SEPA’S effect on the payments industry

Change is always accompanied by a period of adjustment and often upheaval and the introduction of SEPA is unlikely to be any different. However, the hope is that all will be successful in meeting the final deadline for compliance, at the end of 2010.

The main driver for the development of SEPA by the European Payments Council (EPC) has been the potential for much greater efficiency for cross-border payments and transactions. “Ever since it was shown that substantial gains in productivity could be made through eliminating national barriers within the euro payments area, the Commission and the other EU authorities have been pressing for a payments area in which it is as easy to make a cross-border payment as a national one,” says Paul Smee, CEO of APACS. “The banks responded through the medium of the EPC. Undoubtedly, trans-national businesses have been a strong voice for the creation of SEPA.”

For the payments industry, SEPA is likely to have a series of effects, most of which will be felt primarily within euro-zone countries. “The purpose of SEPA is to allow all bank customers in Europe to have access to a consistent payment product offering in regards to credit transfer, direct debit and cards,” says Geoffroy de Schrevel, head of payments market at the Banking Industry Division, SWIFT. “SEPA is a complete redesign of the bank’s payment infrastructure that requires a major investment by the bank to support the products.”

Banking on the benefits

Some of the main benefits for banks, as identified by the European Central Bank (ECB), is that SEPA will help to ensure that the handling of cross-border payments becomes as efficient and as cheap as the handling of national payments. The migration will ensure further European integration and market efficiency thanks to the provision of new payment instruments and common interoperable infrastructures. Furthermore, SEPA is a facilitator for competition, as banks will have the opportunity to expand and compete on a pan-European level, as any bank can offer its services to anyone in the euro area, without additional cost or extra effort. “New opportunities for commerce and for consumers will be opened up by market forces as the banks seek to take advantage of SEPA,” highlights Smee.

Schrevel also outlines how SEPA might eventually benefit the banking community further a field, outside Europe: “Also, banks that do some business in Europe will have to meet the requirements of the European market. Non-European regulators are closely looking at SEPA to determine its relevance to the industry. If SEPA brings the economic promises to Europe, then it’s probable that regulators outside of Europe will look into it for their respective markets.”

The introduction of SEPA will also likely result in a hug leap in the use of pre-paid cards, with the TowerGroup estimating that around 375 million will be in circulation in Europe by 2010. The usage of stored-value cards is expected to rise 600 percent to €75 billion. The massive increase in usage will be the consequence of a drive by banks to try out new routes to increase their profit, which will have been affected by the loss of cross-border payment fees due to the SEPA’s arrival.

SEPA will also be favourable for consumers who will benefit from only having to use one bank account, from which they will be able to swiftly make credit transfers and direct debit payments anywhere in the Euro area. Those residing in another country due to work or study will no longer need two accounts.

Teething trouble

The process of harmonising the payment systems will undoubtedly bring some challenges for member states and bankers. Most prominent is the fact that migration is likely to be a costly business. Complying with the new requirements is expected to cost the top 100 banks in Europe around €3 billion according to a survey conducted by Accenture. “The EPC has produced a direct debit and a direct credit scheme, as well as the SEPA cards framework,” explains Smee. “Their implementation will be easier for some states than others. But it will cost money and take time.”

Another concern is that euro-zone banks are not adequately planning their product and market strategy beyond the first deadline in 2008. A recent survey conducted by Coleman Parkes Research found that only 48 percent of the respondents, from 101 retail banks, were looking at product and market strategy post-2008. Worryingly, the survey also revealed that less then 30 percent have a full plan in place and in operation for the migration of clients. In fact, the majority (76 percent) of those questions admitted that they are just doing the bare minimum to meet 2008 requirements.

This slow approach does not signal well for SEPA and questions whether the industry is fully committed. Recent research on behalf of First Data International involving senior European banking executives confirms that 70 percent of banks believe that self-regulation and market forces should be enough to deliver the SEPA initiative. However, the apparent apathy by some has also led to 73 percent of respondents to expect the EU to legislate to ensure compliance by the target date of 2010.

A lack of adequate communication may be one of the main reasons for the less-than-speedy reaction. Many of the executives questioned by First Data international for their survey admitted that they didn’t fully understand the SEPA requirements in detail. A further drawback was that most see SEPA in terms of cost, rather than the opportunities it is likely to bring.

Meeting compliance will be an issue for banks, but it will also be a challenge to ensure that customers are also ready too. “All stakeholders in Europe will have to change the way they manage payments. The banks are just one element in the SEPA equation,” highlights Schrevel. “The major challenge is if the banks are ready, they have to ensure that their customers (e.g., consumers, the bank’s customers, etc.) are also ready. The question is: how can the banks ensure that their customers are ready for SEPA?”

To ensure that the payment industry meets the challenges of SEPA migration, Schrevel has a few words of advice: “The banks need to have a consolidated infrastructure, rigorous testing and a readiness to change the business model of payment processing.”

The Payments Services Directive will also play an integral role in ensuring that SEPA’s introduction is triumphant. “The successful introduction of SEPA does depend to a certain extent on the passage of the Payments Services Directive which will give the necessary legal certainty for the new system to succeed,” explains Smee. However, although legislation was expected to have been passed by lawmakers by the end of 2006 there has been a delay. As a result of this delay, it looks, unfortunately, as if banks are likely to miss the first SEPA deadline of 1 January 2008 for direct debits. The hope is that this will not be too much of a setback.

Hopefully these challenges can be overcome and those needing to comply with regulations will not only have adequately planned, but will achieve a smooth implementation and have recognised the urgency for a faster migration that meets the final deadline.