Transaction banking: a year of fundamental change

Laurence Neville
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Two issues dominated payment systems during 2012: the switch to Single Euro Payment Area (SEPA) instruments and the rapid evolution of online – and especially – mobile technology, which will have significant implications for payments, reports Laurence Neville.

SEPA – at last

To describe SEPA as long-awaited is something of an understatement. The SEPA Credit Transfer (SCT) was launched in January 2008, followed by the SEPA Direct Debit (SDD) in November 2009. Take-up of both has been poor. Now, with a deadline of February 2014 for a mandatory switch from national payment instruments to SEPA instruments, the banking industry has shifted into a higher gear.

The introduction of SEPA is one of the biggest changes the industry has seen in the past decade. “The change will affect all businesses that make and collect monies through automated clearing houses (ACHs), irrespective of their size, and ultimately all consumers across Europe that receive payments such as salaries and pensions or pay bills via direct debit,” explains Lesley White, head of treasury products, EMEA, Bank of America Merrill Lynch.

SEPA offers opportunities for corporates to improve efficiency and standardization, and to take advantage of the lowering of barriers between European countries. Unfortunately, corporate readiness – or even awareness – remains low. “We recently carried out a poll of companies that revealed 43% of voters had not yet set any migration objectives, and 35% had yet to determine how they intended to create payment and debit instructions,” says Susan Dean, head of transaction services in EMEA at JP Morgan.

However, Dean says that it is important to treat SEPA as a programme, not a format compliance exercise. “The process is a continuum, and progress will depend on the stage that the client is at, the resources they can commit and their end goals,” she adds.

Ray Fattell, global head of product, payments and cash management at HSBC, agrees: “Once SEPA has replaced national instruments, clients using electronic payments and collections (note cash and paper instruments are out of SEPA scope) may decide to rationalize and centralize their banking relationships in one European country, rather than a costly plethora of relationships spread across many countries.” Traditionally, multinationals have tried to centralize their treasury operations into a payments factory or shared service centre. “With the introduction of SEPA we can expect to see many other companies seeking to centralize their banking operations, as the need for in-country services diminishes,” adds Fattell.

The impact on banks

Anupam Sinha, Citi Transaction Services
SEPA will also bring significant benefits for banks – especially those that made large investments but have yet to enjoy increased volumes. “The inherent differences between the legacy country payment infrastructures brought inefficiency and complexity to bank payment processing,” says Anupam Sinha, EMEA head of corporate payments, Citi Transaction Services. “While the Payment Service Directive has been able to standardize the rules and regulations governing the payments, banks are still required to maintain multiple infrastructures or counterparty relations to process one currency – the euro. Higher costs and duplicate processes are inherent.”

The switch to SEPA means that banks need to modernize their legacy systems to cater for richer XML-based SEPA formats. Current systems use and connect to local clearing using local formats. “Banks therefore have to decide whether to retire and replace or enhance their current platforms to cope with this change,” says Dean at JP Morgan. “The platform must be ready for clients’ volumes and demands for the full use of XML.” Banks will also face the challenge of how to use legacy platforms to continue to process the ‘niche’ products, which will still exist post-February 2014.”

SEPA will accelerate the consolidation of euro payment activity through major pan-European banks. On the clearing side, there will be fewer clearing houses after 2014 as some markets migrate to central pan-European clearing while others will outsource core processing to larger players. “Overall, these developments are leading to a more streamlined and harmonized banking landscape which will continue to evolve as banks and payment institutions seek to differentiate their services,” says Sinha. “Competition has already increased as SEPA enables all banks within the SEPA zone to offer SEPA services – traditional territories are being encroached upon while non-bank payment providers use SEPA as a means to widen service offerings.”

Innovation remains crucial

While SEPA may be hogging the headlines, innovation remains the driving force in the payments business. According to Jean-François Denis, head of payments and local offers at BNP Paribas, innovation in the payments space must be more than just an initiative that an organization thinks it ought to embrace. “[For BNP Paribas, it] is a genuine focus throughout the organization, from top management down.”

White says that Bank of America Merrill Lynch continuously invests in its systems. “It’s an absolute necessity to help ensure we can meet our clients’ changing needs and enable them to do business effectively,” she notes. “One growing trend in the last few years is for banks to work with each other and with third-party providers to create fully integrated and best-in-class propositions for their clients.”