Tuesday, September 18, 2007

Making 'bold' SEPA predictions

Just as the banks like to make 'bold' statements about how they are using regulatory imperatives such as SEPA (Single Euro Payments Area) to transform their payments offerings, you can always rely on a consultant to come and put a spanner in the works as it were.

While the major global cash management banks have not been shy about advertising their SEPA-readiness, interestingly not everyone believes they are going to win the lion's share of SEPA payment volumes. Wouter de Ploey, senior partner at McKinsey & Co., Belgium, boldly predicted at Eurofinance's 16th International Cash and Treasury Management Conference in Vienna that smaller regional banks were the most likely to benefit from SEPA.

"I don't think the global banks will be the big winners as they are more sensitive to loss of revenues in their cross-border flows." De Ploey maintains that regional European banks are likely to "move more aggressively" into the corporate banking space as the move to standardised credit transfers and direct debits under SEPA will lower the barriers to entry for these banks to develop pan-European instruments for corporate customers.

Meanwhile, the larger global payment providers' mantra is 'volume, volume, volume' - those that can process the most payment volumes are more likely to deliver the greatest cost savings and efficiencies.

Whether SEPA will force banks to converge towards a single pricing model is uncertain, says de Ploey as banks in different regions derived their payments revenues from different sources. For example, he said some banks generated the bulk of their revenues from the retail banking side and therefore may be less inclined to offer reduced pricing under SEPA to corporates.

De Ploey said the focus on Additional Optional Services (AOSs) by banks looking to make up the billions in revenue that will be lost by standardising payments under SEPA, could result in "non-standardisation" meaning banks could charge more for value-added services as a means of recouping some of their lost revenue.

Anne Boden, head, transaction banking, Europe, ABN AMRO, said that AOSs that meant additional functionality for certain customer or corporate groups with specialist requirements was a good thing. "However, AOSs which are country specific are not in accordance with the objectives of SEPA," she said.

When it comes to migrating to SEPA, de Ploey outlined a number of options including a slow and gradual approach to SEPA adoption, the 'domino effect' and the 'Big Bang' approach. A slow and gradual approach was the least likely, he says, while banks tended to favour a regulatory-mandated 'Big Bang' transition to SEPA, which he said meant they could standardise as little as possible and provide more AOSs at a higher cost.

De Ploey believes the most likely SEPA migration scenario is the 'domino effect' where migration to SEPA starts off slowly and then increases rapidly. Either way he says banks in particular are going to find the transition to SEPA painful because of the "cross-subsidisation" of the payments business within Europe.

Boden of ABN AMRO said the SEPA migration for corporates and banks was complicated and could last well beyond 2011 with no clear end in sight for the switching off of existing national payment systems. Describing the SEPA migration process she said it was "like people deciding to change which side of the road they drove on at different times."

With such uncertainty and complexity surrounding migratinv to SEPA, Boden said it was important all parties kept the end game in sight. "SEPA is a good end game as we will be using the same set of standards across Europe. But getting there is going to be quite complex." Boden said she had every confidence that in the next two to three years the majority of ABN AMRO's clients would convert to SEPA.

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