Who is holding SEPA back?

Given current economic conditions and the precarious financial situation some banks have found themselves in, is now really the best time to be forcing banks to invest in SEPA?

Well it seems the European Central Bank is keen to press ahead with SEPA regardless of external conditions. In a newspaper interview last Sunday, Gertrude Tumpel-Gugerell, ECB Executive Board Member, said that an end date for SEPA to be the only bank payments system in Europe needed to be set.

Many banks and corporates will welcome that statement as SEPA Credit Transfers, which make up less than 1% of total credit transfers, have not been the success some hoped for, with The European Associations of Corporate Treasurers (EACT) blaming that on the lack of an end date for SEPA implementation, which makes it difficult for corporate treasurers to convince their CFOs they need to budget for SEPA.

Tumpel-Gugerell was quoted as saying that, "When SEPA is the only system working, bank commissions will fall further, which will be an advantage for all clients." I am not quite so sure that the banks will look on it so favourably as innovation or disruptive innovation, is not something banks in general are very good at, particularly in a recession.

During the third edition of the International Payments Summit “Do You SEPA?”,held in Milan on Monday, Renzo Vanetti, SIA-SSB’s CEO said that the adoption of new technology solutions and the creation of new services and business models under SEPA and the Payment Services Directive (PSD), represented an opportunity to contribute to a "rapid solution" of the current system crisis. But that it needed to be an integrated and complete vision for change with the authorities acting as the catalyst.

In other words somebody needs to pull it all together. The banks are not going to do it on their own. But is heavy handed regulatory pressure or intervention the way to do it, as some banks clearly do not see the business case for full SEPA migration, particularly when it is likely to erode their existing payments revenues?

Going forward if SEPA is to work, the Do You SEPA payments event in Milan heard that there needed to be a high degree of harmonisation in terms of how member states implemented the PSD, which provides the legal framework for SEPA.

Carlo Tresoldi, SIA-SSB chairman, also pointed the finger at the public sector saying they needed to adopt the new SEPA payment instruments. "At European level these public authority bodies alone account for 20% of all payments in euros and 40% of GDP," he said. "In addition, public authorities represent 15% of market share in the area of credit transfers and collections”.

But are public authorities the real problem? Sure it would be good if governments used SEPA instruments, just as it would be good if corporates did. But when you have a number of banks still not fully implementing SEPA or adapting their payment systems fully to handle SEPA payment instruments, one has to ask who is really holding SEPA back; the public authorities or the banks?

DTCC and LCH.Clearnet to merge

We've had transatlantic exchange mergers, now it seems that securities clearing houses are tying the knot with the DTCC and LCH.Clearnet announcing their intentions to merge.

The merger has been a long time coming, given the fragmentation within securities clearing in Europe and the lack of "interoperability" in the clearing layer, which is one of the conditions set down by the European Code of Conduct for Clearing and Settlement.

Interestingly, the DTCC revived the old Nasdaq Europe platform, EuroCCP, in an effort to give firms a choice of where they clear and to break away from the model of clearing being a "proprietary function of vertical exchanges".

Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.

It kind of makes you wonder why the DTCC bothered setting up EuroCCP in the first place as merger discussions with LCH.Clearnet have been ongoing for some time, and perhaps in this current economic environment where risk management and cost savings are uppermost in people's minds, LCH.Clearnet finally caved.

It is unclear which technology platform will predominate, but it is anticipated that the proposed merger will result in efficiency gains, largely derived from technology savings, as well as economies of scale as both the US and Europe would be supported by a common infrastructure. As such "further reductions in the costs of LCH.Clearnet’s and DTCC’s services", most notably for equities in both Europe and America, are anticipated. Other markets will also be covered including, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps and credit default swaps.

The formal announcement from the DTCC said that LCH.Clearnet would move to an at-cost based structure comparable to DTCC’s within three years. It is believed Euroclear, which has a 15.8% holding in LCH.Clearnet supports the transaction in principle and will remain a shareholder.

A "binding" agreement between the DTCC and LCH.Clearnet is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, and the relevant regulators and tax authorities.

SWIFT misses open standards opportunity

SWIFT's relationship with its member banks is entering an interesting phase, particularly as the Brussels-based banking co-operative courts corporates as customers.

At Sibos some of SWIFT's member banks expressed their discomfort at the announcement of Alliance Lite, SWIFT's new low cost means of connecting to SWIFTNet, which "is as easy as logging onto a web site".

Alliance Lite was developed as a lower cost alternative for corporates, banks and investment managers that don't have the volumes of traffic to justify managing their own SWIFT infrastructure and want to get up an running on SWIFTNet in days rather than months.

However, within the Alliance Lite web browser corporates for example are able to initiate payments, which mirrors the functionality banks provide in their own online proprietary banking applications. So needless to say the banks were not happy with SWIFT treading on their toes. We also hear on the grapevine that the banks have told SWIFT they want to leverage their existing investment in IdenTrust for authentication and do not want SWIFT to reinvent the wheel with some other form of PKI.

But it raises an interesting challenge for SWIFT and its member banks as SWIFT moves into the solutions space and becomes focused on the agenda it wants to push, which is not necessarily that of the banks or corporates.

In a recent research note, analyst firm Financial Insights points out that while SWIFT was busy "selling itself through rebates and fee cuts for users, as well as a few new initiatives like a workers' remittance program and Alliance Lite," it missed an opportunity to promote the ISO 20022 standard and how banks could "leverage open standards to create new business opportunities".

SWIFT is the Registration Authority for ISO 20022 or the UNIFI standard as it is otherwise known, and although usage of the XML-based standard is not widespread, it does form the messaging foundation for the new SEPA payment instruments.

Financial Insights believes that ISO 20022 is the "leading candidate for standardization of corporate-to-bank messaging" but that only a handful of banks (notably Citi and JPMorgan Chase) had thrown their weight behind it, while other banks saw problems in meeting demands for "open messaging standards" unless the large volumes of new business are already there.

It is the old chicken and egg syndrome; banks don't want to develop new solutions based on open messaging standards unless their is significant customer demand and corporates believe that banks should want to fund new developments in order to keep their business.

At Sibos in Vienna, SWIFT had an opportunity to really sell ISO 20022 to the banks, but they were too busy it seems selling themselves. "SWIFT had the attention of the world's bankers at Sibos and failed to take advantage of it to promote a standard that could change the structure of the banking industry," said Financial Insights analysts.

But then of course would banks have had the appetite for such an initiative? After all, as Financial Insights points out, open standards would enable corporates to switch banks more easily. "For ISO 20022 to succeed, SWIFT and other industry players, including leading banks and technology vendors, have to coalesce around a set of new business opportunities like financial supply chain management and quantify the opportunities. Only then will banks be able to justify moving to open standards," Financial Insights concludes.

PSD implementation likely to be pushed back

In the midst of a global credit crunch, the continued roll-out of SEPA (Single Euro Payments Area) and compliance with the European Commission's Payment Services Directive (PSD) are probably the last things on banks' minds.

A Capgemini survey of more than 60 banks at this year's Sibos conference found that 80% had established specific initiatives to address the upcoming PSD which banks must comply with by November, 2009. (One has to question though what will happen to these initiatives given the nationalization of some banks and/or the reassessment of funding priorities in the wake of the credit crunch).

Not surprisingly, almost half of the banks surveyed believe that the scheduled PSD implementation target of November 2009 will be pushed back and given the lack of take-up for SEPA Credit Transfers and uncertainties surrounding SEPA Direct Debits, scheduled for implementation in 2009, almost 70% of banks said they believe a “hard” SEPA end date is required in order to make SEPA a success.

According to Capgemini's survey, more than half of the banks surveyed cited harmonized implementation of the PSD across the EU as the biggest challenge. The PSD is estimated to have a €1 billion impact on banks' business as a whole with lost profit from value dating cited as the main concern.

In an effort to eliminate "float" the PSD prohibits value dating.While banks expect the PSD to lead to new payment services such as direct debit mandate management, this is hardly the level or kinds of innovation that the PSD is really seeking.

Having earned money off the status quo for some time, banks are finding it hard to come to terms with the new world of payments that the PSD beckons in. And the credit crunch is only likely to widen the gap between customers' expectations and banks' ability to deliver new payment services and products.