Accommodating legislative change

Not surprisingly the IT vendors and business consultants minutely examine new rules and change as a potential business driver for bank and/or corporate investment and develop their messages aligned to the new legislation. SEPA is no exception to this pattern and, since it will change the face of payments, certainly within the Eurozone, the investment and business choices are critical. 2007 is a critical year for that investment and planning in advance of the 2008 deadline for availability of SEPA payment instruments: credit transfers, direct debits and card services. The 2008 deadline covers cross border payments and the SEPA process will continue with a December 2010 deadline for the application of the SEPA principles to include domestic payments, the objective being that, within the Eurozone, the concept of cross border payments should disappear.

The principle requirements of SEPA upon a bank are to:

• Convert and process payments to the new ISO 20022 standards
• Accept payments quoting valid BIC and IBAN
• Reject payments without valid BIC and IBAN from January 2007
• Process payments of less than €50,000 with BIC and IBAN at the same price as a local ACH payment
• Accept and process up to 140 characters of additional information for cross border payments
• Receive pan-European direct debits and process set-up mandates

Payments are all-pervasive in banking products and one of the issues that a bank has is that it might have to solve the above in various systems and locations. Often domestic and cross border payments are completely separate departments – should they now be combined?

Some banks will decide to enhance existing systems to cope with the extra requirements, some are planning to start with a clean sheet and, almost inconceivably, some are planning to bow out of direct involvement in the payments market by providing the service through third parties and other banks.

Given the implications of SEPA from a banking point of view it is hardly surprising that they treat system vendors' pronouncements about what they must do for SEPA with more than a level of scepticism. The dilemma has been outlined to me as, “So, I’m expected to invest in systems and processes that will reduce the revenue to the bank. That is difficult for me to justify to my board”.

These changes will affect the corporate/bank relationship in that the bank will require the corporate to provide a valid BIC and IBAN in their payment instructions in order to be able to qualify for the low (domestic equivalent) price mandated by SEPA. It has been said by a number of corporates that banks are looking at the inability to provide the BIC and IBAN as a revenue generating opportunity; we think that is an unfair point of view. The banks provided a service to their clients and, since they have been told that they cannot continue to charge at the cost, it is unrealistic to expect that they can continue to provide the same level of service and not to charge for any additional work to prepare or enhance a payment to ensure it arrives at its destination in a timely fashion. Herein lies one of the opportunities for corporates to take advantage of SEPA in terms of cost reduction – the corporate must invest in the ability to provide clean payments to the bank. For multinationals with payment operations in multiple Eurozone countries there is a greater cost saving opportunity. SEPA means that the idiosyncrasies of individual domestic systems will disappear post 2010 and an economy of scale can be achieved by setting up a pan-European payments factory in place of the multiple domestic operations. Smaller companies may be able to benefit by outsourcing to third party companies who, since they can now operate on a pan-European basis, will offer a SEPA outsourced service to clients. For a minority of companies for whom the business model is appropriate, they will be able to take advantage of some of the new alliances that will form between banks and, for instance, mobile network providers with the intention to use that channel for receipt of micro-payments. For those companies with the ability to benefit from niche payment methods, SEPA will act as a catalyst to cause banks to develop new payments instruments and products to compensate for the revenue and market share loss from traditional payments.

For a corporate that has cross border Euro payments, SEPA provides opportunities for cost reduction and a change programme should be initiated to examine those opportunities. They will fall into two camps, internal and external. Internal opportunities include the setting up of payments factories, investing in systems and data sources to provide clean payments to banks. External opportunities include reviewing banking arrangements, interviewing your own and other banks to ascertain their SEPA plans and the ability to provide the service that you require, competitively priced.

For banks, the picture is less clear. The straight return on investment case for systems upgrade is less easy to justify and the bank must decide upon the role it wishes to take, post SEPA. Certainly any compensation for the revenue loss can only come about through reduced cost, straight-through-processing and increased payment volume. Undoubtedly, as SEPA bites, there will be a further wave of voluntary and involuntary consolidation in the banking market in European and, we expect, the rise of new pan-European payments service providers.

IT suppliers and consultants have some answers; it is for the bank and the corporate to decide the questions according to their position and plans before embarking upon SEPA investments.