SEPA, focusing on core-competences

Effective competition and low costs are explicit EC goals and, according to various studies carried out by the banking sector, the effect of this pricing pressure on banks’ revenues will amount to many billions of euros. This article looks at the possible scenarios concerning this pricing pressure, and in particular the role of ICT companies as new arrivals in the money transfer market.

Why SEPA will give rise to pricing pressure.

The causes of pricing pressure on money transfers can be explained by accepted economic law, in that an increase in competition, transparency and political pressure will result in price reductions.

More competition

SEPA’s harmonisation of the euro payment market, whereby the same basic conditions, rights and obligations apply across the board, will encourage competition between banks. At the moment, circumstances (formats, processes, players and legislation) vary so much from country to country that it is extremely difficult for a bank to become a significant player in another country. SEPA will change this.

More transparency

The standardisation of Euro payments brought about by SEPA will also increase the transparency of prices for money transfers. In the present situation, the direct costs of money transfers do not always allow uniform insight, and they are not always charged to the consumer on a one-to-one basis. In some countries, the costs are mainly covered by companies and money transfers are virtually free for consumers whilst in other countries, it is the consumer who pays the bill. In addition, many banks compensate the costs of payment services with other income, such as interest, value dating and float, but with the introduction of SEPA, costs will be charged or passed on to the consumer more directly.

Transparency will also be increased as a result of the harmonisation that SEPA will create in the payment landscape, which will make it easier to compare banks’ services.

Political pressure

The last, but by no means least, significant factor for price reduction is political pressure. EU directive 2560/2001 has already led to obvious pricing pressure with regard to European cross-border payments and Brussels continues to send out the explicit message that SEPA will lead to efficient competition and low costs.

Strategies

With pressure being put on pricing for money transfers, banks are being forced to develop appropriate strategies to handle revenue loss. The banks have estimated their total reduction in revenue to be between 18 and 29 billion, so the correct approach to this issue is essential. One possible solution is to develop a more balanced division of the costs between customers and companies. That means that both parties will have to pay a price that, ideally, comes close to the actual cost plus a possible margin. It remains to be seen whether it will be commercially feasible to have the customer or the corporation, who in the present situation pay little or none of the actual costs, assume them in the future. What’s more, this improved cost-sharing will not completely compensate for the estimated loss of revenue.

Traditionally, the market deals with pricing pressure by upsizing (thereby reducing costs) or providing distinctive, supplementary services for an additional charge (thereby increasing revenues). The main trend with regard to SEPA would appear to be upsizing.

Before exploring the opportunities for upsizing and product improvement, we need to examine electronic payments more closely. This in turn will clarify the role that can be played by new players in the market, such as ICT companies.

Distinction between message and money

When we look at electronic money transfers, and basically all non-cash money transfers, we can differentiate between the ‘message’ and the ‘money’, i.e., the underlying value that the message represents. This distinction is crucial when deciding how to deal efficiently with the pricing pressure on money transfers resulting from SEPA.

The ‘message’ is the format in which information is exchanged between clients and their banks. Payment messages originate in client systems, whereby information from those systems is activated in a certain format and then sent, possibly via a clearing house, to one or more banks. The production, transformation and dispatch of messages are ICT territory par excellence. Electronic message transfers between organisations are not exclusive to money transfers, but common practice in many areas.

Only when the message has been processed in the banking circuit and money has actually been booked from one account to another do we get into the more exclusive terrain of the banks. From that moment on, ‘normal’ banking processes start to play a role, dealing with questions such as: is there sufficient credit, what are the interest effects, can this transaction actually be allowed to take place from an AML or anti-terrorism point of view, how fast will it actually be booked and what reconciliation information will be made available to the clients. Banks can provide supplementary services in these areas which will differentiate them from their competitors and enable them to charge a higher price for their money transfers. In other words, although the SEPA formats determine the standards for remittance information, the quality of that information and the speed with which it can be delivered can be the means by which the banks distinguish themselves in the market. In addition, although the maximum processing time is determined by SEPA, faster processing at an additional cost is also allowed.

In short, opportunities for delivering added value and thereby justifying a higher price all lie within the terrain of the banking services.

What remains are the message transfers. Due to their rather universal nature and the increasing standardisation resulting from SEPA, upsizing presents the most logical solution here. The cost of the necessary infrastructure, applications and management are reasonably fixed components for which, with optimal use, the lowest possible price per unit can be achieved. This fits perfectly into the shared-service concepts well known in ICT. It facilitates a win-win situation between the provider of the shared service and its customers, resulting, for customers, in significantly lower costs that are also often variable and able to be influenced. Proof that this concept also works in the context of money transfers lies in the success of money transfer service bureaus (including Getronics) that offer their services to both companies and banks.

How can companies make optimum use of SEPA?

Companies and governments can reduce the costs of money transfers by making optimal use of the opportunities SEPA offers, for example, by looking beyond national borders when selecting banks for money transfers. The choice is no longer restricted to local or regional banks as SEPA will mean it will make no difference whether a money transfer is carried out by a German, Spanish or French bank.

The role of the service bureaus

A service bureau can facilitate the whole process. They are perfectly equipped to manage the specific, frequently infrastructural, complexity of money transfers and offer companies and governments the possibility of changing banks within the euro area without having to start complex ICT operations. Service bureaus, and certainly those with an ICT background, are also in a good position to implement and manage the integration of the banking world with companies’ systems as well as provide the necessary know-how. In terms of SEPA, service bureaus can facilitate the switch to the SEPA format and simplify the SEPA business scenario. For example, service bureaus can supply services in which existing domestic formats are automatically converted to the new SEPA formats. They can also help organise the smooth and easy exchange of data between banks and companies by offering a single point of access and control. By doing so a company needs to have only one physical connection, in this case to the service bureau, instead of a number of proprietary solutions for each of the banks they work with.
By using a Service Bureau you as a company need less time handling your payment affairs. And can focus more on your core competences.

Beyond SEPA

SEPA does not signify the end of the evolution of money transfers. SEPA formats are new and, as with all standards, revised versions will continue to appear. In addition, the scope remains limited. Whether it is the Single Euro Payment Area or the Single European Payment Area, SEPA will not help solve the problem of money transfers outside Europe. A company’s approach to SEPA therefore demands a good, integrated vision on money transfers as a whole – a vision of local, European and global money transfers in which all banking and ICT issues are dealt with in their entirety.

Gerwin Brink is Solution Manager, Payment Services at Getronics in the Netherlands.