In essence, there are two objectives to the Single Euro Payments Area (Sepa). First, that by January 1, 2008, banks must have built cross-border payments and direct debit systems. The second is that by the end of 2010, banks must have decommissioned their existing domestic payment systems, having fully migrated to the new SEPA system.
While the deadline is tight, banks are building the new systems, but when it comes to dumping the old systems in 2010, there is cause for concern. Abolishing borders and making all euro payments within the eurozone ‘domestic’ are achievable steps, and a logical follow-on from the introduction of the euro. However, banks consider that moves to force them to migrate completely, while domestic transactions still hugely outnumber cross-border transactions, are driven by political rather than commercial motives.
Little benefit
According to a recent report by the Boston Consulting Group (BCG), the cost of eliminating all domestic schemes by the end of 2010 will be about €5bn in additional investment, but have little additional benefit.
“The bottom line is that pushing for the full SEPA concept to be achieved by the end of 2010 will actually destroy value,” says Nick Viner, a senior vice-president in BCG’s London office and lead author of the report. “A far more workable solution would be to allow payments players to invest in the full Sepa requirements in line with their natural investment cycles for IT infrastructure, cards, terminals, account engines, merchant contracts and related elements.”
Current cross-border traffic in the eurozone is less than 2% and there is a real concern that the business case is simply not there. “The benefits will have been achieved in 2008, when the products will be available,” says Mr Viner. “What you won’t necessarily have is a massive migration.”
Cost of migration
He estimates that a £500m spend will get a bank to the 2008 deadline, as that just involves adapting the core processing system to enable cross-border direct debits. “But when you get to the demand for full migration in 2010, it then gets expensive and complex,” he says, “as banks will need to replace all debit cards and card files, and corporates will need to invest in putting in place pan-European direct debits and getting new mandates from all their customers.”
For this reason, BCG is advising European banks to avoid massive spending for the first phase of Sepa in 2008, to lobby for the delay of full migration by 2010, and to aggregate Sepa investments as much as possible.
However, Eric Sepkes, director of global transaction services, Europe, Middle East and Africa (EMEA), at Citigroup and member of the European Payments Council (EPC), says the demand must be based on offering products and services that people want to use.
“If you leave it to economic and natural business forces, I see most people not having the motivation to change, huge gaps appearing between the national schemes available today and what the Sepa schemes are proposing, and a total lack of clarity in whether we have pan-European ACHs (PEACHs) or ‘Sepa-compliant’ national ACHs,” he says.
He believes that to create a true European domestic market there must be change, and that the true benefits of a new system will not be seen until the plug is pulled on the old ones. “You cannot have national schemes co-existing with pan-European schemes as you will simply increase the cost of making payments in Europe,” he says.
Although one PEACH – the European Banking Association (EBA) – is already in place, Maurice Cleaves, EMEA regional product executive at JPMorgan Treasury Services, wonders if it has the reach and scalability necessary to be the all-encompassing and final version of Sepa or is merely a precursor. It will accept the new schemes and JPMorgan is part of the consortium that is funding development of the direct debit scheme within EBA.
Market moves
Mr Cleaves says: “Through activities like this – the pre-funding and banks getting together to build the final delivery platform – the market will gradually work towards the final goals. It is always good to have the aspiration, but the question is whether these goals are realistic or too aggressive, and how quickly the systems can be built without full specifications being made available early in the cycle.”
As Mr Cleaves points out, most of the ACHs are funded by the market, normally on a cost-recovery basis, so they need to have the systems running with sufficient volumes before costs are recovered. As the systems are handling relatively low-priced transactions, time is also needed to recover costs.
“Many of the ACHs are in different stages of their life cycles; some may already be in profit, while others may have a few years to run before they are profitable,” he says. “Despite this, there will be development work to get ready for Sepa, which will have to be funded and paid down through attracting volume.
“Market forces are a big driver of when those domestic systems may be retired and replaced with something that is more efficient. Efficiency is a function of profit, cost and volume and that will be slightly different in each country. We see ‘full Sepa’ as an aspiration, which may be in place for 2010 but will get more efficient as market forces push its development.”
In its original Sepa blueprint, the European Commission said that a partial Sepa is not acceptable, and a partial Sepa is an environment where national ACHs co-exist with pan-European schemes. A ‘Sepa-compliant’ national ACH would presumably be able to handle the newly created Bank Identifier Code (BIC) and International Bank Account Number (IBAN) payment instruments, but a Sepa-endorsed PEACH would have full access to every account holder, anywhere in the EU.
There cannot be 22, or even 13, pan-European ACHs but Mr Sepkes says perhaps there is a role for ACHs to make the conversion from national to pan-European, which would eliminate the need for immediate investment by corporates on long-term investment cycles.
JPMorgan’s Mr Cleaves believes that, realistically, there will be more than one PEACH to begin with and gradually the system with the best features, best functionality and best pricing will be the winner in the market.
But while the threat of mandatory measures to ensure that full migration to Sepa takes place hangs over the industry, BCG’s Mr Viner believes that this is still not an easy solution.
“If they do legislate, they will have to be quite specific about what they are ruling and that won’t be done overnight,” he says. “They will have to draft in great detail and then you are getting into product design, and in the end you have got to have products that allow commerce to continue.”
Mandatory measures
But Citigroup’s Mr Sepkes is beginning to think that full migration can only come through mandatory enforcement.
“Whether we like the schemes or not, it is too late to change them for 2008. We have got to start with something. The issue is what can be done between now and 2010 to create schemes that people would choose to use, and at a price they would want to do it at,” he says.
“Now is the time to start another group of people thinking much more cohesively about the real challenge of migration in 2010 and what is needed to achieve it. I believe it is unlikely to be achieved without further regulation and it is up to a variety of the authorities to decide how to legislate, and where that will be coming from.”
According to Mr Sepkes, an electronic straw poll at a recent London-based payments conference. which had delegates from both banks and corporates, showed that 80% of them did not believe Sepa will happen without further regulation.
With the banks showing their reluctance on full migration and the rising pressure from the European Commission, the likelihood of legislation has never been stronger.
