Embracing the Changing European Payments Landscape

As the January 2008 Single European Payments Area (SEPA) deadline looms, some banks are beginning to look forward to the prospect of a more efficient payments infrastructure and the opportunities it will bring within the Eurozone.

The European Commission estimates that GDP could grow by 2% as a result of cost savings generated through a more efficient payments infrastructure, so it is no surprise that payments are at the top of its agenda. For banks, however, the rewards are less apparent, as not only do they have to invest to bring their payments processes in line with SEPA's requirements, they will also lose revenue due to the levelling of cross-border payments and domestic payments charges. Banks will no longer be able to charge 15 times more for cross-border payments than domestic payments, as is current practice. This will have a major impact on profits, as payments generally account for around 20% of revenue.

Despite this, many forward-thinking banks have adopted a long-term strategy to accommodate and benefit from SEPA, engaging with payments professionals to embrace the directive and focus on new ways to generate income, reduce costs and maximize efficiencies. The integration of national payment infrastructures and the harmonization of payments standards within Europe is no longer a distant reality, and preparations for the first stage of SEPA are beginning to take shape.

Over the past six months, we have seen a significant increase in investment planning for changes in IT infrastructure. Most banks are planning systems enhancements and some are already implementing new solutions or upgrading systems to support and route SEPA-compliant payments data, including International Bank Account Numbers (IBAN) and Bank Identifier Codes (BIC). A number of vendors have upgraded Enterprise Resource Planning (ERP) systems to process new fields and data with the specified content, format and delivery channel.

Customer service and product innovation will become increasingly important in the SEPA. A harmonized payment infrastructure will give customers more flexibility to change providers. As a consequence, customers may become more mobile and could command greater negotiating power with regard to bank services and charges. To combat this, some banks are looking to create innovative payment-related products and to address niche areas of the payments market to add value.

SEPA will replace the current disparate national schemes for credit transfers and direct debits with common business rules, along with data sets and standards. As a result, banks will be able to compete for clients by developing and marketing pan-European products and services, rather than domestic products for each market.

Additionally, the Euro Banking Association's Priority Payment Scheme has been developed to offer urgent intra-day, single credit transfers for corporate and retail customers. The enhanced payment transfer service guarantees end-to-end processing of single credit transfers within four hours, instead of the standard three-day transaction period for European cross-border payments.

Following harmonization, banks with a pan-European presence could benefit from the opportunity to provide single account coverage to corporate clients with several European subsidiaries. This would consolidate payments into single payments 'factories' with a common set of procedures for all EU payments. Banks are also looking to form new alliances with organizations such as mobile network suppliers, technology specialists and card issuers.

A survey of 101 banks conducted by LogicaCMG earlier this year, aptly titled Single Euro Payments Area (SEPA) - taking the right action?, found that only 37% of banks have developed a SEPA product strategy, while 64% view SEPA as a business opportunity. Interestingly 76% are doing the minimum to meet its requirements.

Some banks are taking a 'make do and mend' approach and putting in place interim measures rather than embarking on a wholesale systems renewal. This is largely because many payments infrastructures are based on inflexible architectures and cannot easily cope with additional data and fields.

SEPA is scheduled for full implementation at the end of 2010 and those banks that leave SEPA migration plans to the last minute will find themselves at a strong commercial disadvantage. It is estimated that one quarter of banks are aiming to solve migration issues by outsourcing payments to a third party. However, even when outsourced, the process will take time and expense, as there are multiple layers to the implementation process -there is no easy fix.

SEPA is fast approaching, and institutions still have a significant amount to do in terms of planning, implementing and testing SEPA-compliant processes and systems. A number of banks will be absorbed by the inevitable consolidation, unable to meet the cost requirements of the directive on their own.

The vision of a modern, information-based economy, in which business can be transacted efficiently and cost effectively, is some way off; the financial community is divided between those that adopt a strategic response to the changing payments landscape to seize its opportunities, and those that feel SEPA is an issue they will eventually get round to dealing with.