The European payments environment is going through major upheaval. This presents cross-border opportunities for some banks and the prospect of takeover for others, writes Chris Skinner.
Since the turn of the century, Eurocrats have been trying to fast-track the journey to an integrated Europe, in particular, pushing the financial markets into change to achieve their vision of economic union. The foundations of these changes are based on the 42 directives that comprise the Financial Services Action Plan (FSAP). These directives are the focal point for the financial industry: they open borders between banks, brokers and insurance firms to compete on a level playing field across the eurozone.
In particular, the FSAP has already led to major changes in cross-border payments. For example, the EU guide to integrating European payments states: “The objective is a single payment area, in which citizens and businesses can make cross-border payments as easily, safely and efficiently as they can within their own countries and subject to identical charges.” The single euro payments area (SEPA) is intended to be fully implemented by 2010.
Blow to revenues
The first steps towards SEPA were made in 2001 when EU Regulation 2560/2001 was announced. The regulation made it illegal for a bank to charge more for a cross-border cash withdrawal, card payment or credit transfer than it would charge for a domestic credit transfer payment. This has been a serious blow to bank revenues because, historically, charges for such transfers may have been as high as a quarter of the total amount being transferred.
Another step was the introduction of standardisation. European regulations made it mandatory to use a standard international bank account number (IBAN) and bank identification code (BIC) by 2006.
Alongside these first steps have been similar movements through the Credeuro Convention on the timing of credit transfers and the InterBank Charging Principles Convention, which standardises the way in which an intermediary bank deducts charges on credit transfers. Yet, surprisingly, SEPA still has a long way to go.
SEPA’s agenda is being orchestrated by the European Central Bank (ECB) and is being implemented through two bodies – the European Payments Council (EPC) and the Euro Banking Association (EBA). The EPC comprises representatives of all of Europe’s payments fraternity in the banks, while the EBA provides the platforms for the development of European payment infrastructures.
Between the ECB, the EBA and the EPC, SEPA will make the vision of a Europe where all payment transactions are priced within the eurozone as if they were domestic transactions a reality. However, that reality requires significant infrastructural changes from the banking community, including new clearing house operations and new financial instruments.
The EBA has created a pan-European automated clearing house (PEACH) called STEP2 for all cross-border euro payments. However, that naturally raises questions about what happens to the existing automated clearing houses, such as Interpay in the Netherlands. Alongside PEACH is a pan-European direct debit (PE-DD), which raises questions about how to make PE-DD a reality when different countries have variations of the same product. Direct debits in Italy (RiBa) and France (LCR), for example, require the customer to approve each payment to the merchant before it is made. In contrast, most usual direct debit products are pre-authorised for payment by a direct debit mandate.
Opportunity for few
The European payments environment is being revolutionised. The old ways of taking significant fee revenues through cross-border charges are disappearing fast. For a few banks this offers major opportunities because they can now compete across all countries in Europe. This raises concerns for the mid-tier players because they are too small to operate across the eurozone but too big to be just domestic players.
The signs are that these mid-tier banks will be acquired. Consolidation games are already coming into play. Among them have been the $15.5bn acquisition of the UK’s Abbey National in July 2004 by Spain's Banco Santander Central Hispano. Dutch bank ABN AMRO has been trying hard to acquire Banca Antonveneta in Italy.
There will be many more mergers and acquisitions of European banks by the time SEPA is a reality. That reality is likely to be in play by 2010. Therefore banks must watch out and work out whether they will be the hunter or the hunted.
