Euro vision – real-time payment methods


26 November 2014


Some thought the day would never come – SEPA (Single Euro Payments Area) is officially now in force, but the story is far from over, with the European Central Bank now looking to implement real-time payment methods to speed up transactions. Paolo Zaccardi of Aite Group briefs Ross Davies on what could be next in store for the continent’s banks and corporates, and the role that payment processors could play in ensuring all goes to plan.


Crack open the champagne, unfurl the EU-motifed bunting and sound the clarions: the single European payments area - more commonly abbreviated as SEPA - has finally arrived. Or let us, perhaps, not be so hasty.

After what can only be described as an unadulterated slog, underscored by countless extended deadlines - duly missed - full implementation for credit transfers and direct debits in the eurozone finally came into effect on 1 August 2014.

The European Central Bank (ECB) - responsible for monitoring the design and deployment of the initiative - might well be mopping its collective brow in relief that migration has been achieved.

Now, more than 500 million people, and 20 million companies, will be able to make use of a single bank account for all direct debits and credit transfers in Europe. Authorities are confident that SEPA will provide the Euro space with an economic stimulus, with businesses able to extend into markets without extra payment costs.

It is purported that the initiative will also enable the stream of more than two billion standardised payments across European borders each month.

"Since the cross-border payment scheme was first mooted at the turn of the century, it has sometimes felt that the goal of SEPA has been complicated in a mire of apathy and indecision."

"The successful completion of SEPA further accelerates Europe's financial integration," explained Yves Mersch, member of the executive board of the ECB, in August. "It removes barriers to credit transfers and direct debits, which will no longer impede businesses or consumers."

A long road

At various points, some doubted this would ever happen. Since the cross-border payment scheme was first mooted at the turn of the century, as the biggest financial integration project of its kind in the world, it has sometimes felt that the goal of SEPA has been complicated in a mire of apathy and indecision.

Sluggish adoption rates have served as the barometer of such attitudes among banks and corporates. Even as late as May - after being handed another six-month extension in January - the ECB voiced concerns that uptake volumes were still underwhelming, with SEPA direct debits accounting for a disappointing 88.2% of all direct debits on the continent.

The ECB's exhortations may well have prompted a last-minute sprint that finally took SEPA over the line. However, this does not mark the end of the SEPA chapter, but merely its beginning, as attentions now turn to improving integration, innovation and competition within the retail payments market.

In preparation for this, the ECB initiated the Euro Retail Payments Board (ERPB) in December 2013, succeeding the SEPA Council. Consisting of representatives from demand and supply sides - seven of each - as well as five delegates from central banks in the eurozone, the ERPB's mandate is said to be more far-reaching than that of its predecessor.

On commission

Overseen by the European Commission, the ERPB's work thus far has consisted of highlighting strategic issues and priorities, such as business practices, requirements and standards. In the run up to SEPA implementation, particular attention was also paid to ramping up direct-debit activity - the longstanding bane for the SEPA council.

"It's early days, but since its inception, much of the ERPB's focus has been on direct debits," says Paolo Zaccardi, senior analyst in wholesale banking at Aite Group. "This has concerned getting direct debits up to the same level of migration as credit transfers, especially among corporates. It has done a good job in achieving this."

The ERPB has clearly had its work cut out from the get-go. For instance, the adoption of the XML ISO 20022 standardised message format for SEPA has been particularly problematic for corporates, who have continually aired grievances over its data field limit of 140 characters.

Some industry figureheads have also claimed that the introduction of the ERPB has done nothing but add another layer of complexity to what was already a far from streamlined process. Zaccardi disagrees.

"I certainly don't think the ERPB has done that," he says. "What it has done is focus more on fewer aspects through the creation of specific working groups, which I believe is a clear and positive intention, but that's not to say that there aren't a host of issues that need resolving.

"It perhaps needs to take a clearer stance over e-mandates, and there are still some issues over the use of XML ISO 20022. Many corporates - particularly SMEs - still don't get the advantage of remittance information. So, yes, there are still open issues, but the creation of the ERPB has been positive."

In real time

Over SEPA's 15-year lifetime, financial technology has transformed exponentially. In particular, the notion of real-time payments (RTP) has gathered genuine momentum, with institutions keen to drive down end-to-end transaction times.

Some RTP systems already operating in Europe include the Faster Payments scheme in the UK, Swiss Interbank Clearing and Betalningar i Realtid in Sweden. More could follow, too. In May, Finland's banking trade body, the Federation of Finnish Financial Services, announced its intention to substitute the country's existing payment system - which dates back to the early 1990s - with a new RTP, SEPA-friendly model. At the time of writing, RTP suppliers are being invited to make their pitches.

"Banks should consider RTP systems as a great opportunity to gain competitiveness against new non-bank entrants offering alternative RTP solutions," claims Zaccardi.

In a recent survey conducted by Aite Group, and entitled 'Real-time Payments: A European Perspective', the majority of respondents claimed they were hoping to implement RTP solutions within the next three years. In response, the ERPB has set up two working groups dedicated to fostering "innovative" payment methods across Europe.

However, while faster cross-border transactions are a major target, the said report argues that the central function banks are looking to derive from RTP is the creation of value for their customers through transparent transactions delivery. As a result, in implementing RTP services, banks will have to reassess their liquidity efficiency models, which could also necessitate the installation of more advanced and timely fraud and risk-management solutions. This, argues Zaccardi, will see payments processors and vendors come to the fore.

"Technology vendors need to consider banks' benefits and challenges that will drive RTP implementations," he says. "Vendors should play a key role driving forward the payment transformation of many fragmented banks' legacy systems, helping banks to increase their operational and liquidity efficiency. They can also support banks in managing real-time information for early fraud detection, risk management and dynamic analytics, and help them in capturing immediate insights from end-to-end payment processing information far better."

The next step

Elsewhere, the ERPB has recently been charged with carrying out a stocktaking exercise on payment cards, with the view to the future harmonisation of what is arguably today's most prevalent electronic retail payment instrument.

While it constitutes a sizeable chunk of the ECB's post-SEPA focus, Zaccardi would also like to see a more concerted effort in cross-border mobile adoption, which he believes to be the key driver for RTP integration.

"Some industry figureheads have claimed that the introduction of the ERPB has done nothing but add another layer of complexity to what was already a far from streamlined process."

"We are witnessing strong demand coming from the retail and corporate sides around the further development of mobile services for faster payments," says Zaccardi. "However, the rate of development is country-specific. If you take the UK, for example, it is moving towards very strong mobile platforms. In some countries, such as Italy, we are not there yet.

"Also, with mobile, payments could become smoothly integrated within the overall sales process, with value-added services focused on creating a more engaging customer experience, rather than just offering an isolated payment, as traditional card solutions do. Moreover, the flexibility and low-cost structure typically offered with an RTP scheme is much better suited than card-based solutions traditionally used in digital wallet applications."

In summary

A final word should be reserved for Europe's technology vendors, whose stock has soared inestimably in recent years.

If the SEPA saga has taught the financial services one vital lesson, it is that legacy systems die hard. Part of the reason successive migration deadlines were missed was down to this very fact. In the end, many banks were dependent on payment networks and vendors phasing out legacy systems and implementing the necessary infrastructures.

The likelihood is that payment processors will play an equally valuable role in driving the aforementioned transition to a real-time economy in Europe, while engendering improved services for private and corporate consumers.

"Vendors should not be mistaken for mere RTP promoters," says Zaccardi. "Instead, they are technology enablers and product innovators. They can truly drive RTP implementation when it comes to enabling a true bank multichannel integration, and driving forward the payment transformation of the fragmented banks' legacy. They can also provide solutions to corporations for business-to-business payment automation and real-time liquidity monitoring."

It would appear that the European financial services industry is clamouring for RTP. Let's just hope it doesn't need to wait another 15 years to see such wishes fulfilled.

Paolo Zaccardi is a senior analyst at Aite Group, specialising in wholesale banking, global payments and corporate banking innovation. Based in Rome, he is a trusted adviser to Europe’s corporate banks and payment services providers and brings solid industry expertise to Aite Group’s banking and payments practice.