SEPA is stalling

Guest blogger, Paul Styles, business solutions manager, ACI Worldwide, comments on the increasing unrest amongst European banks regarding SEPA's slow progress.

The slow implementation of the SEPA project so far has culminated in a statement from the French Banking Federation (FBF), announcing that its members are ‘downing tools’ on preparation for the introduction of SEPA Direct Debits (SDDs) in November 2009.

As dramatic as this statement may sound, it actually reflects general and widespread stirrings of unrest from Europe’s banks regarding the SEPA project. In fact, as early as September 2008, the FBF warned that they would suspend their SEPA Direct Debit projects in reaction to the European Commission's unclear stance on interchange fees, which they believe threatens their current economic model.

The EC and the European Central Bank (ECB) have stated that banks can use interchange fees on Direct Debits only for an "interim period" and if it is justified. However, French banks point out that the interchange fee system is the "only tried and tested cooperative model" to achieve the financing of SEPA infrastructure investments and maintenance costs. If interchange fees are to be scrapped, then the ECB needs to come up with a long term solution, and quickly.

Nevertheless, whilst the French banks are unwilling to commit to the ECB’s provisional timetable, it seems unlikely that they will completely halt their work on SEPA projects as many have wider European operations. Yet, demand for SDDs in a cross-border context is yet to be proven, and with SDDs due to go live in November, this statement from the FBF speaks volumes that the French banks are not expecting a wholesale shift from their domestic Direct Debits processes to the new SEPA instruments.

While the statement from the FBF may have little impact on the overall roll-out of SDDs, it serves to highlight the fact that the SEPA project is stalling. Without strong customer demand, achieving SEPA through self-regulation will remain problematic. As such, appropriate levels of regulation would help the progress of SEPA implementation and help deliver the much-needed clarification of rules for the financial services industry and its corporate customers.

The FBF statement has served to put further pressure on the European banking industry to set an end-date for the retirement of the legacy payment instruments, which can be no bad thing. The ECB has acknowledged this requirement and has stated that it ‘will work on the modalities – self-regulation or regulation – as well as the end-date itself’. Without such a deadline achieved by some degree of consensus, the FBF refusal to commit to provisional timetables may be just the tip of the iceberg vis-à-vis SEPA challenges.

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?

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.

BIC and IBAN confusion persists

With all the turmoil going on in the markets, the first official day of SEPA, 28 January 2008 when SEPA Credit Transfers became commercially available, may pass without much fanfare.

However, just to add to banks' woes, Compass Management Consulting estimates that despite there being a low number of non-STP cross-border payments in the eurozone, the 2% to 5% of non-STP payments that require manual intervention, are steadily eroding banks' trading profits.

Based on its analysis of European banks, Compass estimates that non-STP payments can reduce overall trading profits by up to 25%. To back up its claim, it cites its observation of a banking operation handling 300,000 transactions a day that generated 7,000 exceptions. "Despite the relatively low 2.3% exceptions rate, 270 full-time equivalent staff (FTEs) were required for manual processing of these payments, each of which costs between £25 to £40 to handle," said Richard Bissett, head of banking services at Compass.

Compass found that an average of 20% of all transactions fail requiring manual intervention. These 20% of transactions account for 80% of total back office costs. Bissett says 60% of exceptions could be fully automated. Yet, according to Compass' analysis, banks are only managing to automate 4% of exceptions.

Shedding some light on the results, Bissett said that the real question is why are there still non-STP payments when BICs and IBANs were introduced to try and increase the automated handling of cross-border payments in euro? He says corporates are still "totally confused" by BICs and IBANs and that of the 62,000 BICs, only 20,000 are connected (SWIFT network participants).

With SEPA placing further pressure on banks' payments processing margins, Compass anticipates that this will bring the challenge of exceptions processing into greater focus. It still doesn't resolve the rather confusing issue of BICs and IBANs though, and with cross-border payment volumes tipped to rise post-SEPA, one can only expect the number of exceptions to increase unless something is done to remedy this.

SEPA - a case of industry mismanagement

Although they don't necessarily court publicity or boast about the innovative ways in which they are using technology, Nordic banks tend to have grasped the fundamentals of technology long before many other banks and do not approach it with the same level of fear or risk aversion.

That is why perhaps the Nordic payments infrastructure is considered to be 'light years' ahead of many other European states. It boasts a relatively efficient credit transfer system and the concept of "real time", which most other banks only pay lip service to, is enshrined in consumer internet payments which are credited same day. Float has also been reportedly done away with in domestic Norwegian transfers and internet banking uptake generally is much higher.

Some of these aspects are only now being considered on a European-wide scale as part of the Single Euro Payments Area, which in effect means European banks and their customers now have the opportunity to catch up with their Nordic counterparts, which have enjoyed these efficiencies for some time.

No surprises then that a lot of Nordic banks see SEPA as a step backwards for them. They already offer a relatively efficient cost-effective electronic payments infrastructure, which is linked in with value-added services such as e-invoicing.

I was having a discussion about SEPA via email with Bo Harald, ex e-banking guru for Nordea and now head of executive advisors at financial software provider, TietoEnator, which has helped Nordic banks build innovative e-invoicing solutions.

In his initial email he had this to say:

"The thing is we need to be rather forthright together with the ECB and the EU to get the banking community to move to new services. Having met people in London yesterday it did strike me how many still cling to the past(it has NEVER been a good business strategy) and try
to find reasons to delay starting reforms - only to have to do them later in gigantic panicky efforts without being properly prepared."

My remark to him was that the industry's tendency to want to preserve the 'status quo' meant that the only form of innovation at times was that forced by regulation, and that SEPA was a good example of that.

His reply was that "SEPA had in fact been an issue of industry mismanagement - by resisting the credit/debit part instead of steering it and promoting e-invoicing instead, the banking industry and thus its customers will have to invest and pay close to €10 billion and revenues will go down. Instead he says they could have invested very little and saved €200 billion plus the cost for EU enterprises and corresponding earnings."

It appears that "fostering creativity in payment services" through the introduction of SEPA-wide payment related services such as e-invoicing, is going to be the difficult part for banks.

SEPA Direct Debits and Credit Transfers is a start, but as we have been hearing from corporates, they have yet to be convinced of the business case for implementing these new instruments and where are the additional optional or value-added services that everyone is saying banks need to provide in order to make up for revenues lost through SEPA's implementation?

Just say no to SEPA

Just when you thought there was nothing left to say about the Single Euro Payments Area (SEPA), there appears to be plenty. All this talk of SEPA and pan-European payment intrustments over the last few years anyone would have thought there would be an instant market for the instruments.

But as the January 2008 deadline for banks to start offering SEPA Credit Transfers approaches, it appears neither corporates or public sector organisations have much of an appetite for the new SEPA payment instruments. Corporates maintain that the new SEPA instruments are not a significant improvement on existing national instruments, so why should they adopt them?

This is borne out by the World Payments Report 2007 which after analysing SEPA migration plans and preparations in 13 of the eurozone contries, concluded that it is unlikely a critical mass of SEPA payment instruments will be achieved by 2011. The European Financial Management & Marketing Association (EFMA), one of the co-publishers of the report alongside Capgemini and ABN AMRO, has called for regulators to provide incentives in order to mobilise public sector companies and corporates.

But with the new SEPA payment instruments symbolising bank-to-bank standards, corporates have not been engaged enough by the banking community to fully participate in SEPA, and for them SEPA is not SEPA without add ons such as pan-European e-invoicing standards and banks dispensing with their support of proprietary standards and applications so corporates can more easily communicate with multiple banking providers.

So much for full transition to SEPA by 2010 it seems (most banks probably realised that the transition period would extend beyond 2010, however there appears to be no end in sight as to when banks will stop supporting the existing national payments infrastructure and move wholly to the new SEPA payment instruments).

The World Payments report indicates that some countries want to retain national payment systems as long as demand exists, but doesn't this defeat the original intent and purpose of SEPA, and how long can banks bear the brunt of the cost for running two systems in parallel?

SEPA slippage

After much stalling and compromising, the Payment Services Directive (PSD), which is the legal framework for the Single Euro Payments Area (SEPA) has finally been passed. But when you think that the PSD was first published in 2005 and it has taken two years to agree on the content of it, there appears to be some 'slippage' around SEPA.

The PSD will now be transposed into national law by 1 November 2009 instead of November 2007, but the transition to SEPA will begin from 1 January 2008. The 'slippage' is even more apparent when one considers that SEPA as a concept has been on the table since 2000, and what has the industry got to show for it?

Apart from STEP2, some ACHs with pan-European ambitions and talk of SEPA-compliant instruments, not a hell of a lot says some banks, who according to a knowledgeable industry source, are starting to draw comparisons between SEPA and that other much-talked about EC regulation, MiFID.

The Markets in Financial Instruments Directive had leading investment banks announcing the development of Project Boat, a pre- and post-trade reporting service for off-exchange equity trades, and Project Turquoise, a multi-lateral trading facility.

No such announcements have been made by the leading payment banks for SEPA. However, according to the same knowledgeable source, there is talk of a Project Turquoise for bilateral clearing between banks. This would effectively mean that some of Europe's major payment processors could club together to provide cross-border clearing for their own pan-European direct debits instead of using the pan-European ACHs; STEP 2, VocaLink and Equens, which are hoping to capture a share of this business.

But given the different competitive dynamics between the worlds of payments and investment banking, and the ability of investment banks to move much more quickly, none of us are holding our breaths when it comes to the payments' equivalent of Project Turquoise emerging any time soon.