passed their concerns on to the EPC.

But he wonders how many businesses have appointed ‘Mr SEPAs’ in the same way that many established ‘Mr Euros’ in advance of the introduction of the single currency.

WHERE IS THE PUBLIC SECTOR?

After its initial rocky start to engagement, the EPC did eventually receive input from large corporates, SMEs and consumer associations. But Hartsink’s major concern remains the total lack of response from public sector bodies, which have put forward no representatives to take part in the EPC’s customer stakeholder forum.

He says: "We have been yelling about this for four years, and I simply don’t know how to seduce them to become part of the dialogue. All the rest of the buy-side, including distant sellers, is now represented. The public sector is critical to the process because it makes at least 20% of payments, through tax, social benefits and all sorts of special services. Unfortunately, there is no European organisation that represents the interests and concerns of public sector entities."

The Economic and Financial Affairs Council of the European Union (ECOFIN) has not provided the lead to involve public sector bodies. Nor, perhaps, have those public sector bodies themselves been paying much attention to the development of SEPA. For instance, Hartsink recalls a conversation with the director of a national tax authority who confessed being completely unaware of SEPA.

Yet given the rules of public sector tendering, which effectively opens up public contracts in one country to suppliers in all 27 EU member states, the public sector needs to be looking at its payment banks. As Hartsink explains: "In the new SEPA world, public sector bodies do not just have three or four local banks that can deliver payment services at acceptable cost; they have 40 or 50 potential service providers because the standards and business rules are all the same now."

BANKING ON SUCCESS

The key to SEPA’s success lies in how easily the eurozone’s 8,000 banks can access the system. However, as Hartsink points out, more than 80% of payments are actually handled by only around 200 banks, all of which reported that they were ready to go from January 2008.

The banking system has, therefore, got its act together since the European Commission criticised it in February 2006 over its slow progress. Hartsink points out that the EPC, whose banking members have struck a delicate balance between cooperation and competition, has done its job by drawing up the standards and rules for payment products. The delays have come, he says, from the implementation of legislation in various eurozone countries and he might have added, but did not, by Brussels itself.

He explains: "A lot of banks have operations in more than one market and some in a multitude of markets. In the case of my own bank, for instance, we have 30 markets within Europe. Banks have had to position themselves in this complex evolving world – they definitely want to continue to serve their own customers, so they have to assess the payments value proposition."

The cost to the banking system looks to be high. Hartsink quotes figures that suggest banks are investing some €1.5bn in SEPA systems and bracing themselves to take a hit of the same amount in loss of fees and interest when settlement drops to one day only from 2012.

The banks that make a success of SEPA will, he says, rightly expect to pick up other corporate business, which will justify their investment. They will also look to provide payment services, perhaps on a white-label basis, to smaller banks that cannot make the business case for tooling up themselves.

THE ROLE OF TECHNOLOGY

Large banks also have the advantage that they have been outsourcing their technology for some time. Hartsink says: "This has come already. A lot of large banks, such as Deutsche Bank and ABN Amro, have already outsourced their technology because it is cheaper. So a lot of the larger players had already taken this type of decision.

"However, for the smaller players, it has perhaps not been entirely clear what they should do to ready themselves for SEPA. However, they do realise that it is impossible for them to continue to do their own processing. In the short term, of course, outsourcing will hurt them, but it will change their strategic position.

"In the end, the decision is to do with servicing your customers and making money out of them so that you can cover the costs of payment services for the front and back offices."

Hartsink sees payments eventually going the way of custody, with a few dominant players. "The reality is that the top ten custodians manage the show. But even in this consolidated business, a substantial part of the custody is still in the hands of smaller players, although the trend is very clearly that the largest will become larger."

It is his view that small and large banks will not give up their banking relations: "They will continue to service their customers with payments, current accounts and things like that. The point is that the manufacturing part may be done by others and among those others, there will be consolidation."

So, as the new era of a Single Euro Payments Area dawns, it remains to be seen which banks will seize the opportunities it will provide.