Staying cash positive

Michael Arben, Director of Strategic Initiatives, CSC, argues that the cash curve principle is by far the best approach for organisations implementing SEPA.

When a World Payments Report predicted in 2007 the likely cost of SEPA implementation to be in the region of 8 billion Euros, the European banking and payments sector knew that the harmonisation of payment processes would come at a cost. However, many banks, having spent considerable sums already are now frantically asking, “How will we make any money from this?”

Most banks found the cost to migrate to the SEPA Credit Transfer (SCT) in January 2008 considerable and, the fact that high volumes of transactions have not migrated as predicted, has added to their sense of alarm.

Whilst it sounds encouraging that 95% of banks in Europe now accept payment instructions from their clients in SCT format, banks are worried how much more it will cost to achieve the next great hurdle – the SEPA Direct Debit (SDD) – especially at a time when budgets are being squeezed and every penny needs to deliver a return on investment (ROI).

Thus the current reality is that SEPA is turning out to be a giant headache for banks. They are faced with high implementation costs at the same time as their payment-related revenues are declining sharply due to regulatory fiat. Many have started their projects too late, so they are now facing tight deadlines and competing for scarce expertise.

Our concern is therefore that many banks will aim for compliance only, rather than strive to generate additional revenues by adding new services. In so doing, this will only hasten the decline of their core payments franchise, as other organisations that have bothered to ‘go that extra mile’ inevitably take old and new revenue sources away from them.

‘S’ for Success

For those organisations that are rethinking their approach to SEPA or are yet to take the plunge, I believe the cash curve model is the most appropriate approach to take.
It’s an approach that gives you a realistic and far-reaching perspective on how your organisation can adopt the most appropriate way to adapt. By accurately finding or ‘plotting’ the cost and risk-effective solutions that will work within your financial and management structures, you can realistically see when to expect a return on investment (ROI).
A simple cash curve model plots the return on investment of a new product or solution, measuring the investment size and timing of your organisation’s development in this offering, the speed with which it is brought to market and the solution’s ‘scale’ or time it takes to achieve volume.

Three principal risks are accounted for measuring the impact on the outcome of the cash curve:
•    the solution risk (or, what is the most appropriate solution)
•    the execution risk (how to implement and launch the solution successfully)
•    the market acceptance risk (how to capture sufficient business volume to obtain the desired payback).

I believe the risk most often underestimated – and which has the most damaging effect on payback – is market acceptance risk.

It’s only once you plot these areas, that you can get to grips with the most appropriate way for the organisation to proceed. By completely understanding the cash curve and risks, this is a solid method to establish the ‘pain’ points say, the increase in costs to adapt old computer systems or migrate to new ones, or say, the loss of revenues associated with cannibalisation, or how these will eventually lead to the ‘gain’ points, such as increased revenues and market share derived from value added services such as, for instance, a comprehensive corporate payment services platform.

Using the Cash Curve

The cash curve clarifies many of the hidden challenges that are often overlooked when charting a new project through spreadsheets and cash flow projections.

I have found that a cash curve applied to some organisations at the outset of the SEPA process reveals that this transformation can’t be delivered at a profit and therefore, looking at alternative options, such as finding an outsourcing provider, is the best way forward.

Others have enhanced their own services to provide additional revenue opportunities. Take ABN Amro for example. It has used its advanced payment processing platform and upgraded software to offer outsourced services to other banks. The bank has connections to every major clearing house in Europe and, as a result, has a network in place to route payment to anywhere in Europe automatically. It is extending its direct debit capability to offer value added services to direct debit creditors and debtors. Not only is the bank doing this to reduce its internal costs through economies of scale, it is also responding to a wide re-thinking about its payment strategies.

Thinking Ahead

Banks that have found the cost of SEPA implementation thus far to be higher than anticipated and are considering scaling down their operations on this front should now ask themselves about the merit of revisiting this project, this time using the cash curve model. Corporates on the verge of implementing SEPA or who already have this underway should also consider their plans with this perspective.

In theory, SEPA should lead (at least) to reduced transaction costs, faster fund flows and easier access to common standardised information. Beyond that, it promises to open up markets to increased competition and provide banks and other organisations with increased access to new customers. But organisations that fail to conduct a rigorous assessment of risk versus gain at the outset could ultimately achieve neither.

Contact:
Michael Arben
Director of Strategic Initiatives
E: Marben2@csc.com
T: +44 (0)7764 282 363