SEPA - no mass adoption

The usual suspects (Gerard Hartsink - European Payments Council; Jean-Michel Godeffroy - ECB) will be lining up at Sibos in Vienna this year to debate the "root causes of the limited momentum in the SEPA (Single Euro Payments Area) migration."

SEPA Credit Transfers went live at the end of January, but so far uptake of the new SEPA instruments has been less than encouraging - not surprising given that banks did a poor job of selling SEPA to other FIs and corporates.

Given that the EPC (European Payments Council) has pretty much dominated the banks' response to SEPA and the development of the SEPA rule books, are they really the best group of people to drive the SEPA momentum forward and sell SEPA to corporates and public sector bodies?

After all the EPC is largely a conservative European banking organisation, which has focused solely on formulating the banks' response to SEPA without engaging in any meaningful collaboration or consultation with corporate users.

Also it has to be said that the EPC's SEPA vision is not necessarily the one promulgated by the European Commission or the European Central Bank, nor is it what corporates really want from SEPA. So will Jean-Michel Godeffroy be taking the banks to task at Sibos for failing to establish enough momentum behind SEPA?

There is enough evidence to suggest he should be wielding the stick. It appears the banks want clear deadlines for full migration to SEPA as the current environment where SEPA instruments and the existing national payment systems co-exist is likely to persist for some time unless there is a clear end in sight.

I doubt that the average bank (except for those that have made a strategic decision to invest in SEPA) is going to do much more to drive SEPA forward unless they are absolutely forced to.

We keep hearing a lot about the non-STP (straight-through processing) of cross-border payments in Europe, years after BIC and IBAN were introduced to try and enable banks to process these payments straight-through with no manual repairs at lower cost.

One has to wonder whether it is in the banks' interest to maintain a high number of non-STP payments as they can charge more for that, which could help make up some of the revenues lost through implementing SEPA in its entirety.

At a pre-Sibos press briefing, Deutsche Bank, which classes itself as the leading SEPA bank in Europe, said that banks could save billions by moving to full STP of cross-border payments.

Deutsche Bank anticipates its SEPA Credit Transfer volumes will triple by the end of this year, but that is coming from a low base and most of the current volumes are from financial institutions, not corporates or public sector organisations.

While Deutsche may have invested millions in building its SEPA payments engine, Michael Mueller, head of Wholesale Solutions, Deutsche Bank, said that many banks had just taken their existing payment systems and made some modifications to them for SEPA. "That approach will come to an end as soon as SEPA transactions ramp up in terms of volumes as legacy systems won't be able to process these types of transactions," he said.

Having obviously invested considerable sums in its own SEPA payments infrastructure, Deutsche Bank is keen to white label its SEPA solution to other banks to help recoup some of the money it has invested. But even the SEPA white labeling market has been slow to take hold as a number of banks are only now beginning to realise that they do not need to own and build everything themselves.

Yet, given that a number of banks still have not made a strategic decision regarding their SEPA payments infrastructure and that national clearing systems still exist, it could be some time before the economic benefits for corporates to move to SEPA are clear.

The lack of corporate appetite for SEPA was borne out recently by the findings of a VocaLink survey of corporate treasurers, which found that 35% had had no experience of SEPA and only 28% of respondents expect to use SEPA Direct Debits (SDD) by the end of 2009.

Financial software providers like Fundtech have launched a new Software as a Service (SaaS) platform which packages its payments platform PAYplus FTS with its SWIFT Service Bureau offering to provide banks with a low-cost option for upgrading their payments platform for SEPA and SWIFT payments.

That may help banks develop payment services that corporates want, but one has to ask why these kinds of platforms were not available sooner and why banks are really holding off on seizing the so-called opportunities that SEPA provides to offer new value-added payment services to their corporate customers?

Can Sibos restore confidence in banks?

Guest blogger, Bob McDowall, research director, TowerGroup, asks have banks, technology and service vendors attending Sibos 2008 in Vienna, and even SWIFT itself, heeded the significance of events in the last 12 months in global credit markets?

From a business perspective Sibos 2008 will be a more sober affair than 2007, when the conventional view was that the credit crunch was a brief, albeit disruptive, episode in the life of the global financial system.

The challenge for all exhibitors, technology vendors, service providers and financial institutions, is how to contribute effectively to re-engendering trust and confidence in the financial institutions and global financial system while benefiting their clients and themselves.

The challenge should not be underestimated. In the western hemisphere, financial institutions individually and collectively have suffered a downturn in revenues. The liquidity famine in the wake of the credit crunch has led to disenchantment by investors and their loss of trust and confidence in financial institutions and the financial system.

Financial institutions have experienced reduction in revenues. Expectations and timing of growth are at best uncertain. In other geographic regions, financial institutions have not been as badly affected to date, but they anticipate lower growth and more modest increase in earnings.

Demonstrable, improved risk management will contribute to restoration of trust and confidence. Financial institutions have to implement permanent improvements in their risk management systems. Regulators have to make improvements in two of their roles; oversight of conduct of risk management by financial institutions and oversight of risk management in market clearing and settlement systems.

The central challenge to SWIFT, its membership, technology vendors, and service providers is delivering meaningful services that will contribute to these objectives.
SWIFT conveys transactions and data that support confirmation and settlement of transactions in banking and securities markets globally.

SWIFT’s financial institutional members, in concert with technology and services providers, deliver the information on which informed risk management decisions can be taken. They formulate, implement and control the timeliness, form efficiency, and cost of delivery of that information.

Sibos 2008 provides the premier venue for exhibitors to showcase their own competitive contributions to improved services to support quantitative and qualitative risk management by financial institutions and financial regulators.

Technology and service providers that fail to encapsulate the underlying message of restoration of trust and confidence in financial institutions and the global financial systems in their offerings signify that they have not appreciated the significance of the changes and the events of the past year.

Investors' and customers' confidence in financial institutions and global financial markets and systems has diminished. It has to be restored before financial institutions can restore their own fortunes. Successful exhibitors will embed the importance of restoration of trust and confidence in financial institutions and the global financial systems in their technology and service offerings.

SWIFT - All you can eat

“For the first time, SWIFT ... has finally realised that it has competition.” Those were the words of FinancialTech Insider guest blogger, Ted Iacobuzio, managing director and practice leader, payments, TowerGroup, at Sibos in Boston last year. At last year’s event, new SWIFT CEO, Lazaro Campos, announced that from the 1 January 2008, high-volume customers of SWIFT could opt for a three-year fixed fee contract and that they could increase their messaging usage by 50% at no additional cost.

Building up to Sibos in Vienna this year, reducing the cost of ownership of SWIFT is likely to be a dominant theme. There will probably be the usual user rebate announcements, but this year will see the official launch of the new SWIFT “Lite” interface that Campos alluded to last year. “A SWIFT button on the fax machine,” he stated. “Beautiful simplicity. Simply SWIFT.”

As a network provider, SWIFT faces significant competition from commercial IP network providers (BT, Savvis et al) who claim that they can provide similar if not better levels of speed, reliability and value-added services for half the cost of SWIFT. “The threat to SWIFT is that people are rethinking flows that go over SWIFT and we have to be quick as an industry to respond to that,” said Gottfried Liebbrandt, head of markets, SWIFT, in the run up to Sibos in Vienna.

SWIFT’s weapon in its battle to remain the network of choice for banks and their customers is Alliance Lite, which is being piloted by more than 20 SWIFT customers. The first official release of Alliance Lite is scheduled for October.

Instead of having to install “SWIFT-specific connectivity” at their premises, Alliance Lite allows firms to connect to SWIFT via the internet at lower cost using a hardware security token. The jury is still out on whether this will be enough to stop network providers like BT Global Services crowing that it can offer connectivity to banks for half the price of SWIFT.

Liebbrandt said cost remained an issue, not just for emerging markets where SWIFT is focused on gaining greater traction, but for all users of SWIFT. “Total cost of ownership of SWIFT has come down,” he said, adding that he anticipates investment managers, some corporates and smaller banks will use Lite.

The good news for corporates is that SWIFT is looking at reducing the strict criteria for joining its SCOR (Standardised Corporate Environment) model, which enables corporates to interface with multiple banks via a single, standardised CUG (Closed User Group).

There are currently more than 30 corporates on SCORE, and more than 150 banks. However, at Sibos last year mid-sized corporates such as Virgin Atlantic stated that SWIFT was only viable for large corporates with “deep pockets” and the rest had no real choice in how they connected.

“We are looking at relaxing the criteria to join SCOR, which currently is tightly-defined (companies have to be listed on an exchange in FATF countries),” said Liebbrandt, adding that SWIFT had posted a discussion paper to obtain feedback as to who should be eligible for SCOR.

Yet, of the 8000 or so banks that are members of SWIFT, only 250 offer SWIFT corporate connectivity. Liebbrandt said the number of banks offering SWIFT corporate connectivity had doubled over the past two years, but that at the end of the day it was something SWIFT could not control. “We are seeing a lot of interest from UK banks,” said one SWIFT spokesman. “If they think they are losing business they will do it .”

Of SWIFT’s more than 8,400 customers, Liebbrandt said an increasing number were investment managers, stock exchanges, corporates and clearing and settlement providers. While half of the traffic on SWIFT is still payments, securities now comprise 40% and FX, 7%.

The largest growth in SWIFT volumes in the past year was in the area of treasury which grew by 29.4% as at April 2008. The next biggest area of growth was securities, which increased by 24.8%. Payments traffic grew by 12.4%.