What does Sepa involve?
Sepa and the PSD: a brief history
What corporates must do
ON JANUARY 28, 2008, the Single Euro Payments Area became a reality. No flags were waved, no confetti was thrown and no Euro-anthems were played. This effort to harmonize national payment systems – seen by some as the culmination of the introduction of the euro and the final stage in the creation of a true single market – debuted without anyone outside the cash management industry even noticing.
Why the deafening silence on such a momentous occasion? To be sure, Sepa has nothing like the popular impact or appeal of the introduction of the euro, which might have contributed to keeping it off the front pages. Perhaps more important, Sepa – although a bank-led initiative – has got bogged down in European Union inertia, resulting in its introduction being staggered, and therefore lessening its impact.
But what about banks, which are at the heart of Sepa? Shouldn’t they be cheerleading its introduction? In truth, an embarrassed hush seems to have descended on some of the leading cash management banks operating in Europe. Having hyped up Sepa and garnered little response from corporates, they have reflected soberly and decided that Sepa should be treated as a marathon – not a sprint.
What is beyond dispute is that Sepa will prompt competition between banks that will change the shape of the cash management business, and possibly of the broader banking market in Europe. It will also – eventually – offer significant opportunities for corporates, both in how they use their cash and, potentially, in how and where they operate. Say it softly then – Sepa really is a revolution.
A slow start
The quiet revolution of Sepa – the first stage of which is the Sepa Credit Transfer (SCT), which launched on January 28 and allows the easy transfer of euros – began with a whimper. "In reality, although most of the main banks are claiming to be ready for the SCT, the deadline is symbolic since very few clients will be able to initiate Sepa payments," says Martine Goubert, senior adviser in cash management at BNP Paribas, speaking before SCT’s launch. As important, the readiness of banks themselves is questionable.
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"In the US, the Federal Reserve and leading banks are known to be jealous of Europe’s achievement and we should be proud of it"
Gerard Hartsink, European Payments Council |
Gerard Hartsink, chairman of the European Payments Council, the decision-making and coordination body of the European banking industry in relation to payments, concedes that only 4,120 of about 8,000 banks in Europe had signed an adherence agreement confirming their capability to send or receive a SCT a week before it launched. "[But] many of the banks that have yet to sign are specialist vehicles that are not involved in the payments industry – we believe 90% of all banks in the payments business are signed up," he says.
Although the launch of the SCT is not a big event in terms of volumes, it is still significant for the banking industry. "This is the first time that the entire payments industry is covered by the signing of a document that sets out standards," says Hartsink. "In the US, the Federal Reserve and leading banks are known to be jealous of Europe’s achievement and we should be proud of it." In addition, the degree of cooperation between banks has been profound. "Never before have banks in Europe worked together for such a substantial common goal," says Hartsink.
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"Deutsche has set the requirements so that they are as flexible as possible"
Christian Westerhaus, Deutsche Bank |
Christian Westerhaus, head of payments strategies and infrastructures in global transaction banking-cash management at Deutsche Bank in Frankfurt, agrees that the creation of uniform business rules across Europe is a big accomplishment and notes that Sepa is also a remarkable technological achievement. "Sepa involves usage of a new file format based on a global standard called ISO 20022 XML," he says. Such a detail might sound arcane. However, as Westerhaus notes, EU banks are the first to use what will become a global standard for payment transactions – giving them a competitive advantage.
How will Sepa change cash management?
Leading cash management banks are quiet about their Sepa build-out costs – and the burdens of maintaining legacy payments systems for the foreseeable future in addition to Sepa systems. One observer estimates that Sepa build costs could be "hundreds of millions". Moreover, as Peter Jameson, Sepa market manager in EMEA cash management at Citi in London, notes diplomatically, there is no prospect of any rapid return on investment. "Our infrastructure has been built for strategic reasons rather than short-term revenue generation," he says.
The conventional wisdom about Sepa is that the scale of technological change it necessitates will hasten consolidation of the banking industry. The costs of introducing Sepa-compliant technologies – which depend on huge payment volumes to deliver a return on investment – are simply unrealistic for medium-sized and smaller banks. As a result of their inability to adequately service their customers, smaller banks will eventually lose out to large regional and global players.
However, the argument that cash-management business will simply migrate to larger banks is overly simplistic. First of all, it assumes that smaller banks won’t put up a fight. "Payment services are key for banks – everyone wants to keep and increase their business," says BNP Paribas’ Goubert. "The question is how to improve your offering in order to develop your market share."
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"Sepa will have started smaller banks thinking strategically"
Mike Hampson, ABN Amro |
Certainly, local banks will face a competitive threat as existing revenue streams are eroded through regulation and competition. But rather than capitulate, they will instead have to decide whether to build, buy or outsource their infrastructure requirements relating to Sepa. "There is still a substantial contingent of banks that are trying to ignore this reality but more banks are open to considering partnership to address the issue," says Jameson.