The real benefits for companies will not be in the small savings in transaction costs but in the wider efficiencies that Sepa will introduce to payments systems and markets. By Michael Imeson.
For a summary of how the Single Euro Payments System (Sepa) and the Payment Services Directive will benefit bank customers, look no further than the European Payments Council’s (EPC) document, Making Sepa a Reality, revised in August. Chapter three, The Sepa End-user Experience, spells out the practical implications for individual citizens, small and medium-sized enterprises (SMEs), large companies and public administrations.
SME merchants
The benefits for SMEs are split into two sections: SME merchants and other SMEs. Merchants that have a high tourist or “adjacent border” spend, either through card or cash, “will see significant change and improvement” in the services they receive from their banks, according to the document.
With the introduction of Sepa, many of the national practices that are specific to each domestic market will become more consistent. For example, card schemes will move to more standardised approaches; there will be a Sepa campaign to encourage consumers and merchants to switch from cash to cards; domestic-only payment cards will be supported by all terminals across the EU; all Sepa cards will be chip-based, not magnetic stripe-based, and authenticated by PIN, not signature; and a common legal framework will exist for “exception items and consumer redress”.
The typical SME sometimes has problems with cross-border transactions. Sepa and the directive should make these a thing of the past. The harmonised legal framework created by the directive will introduce more certainty and clarity in payments for sales and purchases, including a common settlement timeframe for cross-border and domestic receipts and payments.
Similarly, a common Sepa-wide direct debit service will be introduced with common IBAN/BIC account codes and an electronic mandate processing feature, with the potential to dematerialise paper records thus reducing back-office costs. In home markets, these same standards, new account codes and improved service levels will apply to domestic direct debits and direct credits.
Large companies
The benefits for large companies are also divided into two categories: large merchants, and other large “corporates and public administrations”. Large merchants will get the same benefits as SME merchants but they will also gain from large economies of scale. For example, encouraging consumers Sepa-wide to switch from cash to cards will produce lower processing costs; common point-of-sale (PoS) processes for card acceptance will simplify staff training and reduce errors; and the introduction of a single Sepa software application and common terminal-to-host standards will cut PoS processing, infrastructure and terminal costs.
The benefits for other large companies and public corporations will be substantial. They include a single process for all incoming and outgoing payments, national and cross-border; harmonised, guaranteed and secure remittance information across Europe; standard rulebooks for direct debits and credit transfers; and a consistent legal framework for exception processing to improve efficiency.
“Companies with operations in several countries will be able to create (and receive) a single aggregated file for all payments (domestic and cross-border) and submit these to a single institution within standard clearing and settlement timeframes,” explains the EPC document. “There will no longer be a need for multiple files prepared to different standards. This will remove costly multi-country payment platforms and enable a migration to one common, consolidated system in the head office country.”
Entities with large volumes of direct debits and credit transfers will be able to shop around for banks that are able to clear and settle at best service and lowest costs, inclusive of additional bank services, in any country. The new standard for pan-European direct debits will offer a much-improved service for companies wishing to receive payments from customers working or living across Europe.
Sepa will deliver similar benefits to governments and public administrations, utilities and other organisations that make substantial payments in national and pan-European markets.
Smoke and noise
Steve Blizzard, a director in financial services at KPMG, says that only 1% or 2% of all EU transactions are cross-border, so in the general scheme of things Sepa is not a big deal for a bank’s corporate customers. “Yes, they will benefit, but the transaction cost saving will be marginal,” he says.
Somil Goyal, a financial services adviser at consultants BearingPoint, says that the much-trumpeted advantages need to be put into perspective. “There is a lot of smoke and noise generated by Sepa,” he says. “The savings will not be anywhere near as great as those that came through the creation of the euro and the abolition of exchange rates in the eurozone.”
Mr Goyal estimates that cross-border transaction volume in the EU is about 1.2bn a year, with an estimated value of €80,000bn, producing an average transaction size of €60,000-€70,000. If the one-day float cost on that transaction size is €3-€5, and the transaction fee is €1-€5, then the average cost to a company per transaction is €5-€6.
Over the next seven to eight years, because of volume growth (x3) and value growth (x0.5), and the cost efficiencies introduced by Sepa, the average cost per transaction will fall to €3-€4, Mr Goyal estimates, a saving of €2. “A €2 saving on three billion transactions a year amounts to €6bn in all,” says Mr Goyal. “That might seem a lot, but the current annual GDP of the EU is €13,000bn – so €6bn is less than 0.05% of GDP. Put another way, the current population of the EU is 450 million, so a €6bn saving is only about €13 per head per annum.”
Mr Goyal adds: “Savings in banking fees are always welcome, but they will form a small part of the Sepa benefits. The bigger benefits to corporate customers will be from being able to transact on an EU-wide basis from one account. This will increase flexibility for SMEs and large local corporates (LLCs). It will offer simplification and administrative savings for LLCs and multinational corporates. It will be a shot in the arm for shared service centres, and outsourcing and offshoring in general.”
