SEPA payments

The Single European Payments Area (SEPA) aims to create a standardised and integrated payments environment.

However, time is in short supply with the 2008 deadline looming, by which banks must offer customers the option to make SEPA compliant payments, approaching fast. Eva King, National Expert for Retail Issues, Consumer Policy and Payments Systems at the European Commission approached three industry leaders for their latest thoughts.

Richard Crookston, Director of Product Strategy for VeriFones EMEA
Simon Bailey, Director of Payments, Global Financial Services, LogicaCMG
Nick Daniel, Business Development Manager, CB.Net

FST. How do vendors rate the new SEPA payment schemes? Will they be ‘best of breed’ and will the service proposition of ‘core SEPA products’ be a sufficient incentive for customers to adopt SEPA?
RC. At the present time, the terminal vendor community is awaiting the publication of detailed specifications in order to fully assess the impact of card-based SEPA payment. However, all the indications are that card-based payments for SEPA-compliant schemes will be very much like existing international credit and debit instruments. What we are expecting to change is the way in which the payment system security is implemented and, again, we are anticipating clarification of the requirements. As we see it, the job for the industry is to make sure that the political drive for open markets is supported by the vendor community, and that the process is made as easy and beneficial as possible for consumers.

SB. The new schemes are considerable progress. I am not sure best of breed is a very useful term as the common core SEPA capabilities are designed to enable Additional Optional Services to allow communities and banks to innovate and differentiate. This adds complexity to the implementation and interoperation of the SEPA environment but preserves the ability to differentiate and maintain a commercial market structure for payments as opposed to purely regulated utility approach. That is the approach that has been agreed between stakeholders and has clear consequences in terms of the scope of the proposed schemes, scheme development and in terms of the interoperability challenges that the industry is currently addressing.

The issue of SEPA adoption is a considerable one. The payments industry is being asked to make a considerable investment in developing new pan Euro instruments and is actively engaged in this task. The take up of these instruments will be driven by clients of the banks, including public authorities, corporates and consumers. The clear expectation of the banking industry has been that public authorities would be early adopters of the new instruments helping to drive critical mass. Recent noises from these entities have been less encouraging. It is important to the success of SEPA that the European Commission is seen to take the lead, not only from a policy but also from an implementation perspective. Action in this area has yet to be communicated to the industry and to other public authorities. Leadership by banks is expected and active campaigns are beginning. A similar level of leadership is needed by the public authorities.

ND. With the majority of bank’s IT resources being devoted to accommodating legislative change, little appetite or ability from the banks to implement systems designed to exploit competitive advantage, introduce new products or enhance performance and a null decision being most vendors’ strongest competition, the vendors can hardly be blamed for their enthusiasm for any legislative changes that provide market potential. Accordingly, vendors have analysed the SEPA legislation for opportunity and have striven to develop upbeat messages to the banks to support that opportunity. In conversations with vendors at trade shows it is clear that their clients are playing a waiting game and the expected rush of client projects has not, to date, materialised. The general view is that the majority of banks will implement changes to systems to accommodate SEPA products on a pragmatic rather than strategic basis. A small minority of banks will take the opportunity to make a strategic play for one or more of the SEPA products but there is general scepticism by the banks at the extent of the available opportunity and the return on investment potential.

FST. Are the new SEPA payment schemes sufficiently open to permit future-oriented developments such as e-invoicing, e-finance, e-reconciliation and seamless integration in other automated business processes?
RC. We believe so, however, in terms of governance, we would hope that the various vendor communities will be fully engaged in the ongoing development of the SEPA standards.

SB. Yes – the framework schemes give the flexibility of Additional Optional Services and the additional fields in the new payments formats enable linkages between the key elements of the value chain. One potential issue is that the creation of AOS infrastructures on behalf of communities may not be compatible, unlike single nation payments infrastructures. The key benefits to users of payments services are in the improvements in automation of AR and AP and the resulting simplification of cash management and reductions in DSO. The term e-finance sounds a little general – I don’t think this helps as migration and commercial incentives require a level of specific language and precise business case descriptions. Commercial banks and their clients need tangible and clear business cases to make changes. Longer term visionary views are fine but will not be enough to create the future position desired by the EC – it needs pragmatic, practical, and implementable approaches rather than rhetoric.

But the issue is not whether the schemes can enable future oriented developments – as they develop over time and through AOSs they clearly can – the issue is how capable are the banks and their partners of supporting these changes simply, cost effectively and rapidly. This is about building, over time, the flexible modern payments processing infrastructures that are needed to manage multi entity and multi service payments transaction processing – a subject that is very close to LogicaCMG’s heart and where we have considerable expertise and capabilities.

ND. By mandating consistent payment practices throughout the Eurozone, we believe that SEPA will encourage all such future-oriented developments. For e-invoicing it will allow corporates to invoice across the whole of the Eurozone from a single system or location and the cost benefits to the corporate of this approach should be sufficient to encourage investment in e-invoicing schemes. The resulting growth in e-invoicing and the pan-European scale will, we believe, encourage the more innovating financial institutions to develop e-financing products based upon the invoice instruments.

With a swing from paper towards e-invoices, many of the barriers to e-reconciliation will be removed and there should arise a clear return on investment case for investment in the infrastructure necessary to perform the reconciliation processing. This process may well take several years before it can be deemed to have been an unstoppable industry shift but for the corporates and the financial institutions providing innovative invoice financing schemes, we believe that there are real cost saving and business growth benefits to be had.

FST. How can user migration from national banking codes to IBAN and BIC be facilitated? Could switching banks be made easier, allowing users better options for changing to the best service provider at minimum cost?
RC. This question falls outside of VeriFone’s areas of expertise.

SB. There are two questions put here: one on the issues of migration and maintaining high STP rates for users of the new payments schemes, the other about account portability. The first is the immediate challenge and availability of high quality IBAN and BIC reference data to payments initiators and banks would assist considerably in the process of migration and in ensuring high STP rates for all players. This is a key element to support the industry and can bring substantial benefits to clients in easing the migration. Such a service, offered commercially, could substantially enhance the ease of use and take up of the new SEPA instruments. The issue of true pan-EU account portability is a lot more complex. A single set of account numbers exists across borders that conform to a common standard such as the IBAN enables portability but, given the interbank processes required for payments to operate, the BIC will clearly change if you move bank. It is also not entirely clear what the value of such portability across national boundaries, as opposed to within them, would be. Portability may require an account synonym for the real account number. This would result is lots of hits on translation databases in every transaction.

Alternatively core accounting systems in banks could be enhanced to enable the importation and inheritance of standardised IBANs irrespective of bank of issue or of country or origin. The current IBAN structure and core banking systems make this highly complex – extremely expensive and of dubious value. Consideration of this issue in the UK in around 2000 raised very similar issues. It would appear that the underlying question here is whether it could be made easier for users to move banks and underlying this is the assumption that banking services could be made more competitive and cost effective across the EU. Barriers to such open competition across Europe are not limited to account numbering but include national reporting issues, national legal variations in treatment of certain transactions and different business practices. A genuinely portable IBAN and handling the BIC to IBAN relationship would not resolve this and the cost benefit needs careful consideration.

ND. It is our belief that it is should not be a requirement for corporates, retail clients and workers sending remittances to provide anything other than the IBAN. The BIC, after all, is the identification of a network node upon the SWIFT network, a banking issue that we feel should not be of concern to the end client.

In terms of customers being able to switch banks and select “best of breed” banking service providers, the mandated IBAN and BIC combination does anything but assist this ability in that the EU Directive requires corporates to print the IBAN and BIC upon their invoices; any change of banking service provider, therefore, requiring a campaign of informing suppliers and clients, and a subsequent updating of their systems. Incidentally the smaller, non-SWIFT, banks will encounter similar problems in their ability to change their correspondent relationships and any merger or acquisition by larger banks where there is a BIC change will cause major upheaval for their customers. We believe that the only way to effectively provide this ability is to introduce the concept of “portable IBANs” in which the end customer has the control of where the money is actually routed from their individual, non-changing identifier.

FST. Will banks be willing to establish remittance advice service and infrastructure to clear comprehensive remittance advice information larger than the current 140 characters? Are there alternatives?
RC. This question falls outside of VeriFone’s areas of expertise.

SB. Some nations already do this is in their existing structures, that will have to be replicated to enable migration to SEPA without degrading current capabilities. The issue of the 140 characters is very detailed and specific – if its XML then it probably doesn’t cover enough data to be useful for reconciliation in a wide variety of cases. If it is non-XML it may well cover the majority of cases. But the relationship between a payment and the invoices relating to the payments are complex and specific. A simplistic approach cannot meet all needs. However the need for common standards does imply that such an approach would be practical and implementable for the banks and infrastructure providers that have to manage and transport the data seamlessly from origination point to final destination.

Again there seems to be some lack of specific business case development on the topic. EACT has a reasonably articulate view on the value of different data lengths in terms of handing the typical requirements of corporates and, within this very large community, those of some specific supply chains. The substantial gains and business case for corporates lies with the development of automated e-invoicing services and the related improvements in AR/AP processing. It is not apparent that such services need to be carried through or directly linked to the existing payments systems. Provided there are mechanisms to reconcile simply and efficiently, the route from payee to payer is not material and a number of both proprietary and open options exist today.

ND. Almost by definition, any remittance containing the level of detail that requires more than 140 characters will require manual processing. It is possible that banks may be willing to provide services to process such payments but they will, quite rightly, expect to be able to charge a commercial rate for the provision of that service. However, we believe that an analysis of the customer requirement for this service will highlight that it is/would be used for onward routing and priority instructions. In our view these requirements can be accommodated through more granular routing codes and payment channel designation with the advantage that this would not require manual processing and could, therefore, be provided at lower cost for the end customer and the processing bank. To operate efficiently, such a scheme presupposes a widely available, economic source of accurate routing information – another support for an industry utility in the same vein as an IBAN to BIC linking utility.

FST. Are vendors satisfied with the current governance of payment standard-setting bodies (ie EPC, ISO etc) and how have the expertise and views of vendors been taken into account?
RC. We are highly committed to working with standard-setting bodies for the benefit of the industry, and we have already actively offered our expertise and advice on these issues. The leading terminal vendors have all agreed to co-operate in supporting the standard development process, and we would welcome approaches from the EPC and the working parties to help define the card and terminal requirements. As the leading vendors of secure payment devices, we are very open to our expertise and experience being used to help the EPC working groups define the standards that will ultimately be implemented by all vendors.

SB. There are issues of ongoing scheme management, the issue of the developing architecture for the separation of payments scheme governance, the operators of these schemes and the underlying question of the contractual relationships between users, operators and schemes. Questions such a whether there is one operator per scheme or more, whether the contract is between the scheme and operator(s) or banks and operator(s). The regulatory authorities appear to be moving towards a much more complete separation between the elements of the payments processing chain and requiring a level of transparency not always available in today’s integrated schemes. From a technology implementation point of view many services are possible – what is practical or economic is not for vendors to specifically comment on. The transposition of this payments model into the card market adds further complexity in a market where scheme and operation are today largely synonymous.

The blurring of roles within the infrastructure also appears interesting – the EPC is a self-regulatory body and openly so. Some other aspects of the standards process appear less obviously open and clear to the vendor community whose enactment of these standards in implementable software and service offerings is critical to the success of the entire process. Separation of standards setting from operation and provision of services would also seem to be a potential enhancement in the transparency and open operation of the payments marketplace.

ND. If our own views are representative, we are generally satisfied with the actual governance of the bodies but a number of payments oriented vendors intend to create a lobbying body to liaise with the standard setting and other relevant bodies. For many vendors it is a cause of some frustration that their views, expertise and requirements are rarely called upon or considered in future planning. Of specific concern is what is perceived as a lack of access to documentation and information by standards-making and other bodies to vendors since the vendors are perceived to be beyond the reach what is usually a payments practitioner’s mandate for those organisations. Yet vendors are intrinsically embedded within the payments processes and hold a high degree of expertise in the operational implications of decisions affecting those processes. At best this misses the opportunity to understand the implications of decisions from all sides and, at worst, it results in banks demanding last minute systems changes that could have been accommodated in a more effective and timely manner with the benefit of detailed prior knowledge.

FST. How will the solutions you offer help with migration to SEPA over the next 12 months?
RC. With skills, knowledge and experience developed over 25 years as leaders in the industry, VeriFone has taken its solutions through many security standards and changes, so we can claim considerable expertise in this area. As security experts, and from our experience with EMV, we understand the potential customer issues in terms of changing software, training end-users and the general support required for such major technology migrations. We believe that major vendors like VeriFone can play a very significant role in this process, for both the banking and the retail community.

SB. We can get national communities, banks and their clients to the start line of the race, can assist in the post implementation migration and in the differentiation process for individual parties. We are intimately involved in key parts of the infrastructure assist the industry in ensuring practical levels of reuse and the availability of service components that will reduce the duplication of expenditure and share those services that are best provided from a single point. Working with the industry bodies, the banks and their clients to develop and implement clear plans that meet the requirements of each stakeholder. LogicaCMG is well placed to provide practical support to banks, clients and public authorities to position and exploit the new reality of the European payments market.

Our approach is based on a group level strategic focus on payments, backed by several decades of practical implementation experience internationally. This means our vision for the SEPA journey is far more than mere compliance with the deadlines and standards and engages with the key strategic questions faced by market participants over the next decade including those of banks, infrastructure providers and users of payments services both in the private and public sectors.

ND. In SEPA terms the next 12 months is very much a short-term perspective. Within this period CB.Net can assist, and is already assisting, banks and corporates with appropriate payment routing information, especially for credit transfers. Corporates use our services, often integrated within their ERP systems, to check, correct enrich payments instructions to their suppliers with the benefits that their suppliers are paid promptly and correctly; they attract the lowest level of service pricing from their bank and they keep payment processing costs to a minimum. Banks use our services to assist their corporate customers in payments, ensuring that they will reach their destination first time, often incorporating CB.Net data in their corporate banking and branch banking systems as well as in the back office. The benefit to the bank is enhanced service to clients and lower internal cost of payment processing. We continue to explore ways in which this information can be made more readily and more widely available through industry collaboration and value added resellers and expect an active 2007.

Richard Crookston is Director of Product Strategy for VeriFone’s EMEA and has been a retail payments specialist for over 30 years. His sector experience includes banking, with National Westminster Bank, the retail sector with House of Fraser, where he was responsible for in-store systems, and payments software, with ACI Worldwide.

In his role at VeriFone, Richard can draw on many years in practical implementation of payment systems. Richard is also a past Chairman of several of the APACS standards development committees which he led during the first implementation of chip-based credit and debit cards in the UK, and has been a long-time advocate for the introduction of smart payment cards.

Simon Bailey has responsibility for payments systems business development and marketing in LogicaCMG’s global financial services business. He has most recently been involved in the issues facing the industry as a result of changes in core payments infrastructure and the effect on banks’ business models, operations and technology platforms.

Simon has more than 20 years experience of retail and wholesale banking, payments and electronic delivery systems internationally. This includes sales, marketing, consultancy and business management in a range of companies from innovative e-commerce start-ups to large technology service providers.

Nick Daniel joined CB.Net in 2002 as head of business development and has played a large role in developing the companies offering, winning a number of its key clients. Originally from a programming and data communications background, Nick has more than 20 years’ sales experience for financial services organisations on a national and international level. Nick has held numerous sales roles including senior sales executive for futures and options company Rolf and Nolan where he researched, targeted and effected new business opportunities. Nick is active in the industry and regularly participates in reference data user group committees.