Banking on it

As Europe moves headlong towards a Single European Payments Area (SEPA), banks across Europe face big challenges in making the necessary preparations.

By 2008, they must have the capabilities in place to enable their customers to make SEPA compliant payments – but are they on track and what opportunities might the process and the resulting payments system offer business in Europe? CXO asked Nick Daniel, Business Development Manager at CB.Net for his expert insight in this field.

CXO. From your experience with organisations in the industry, what is the level of support for SEPA and do they think this deadline is feasible?
ND. The majority of the IT budget in many banks is allocated to non-discretionary change imposed by legislation. It is unrealistic that any addition to that burden will be welcomed and, on the whole, we see that for those banks that acknowledge SEPA as inevitable, a sullen acceptance and a search for ways to accommodate the changes required in the least disruptive and most economic manner possible. As an unwelcome change in banking operations we cannot say that there is great support from the banking industry and the timetables are certainly aggressive, especially since the Payment Service Directive that will provide the legal framework for harmonise payments operations throughout the Eurozone is only now due to be ratified imminently.

However, the political will is certainly there to ensure that SEPA will happen and David Deacon, Head of the Unit for Payments and Retail at the European Commission, has said openly on a number of occasions that whilst the EC does not want to impose further legislation, they will do so if they believe that the objectives of SEPA are being sidetracked.

When it comes to the deadlines, at a recent SEPA conference when asked by a bank representative what would happen if banks failed to meet the deadlines, the EC’s Eva King made it quite clear that the EC accepts that some banks may well fail the deadline and even also fail to stay in business.

CXO. Not all banks have yet implemented systems to deal with SEPA. What challenges do they face in being ready for that deadline?
ND. The first deadline is January 2008, when banks must be able to provide the SEPA instruments, credit transfers, direct debits and card services, for cross-border payments. The greater change, to provide these instruments for all domestic payments, is not mandated until December 2010.

Given that cross-border traffic in Europe is generally thought to be around two percent, there is the opportunity yet for banks to bring a SEPA project on track and ensure that it is implemented and operational. The challenges are to decide what role the bank intends to play post SEPA, whether it intends to form an alliance or outsource some level of its payment service. Once the strategy is decided, the challenges are to reorganise the business and then implement systems around that organisation rather than force-fit a solution to the problem.

The December 2010 deadline is more significant, when all current domestic payments are to be treated as SEPA and it is difficult to see the benefit of continuing with separate domestic and international payment operations as the majority of banks currently do. This reorganisation provides tremendous challenges on a geographic, staffing and systems basis

CXO. What will it mean for businesses in Europe? What changes will be necessary in their internal systems and practices?
ND. Post the 2010 deadline, the particular foibles of national payment systems will be swept away leaving those companies with multiple European payment operations with the freedom to achieve an economy of scale by setting up payments factories to prepare and process payments on a pan-European basis. SMEs may also be able to benefit by outsourcing their payments operations to pan-European service providers who can offer an economic service for the processing of payments.

E-invoicing, although not part of SEPA, will be facilitated by it and the opportunity for new payments instruments based upon the securitisation of e-invoices, a sort of e-factoring, will benefit companies greatly in terms of cash flow. The breaking down of barriers to entry into overseas markets will provide companies with the ability to expand and achieve economies of scale in terms of production driving greater cost effectiveness. There are implicit threats also in that the same measures also provide opportunities for companies in other countries to enter into your domestic marketplace but that is the whole point of SEPA, to remove barriers to trade within the Euro Area.

CXO. In particular, what technical issues must be resolved by financial institutions and business in order to facilitate SEPA payments?
ND. The issues faced by financial institutions and businesses differ. For financial institutions and banks in particular, payments underpin every banking product. Traditionally in banks, each product has evolved as a discrete silo with payments attached, so the number of instances where the implications of SEPA must be considered are many. The business challenge is to decide between keeping these discrete product related payments boutiques or setting up a cross-product enterprise payments operation.

The technical challenges relate to the outcome of this decision – on the one hand, to implement a reusable SEPA add-on that can be utilised within various systems, or on the other to build/buy a completely new SEPA compliant payments infrastructure. Leaving aside the financial considerations, the technical challenges of the former approach are huge, many of the legacy systems simply cannot accommodate the additional information (e.g. IBAN and BIC) required in order to make SEPA work. If we were to take the issue of Y2K as an example, it is clear that legacy systems can be made to work in new ways, the question is whether any bank feels that it has realised benefit from investment in those legacy systems. We suspect not.

In a parallel to the situation in banks, for corporates the technical issue revolve around their ERP systems to which they are wedded and do not consider to be legacy. Many, if not most, ERP systems cannot accommodate the additional information required in order to prepare a payment that would be considered a straight through processing (STP) payment by the client bank.

The ERP suppliers, for the most part, do not appreciate the significance of SEPA, which they see as being an exclusively banking focused legislative push. It is incumbent on the corporates, therefore, to highlight to their ERP suppliers the requirement to accommodate SEPA within their product release schedules and to impress upon them the timescales involved. In other terms, the issues are less technical than organisational, for instance the reorganisation required to outsource payments to a third-party payments supplier or to set up a pan-European payments office.

CXO. How can technologies such as your own be of benefit in addressing some of these challenges?
ND. CB.Net is a provider of reference data information to assist in the preparation of payments that conform to SEPA rules and which will, therefore, benefit by being STP payments. In other words, payments messages that require no further manual intervention and that qualify for the lowest tier pricing available. As a provider of information, we are co-dependent upon systems that use that information correctly. We often use the analogy of a high performance car – a bank or corporate may invest in a system that it regards as providing world-class performance – to take the car analogy, that performance will only be realised with the addition of high octane fuel. In this analogy CB.Net are the providers of high octane information.

CXO. So how, ultimately, will both banks and corporates benefit from making the changes – how will they reap returns on the necessary investments?
ND. For corporates, the benefits are relatively clear. They will see reduced costs in cross-border payments, will have the potential to consolidate or outsource payments functions and be able to leverage their supply chain relationships to improve cash flow and reduce costs. Should the ACHs break out of their domestic payment mindset and provide services of benefit to corporates,, such as portable IBANs with incoming payments managed dynamically by the corporate treasurer, there will be further benefits in cash flow management.

There are also business benefits in terms of being able to access overseas European markets without the barrier to entry that exists today. In terms of their banking relationships, they will benefit in being able to handle all Euro payments from a single account and a single location.

For banks, the picture is somewhat different in that there is no clear return on the required investment for SEPA. It is necessary to fundamentally rethink the bank’s role before return is visible. Banks must be able to offer an efficient Europe-wide service to clients and those that can offer this together with STP payment preparation tools in their corporate banking systems, a choice of ACHs depending upon a mix of cost and service provision, will meet the corporates’ aspirations and acquire customers and volume. For those who cannot, or choose not to, embrace the changes that will come the future is less clear.

Nick Daniel joined CB.Net in 2002 as head of business development and has played a large role in developing the companies offering, winning a number of its key clients. Originally from a programming and data communications background, Daniel has more than 20 years’ sales experience for financial services organisations on a national and international level. He has held numerous sales roles including senior sales executive for futures and options company Rolf and Nolan where he researched, targeted and effected new business opportunities. Daniel is active in the industry and regularly participates in reference data user group committees.