Sepa and the Reference Data Revolution

With the Single European Payments Area (Sepa) directive fast approaching, financial institutions are looking to rapidly implement new solutions and reference data management processes to meet its requirements and ensure the smooth running of payments within the eurozone.

Sepa aims to put in place a transparent payments process whereby cross-border payments operate on a comparative level to those made within national borders. This would remove the wide disparities between payments service levels that are currently experienced and significantly reduce cross-border transaction costs within the area.

Reference Data at the Point of Transaction

While the directive does not fully come into force until 2010, financial institutions need to act now to put processes in place to meet its requirements. From January 2008, all financial institutions making cross-border payments within the Sepa have to be armed with the beneficiary's International Bank Account Number (IBAN) and Bank Identifier Code (BIC). As a consequence of these requirements, banks also need to be able to access Swift-enabled routing BICs (which may or may not be the same as the BIC provided by the client). If banks are unable to check the IBAN against the identifying BIC and the Swift-enabled routing BIC at the point of transaction, they will not be able to guarantee the cost of the transaction, the transfer cycle or whether the transfer will be effected at all.

It is estimated that more than 2,000 banks within the Sepa do not have BICs, and around 4,000 banks only have identifying (non-Swift-enabled) BICs. Therefore, approximately 6,000 banks within Sepa are not connected to Swift and do not have a Swift-enabled routing BIC. Although these banks tend to be the smaller banks and will therefore represent a lower percentage of payments, they are bound to create the maximum headache for Sepa implementation.

Smaller banks pose a challenge on two levels:

1. The larger banks need to know their routing BICs in order to effect payments to them, but the smaller banks have limited publishing facilities and budgets for advertising these details.

2. To service their own clients' needs, smaller banks should invest in an improved IT and reference data infrastructure, but they will typically have budget constraints here as well.

The Complex World of Reference Data

The world of reference data is rapidly changing. In addition to Sepa, the Markets in Financial Instruments Directive (MiFID), Basel II, KYC and AML, among others, are all affecting operations and demands for new reference data sources. Reference data was once peripheral to banks' activities, however, Sepa has made it a compliance issue and therefore pushed it to the forefront. Sepa is acting as a catalyst for change, representing a significant opportunity for the industry to achieve straight-through processing of payments and significantly reduce cross-border transaction costs within the eurozone.

Outsourcing Reference Data

As reference data management becomes more complicated, financial institutions will increasingly look to outsource their reference data needs. Outsourcing can remove the need for financial institutions to commit valuable time and resources to the task of sourcing, verifying, validating, normalizing and updating the high volumes of data required for secure and accurate cross-border cash payments. Outsourced reference data companies are able to work in partnership with information technology solution providers to ensure the latest offerings take full advantage of the reference data available.

Investment in Software

However, accessing correct and comprehensive reference data is not enough. In order to introduce Sepa-compliant systems, banks must invest in IT. This is far from straightforward as reference data needs to be delivered with the specified content, format and delivery channel to existing systems and the data then integrated with those systems. The numerous legacy systems that exist further complicate this process.

While there is no quick fix for Sepa compliance, the ability to access correct, comprehensive reference data at the point of transaction is key to meeting the directive's requirements.

Financial institutions that act now will not only meet their regulatory obligations, but also ensure the secure and timely completion of transactions, and minimise error rates and transaction costs.

A number of solution providers are offering new solutions and system upgrades that replace or sit on top of legacy systems. As the pressure to comply with the Sepa mounts, there is likely to be an element of 'panic buying' of Sepa-compliant solutions within the directive's timeframe. Indeed, smaller banks may well find that this is the catalyst that pushes them to completely outsource their payments processing.

Ian Dunning is managing director of CB.Net, a provider of payments reference data management systems