A recent roundtable organised by The Banker looked at the New Legal Framework (NLF) for Payments Directive, issued by the European Commission in December 2005, and the implications for the banking industry. A group of payments professionals from leading banks took part in the discussion, chaired by The Banker’s technology columnist Chris Skinner.
THE PANEL:
Alec Nacamuli global payments executive, IBM
Eric Sepkes head of payments, Citigroup
Jamie Martin head of payments, National Australia Group UK
Mark Watkinson payments executive, Lloyds TSB
Alan Brown head of cash management, ING
Tim Decker vice-president, JPMorgan
Tamim Saleh partner, strategy & change, IBM
What are the implications of the Single European Payments Area (SEPA) and NLF for Europe’s automated clearing houses?
Alec Nacamuli: It is a question of critical mass. If you look at volumes handled by ACHs today, you have a tier above 10 million transactions a day such as Voca in the UK. Then you have the middle tier, such as Interpay in the Netherlands, processing between 3 million and 5 million items a day. The small ones have hundreds of thousands a day, such as Luxembourg. There is no way you can get economies of scale in those.
As a result, the bank will look at this and say “How much is it going to cost the banking community to invest in the technology for a volume of X?” In a competitive environment it is not worth it. So the small ACHs will consolidate.
Meanwhile, no-one believes there is going to be one big ACH somewhere in Brussels or Paris. In the UK, we still have to offer sterling clearing in addition to Voca’s ambitions to become part of PE ACH (Pan-European ACH). So the objective of SEPA should be to ensure banks only need to operate one payment factory across Europe.
Eric Sepkes: The regulatory push is different from the infrastructure push. The EC and Central Bank aim to remove national infrastructures by 2010. The European Payments Council’s (EPC) SEPA blueprint talks about common pan-European infrastructures and a single set of payment products. This means that infrastructures have to evolve but they have not understood the political will for a single set of products and infrastructures. To be a pan-European infrastructure, an ACH has to meet the technical definition of the term PE ACH. PE ACH is not just a word, it is an EPC definition of criteria that have to be met. Today, not one national ACH in Europe meets that definition.
Jamie Martin: That is why banks are looking at their strategies in light of the difference between having a big single European clearing area versus the days of direct correspondents in each country. Settlement is worth considering, given the reduction in income and increase in fees that our correspondents receive. Add on to that the fact that the Euro Banking Association is charging us for making the payments. It has certainly changed our way of thinking towards a direct correspondent entry point in each of our key European locations, rather than using the central EBA.
Does it make a difference if you are a country that is not part of the euro, such as the UK?
Mark Watkinson: We have an arrangement with another bank to assist us and manage some of the UK-to-Eurozone complexity, although that does not mean that this is our long-term strategy. It just gives you time to develop your strategy in response to this wave of change.
Alan Brown: The niche that European network banks have in London is that they can give corporates direct access into these clearing systems from the UK and price it accordingly. I have seen the UK market equalising the cross-border fee with the local fee in the UK for a euro-denominated payment. You only have to equalise it, you do not have to bring it down to the lowest common denominator. You can actually keep it up, making it equal but high.
Eric Sepkes: Equally, the main benefit is not to retail payments but to corporate payments. For example, only 2.5% of all payments in the Eurozone are actually cross-border, and most of those are generated in the corporate-to-corporate flow. Individuals rarely make a cross-border payment.
Tim Decker: No. The EU would say that the reason there is only 2% of cross-border flows is that the banks are stifling cross-border trade.
You could take one rather than the other, but certainly if it becomes easier to transact on a cross border basis, then it becomes easier to trade on a cross-border basis. I think the two go hand in hand.
What are the strategic implications for a bank in this context?
Alan Brown: Banks have to look at their strategy. Are they going to consolidate their domestic market? Will they keep some kind of international portfolio going that is expensive? Will they try to be a top player? Our strategy is to grow our international portfolio within the European zone, and keep our presence there, but if everyone takes that strategy, how much space is there?
Eric Sepkes: If you look at retail banking and small corporate banking, most banks do not compete on their payments. In that market it is credit, service and a whole load of things. They make a CHAPS payment every couple of years and a cross-border payment every five years. Payments are not a competitive issue except at the very top level. There are only seven or eight banks in Europe that are competing for those clients.
Tamim Saleh: In those banks, you are not just dealing with one set of clients but a range of clients, and no one solution fits all. You will be dealing with a multinational with a centralised office: they want one point of contact and a consistent level of service. Or you are dealing with a decentralised organisation that wants service for each country. Or you are dealing with a small company requiring only two transactions a year.
Tim Decker: That is where you have to be selective. In a ‘payments relationship’, the elements of competitive differentiation are things like credit lines and the exchange rate you are offering. It is balances, cash management and treasury management. The relationship is in the liquidity, fees, credit lines and, perhaps now, the delivery channel.
Mark Watkinson: The bottom line is that it absolutely comes down to the strategy of the bank. You need to decide which customers you focus on. When you start looking at the erosion of the market and losing market share, be realistic. What is that market? Are you going after it?
In concluding, what is your vision for European Banking in 2010?
Tim Decker: I think the landscape is going to look like the UK. How many banks do we have in the UK? Not many. How many clearing systems do we have? We have an RTGS (Real-Time Gross Settlement), an ACH and the new faster payments scheme. I think that is what Europe is going to look like in 2011.
Jamie Martin: There will be fewer banks participating in payments, rather than fewer banks. You may see bigger banks or even non-banks moving into the payments environment, trying to provide the infrastructure to the smaller banks.
Tamim Saleh: Yet the majority of the top 100 banks want to get into cross-border European payments even though that is very tough economically. From a cost perspective, it is at least 20% on top of the basic cost of running transactional services.
Therefore, being a European payments processor is a big decision because if payments are 30% of your cost base – depending on how you define payments – then you have to raise that by another 20% or 30%.
The roundtable was organised in association with IBM.
