Combining economies of scale and flexibility

Equens will be prepared for this crucial step and will start processing SEPA payments on one joint platform from the first day of the year. This state-of-the-art platform will enable this pan- European payment service provider to provide its services modularly and flexibly. The resulting economies of scale will provide SEPA clients with high-quality one-stop shopping at low costs. The company will also be able to supports its clients to successfully make the transition to SEPA compliance.

Equens was established through the merger of the Dutch Interpay and the German Transaktionsinstitut. It was the first cross-border merger of full-service payment service providers in the eurozone. Equens processed seven billion transactions in 2006, making it one of Europe’s largest payment service providers with a more than 10 percent share of the European payments market. Conducting these seven billion transactions on one platform means that Equens will now be able to achieve the economies of scale and the cost-savings that were the principle objectives of the merger. This will allow competition on the basis of price, which is a critical condition for being able to operate successfully in the European market.

Maintaining the current level of service

With the introduction of SEPA the requirements for the basic level of payments will increase in some countries and decrease in others in 2008. Banks and corporates that currently enjoy an advanced payments infrastructure will, however, want to be assured of receiving the current level of service after 1 January 2008. Therefore banks will require variations with regard to different communities, additional optional services and specific requirements from individual customer institutions in addition to the SEPA core layer. Banks are already developing features that will enhance the value of the SEPA core products for their own customers. In order to fulfil these requirements Equens will offer both basic services and additional services to bridge the gap between the minimum level of service stipulated by the EPC Rulebooks and the level of service that end customers – both corporate and retail – are accustomed to receiving.

More than one settlement engine

As a consequence of SEPA banks will receive more freedom of choice regarding the manner and location of settlement. Although payment processors will keep providing transaction clearing and not perform a settlement function, banks do not have to stick to just one settlement engine. TARGET2 is just one of the settlement engines that will be available. From a processing point of view, payment processors will need to be able to accommodate their clients regardless of the settlement engine or process they wish to employ. This includes bilateral settlement, which will most likely continue in certain countries. Equens will be able to offer the requirements from both worlds.

Distinction between high-value and low-value will be eliminated

Increasing economies of scale will result in the elimination of the distinction between high-value and low-value payments in the future. The real focus will instead be on the speed at which payments are settled. Equens recognised this development years ago based on its experiences in the Netherlands. The company has consequently joined forces with the banks to take the initiative to introduce ‘parcel settlement’. The first step entailed the transition from a 24-hour cycle to a settlement cycle every hour. In the Netherlands clearing now takes place at Equens and settlement takes place at the Dutch Central Bank a few hundred times a day. This is virtually real-time. The distinction between urgent and non-urgent payments in a clearing cycle that approaches 30 minutes is also of less significance. Equens foresees that the next development within the world of SEPA will be the elimination of the distinction between domestic and cross-border.

Critical mass and the need for reachability

With regard to efficiency the ideal number of payment processors is naturally one. However, this would obviously be unacceptable from the perspective of freedom of choice and competition. In view of the fact that a scale of ten to twelve billion transactions is required in order to be profitable as a payment processor, after the process of consolidation in the European market there will be three to five processors remaining. Another argument for this reduced number of processors is related to the requirement that payment processors must operate across multiple national borders. A pan-European payment processor must be able to guarantee that any payment sent to any other bank account in the eurozone will reach its destination within the agreed time frame. The greater the number of processors, the more complex and expensive it will be for each market party to achieve this international reachability.

Interoperability demands partnership

Despite the requirement to operate in a competitive environment, partnership among payment processors will be crucial in order to realise the necessary interoperability. After all, the reachability of every account number within the eurozone can only be guaranteed when there is systematic and consistent access to payment institutions and processors. Partnership among processors is consequently one of the basic prerequisites for the success of SEPA. This demands open standards for routing, tracking and tracing and connectivity. Equens consequently actively participates in standardisation organisations and is working towards achieving this interoperability by serving on the board of directors of the European Automated Clearing Houses Association (EACHA). Equens is also a member of the Berlin Group.

Excellent starting position

Consolidation of the European payments market will continue in the near future. In this context Equens will continue to take a proactive approach and will tap into opportunities as they arise. It is to be expected that smaller processors will realise that they will not be able to survive in the long term and will move to transfer their volumes. A number of banking communities have also clearly stated that they do not wish to invest in a national SEPA processing capability and are looking for a SEPA-compliant processor that will fulfil their needs. Equens has an excellent starting position for fulfilling these requirements.
www.equens.com