Michael Mueller, head of wholesale solutions for Deutsche Bank’s global transaction banking business, spoke to Charlie Corbett about the implications of this year’s roll out of a Single Euro Payments Area (SEPA) for the European banking industry.

Click here to view an edited video of the discussion

The full impact of SEPA has yet to be felt and will not be fully known for several years but what is understood is that the cost of implementing the technology required to meet SEPA’s standards, combined with the implicit loss of revenue due to the end of cross-border payments, will have serious implications for banks’ bottom lines. The Banker asked Mr Mueller how these developments will change European banking in the future and how much it will all cost.

THE PARTICIPANTS:

Charlie Corbett, economics editor, The Banker

Michael Mueller, head of whole­sale solutions, Deutsche Bank

  • What is the impact and cost of SEPA for banks?

An increasing number of banks have embarked on a strategic review of their transaction systems, operations and also their business model and a lot of that is triggered by SEPA. I would say that many of the banks I am talking to haven’t really seen the full extent of the investment required to become fully SEPA compliant. Overall I think there won’t be many banks who will get away with less than a double-digit million euro number, just on the technology side.

  • Will the technology spend and falling revenues squeeze out the smaller players?

I would say that transaction processing is a core banking activity so we’re not going to see many banks who won’t offer that service any more. However, banks are reviewing their strategies... and also whether they’ll be able to make money with these products in the long run. I think more and more banks are coming to the conclusion that this will be very difficult.

  • What strategies are banks using to implement SEPA?

You can look at the existing technology, and that’s what many banks have done, you can go into the market and buy technology... or you can look at systems that other banks are operating quite successfully to see if you can partner with them. I think these are the options: the build, the buy or the partner option.

  • Is there a danger when banks outsource transaction services that they might lose clients to the partner bank who is a ­competitor?

We are competitors but I think many of these banks would also realise that the main reason why their customers have a relationship with them is not [just] the ability to make payments. Customers would also select their banking provider based on service, relationship and availability of credit and therefore payment processing capabilities are often taken as given.

  • Overall, is SEPA a positive development for European banking?

We decided that Sepa was an opp­ortunity rather than a threat. I am not hiding the fact that Deutsche Bank has felt the SEPA impact on the revenue side. We’re not seeing the full impact yet, but a lot of intra-European cross-border business has been converted to what is effectively a domestic payment instrument with the respective revenue and cost implications. But overall, I think SEPA is a positive development.

  • How will banks make up the lost revenue from the loss of cross-border trades?

For us it is not so much about other charges somewhere else. For us it is about attracting more volumes on the SEPA side and also in traditional cross-border payments. That is a strategy that can’t work for all banks because there’s only so much volume to go round. SEPA is going to drive consolidation further so there will be a few players who will be able to make up for the revenue loss by increased volume, higher straight-through processing rates and some cost reductions.

  • It is clear the market will be fiercely competitive in the future because of SEPA. Is this a wake-up call for a lot of banks?

I think it will be. [There] will be a bit of a shake-up in the industry with the next wave of SEPA. SEPA direct debit, together with the payment services directive (PSD), will be implemented in the coming months and I see that as a much bigger trigger event, compared to what we have seen. I think this will ­force banks to very clearly review their ­strategy.

  • How prepared are banks in Europe for this next step down the path of borderless European banking?

I think that the readiness for the next phase of SEPA is comparatively low, surprisingly low actually, and I come across quite a few players in the market who have not really put together a clear-cut strategy. I would say that many banks will really have to make up their mind in the second half of 2008, in order to become ready for this at the end of 2009.

  • How are banks in countries out­side the eurozone going to cope with the new SEPA ­regulations?

Take the UK as an example. The volumes that [UK] banks will be able to generate on the SEPA side are going to be lower, compared to what banks within the eurozone are able to generate, simply due to the fact that their underlying business is largely booked in sterling. So, from a business case perspective investing in SEPA [for UK banks] is even more difficult than it is for some of the European banks because those banks are going to see a lot more volume and the business case will be more attractive.

  • Do you feel there is unwillingness among banks in Europe to invest in SEPA ­technology?

I am aware of discussions where the IT or the operations team has actually put forward a business case for a significant SEPA investment and the management of the banks have said: “it is not sustainable, we can’t make that kind of investment for all of these kind of regulatory initiatives”. Budgets for strategic investments are not necessarily available so we’re having a lot of discussions with banks to see if there could be a low-cost option, which involves partnering either with an application service approach or an outsourcing approach.

  • Is there more of a focus on transaction services because of the loss of revenue in other parts of banks’ businesses due to the credit crunch?

Sure, I mean, our senior management has been pretty vocal about this. I think the relative value of the so-called stable businesses, which are transaction banking, retail banking and similar, in times such as these has increased. The multiples for these businesses tend to be higher than on the investment banking side. On the other hand, I think that we can’t really say that our business has been completely unaffected by the credit crunch.

  • Will the industry set a deadline for banks to become SEPA compliant?

That’s the hundred-thousand dollar question and I can’t answer that, and also, I can’t really answer the question, ‘who’s going to set the end date?’ There are the obvious candidates for setting an end date; it could be the ­EBA [European Bankers Association], the [European] Commission or the [European] Central Bank.

  • If no end-date is set, how long do you think it will take banks to become fully SEPA compliant?

All banks have come up with projections because you need these projections for any meaningful investment plan. If you don’t know how many payments you’re going to process, and by when, then you don’t know how big this machine should be or how much revenue you’re going to generate, so it makes the business plan even more intangible.

So, what is the migration going to look like? To be honest, nobody really knew the answer to that.

Judging from the first three or four months, after the implementation of the SEPA credit scheme, I would say it is going to take a long time.

  • Are banks in Europe being swamped by regulation?

Whether banks feel swamped or not depends on who you are. But I think it is fair to say that an increasing proportion of banks’ investments go into mandatory initiatives to comply with regulations and this is forcing banks to review their business models.

  • Post-SEPA who are going to be the winners and who are going to be the losers?

What we can say is that size matters in this business. The institutions that are going to be the winners are those that can attract additional volume to make up for revenue lost due to decreased ­pricing. However, there is also a role for smaller providers to play if they are ­specialised around certain areas in transaction banking. You’re either very big and can invest along all parts of the value chain, or you have the ability to provide ‘best in class’ services in some parts [of the business] and procure services in other parts to combine this to a strong product offering.

This is the first of a series of discussions sponsored by Deutsche Bank.

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