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Asia-PacificJuly 2 2006

Pulling Europe’s threads together

Consolidation, interoperability and transformation of the EU’s disparate clearing infrastructure. Amarendra Gokhale explains what is really at stake in realising Sepa.
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The Single Euro Pay-ments Area (Sepa) initiative aims to create a single market for payments within the eurozone wherein cross-border payment transfers can be transacted as conveniently and cost-effectively as domestic payments within national borders.

Sepa is primarily focused on retail payments, as wholesale (large-value) payments have an established Pan-EU clearing infrastructure – Target (Trans-European Real-time Gross Settlement Express Transfer System) for real-time gross settlement (RTGS) payments, and Euro Banking Association (EBA) Euro1 for net settlements.

Target’s launch coincided with the euro’s inception because a pan-EU settlement mechanism was a prerequisite for the European Central Bank (ECB) to conduct its monetary policy. The existing Target system is, in essence, a bridging infrastructure connecting 15 national RTGS systems through an inter-linking component.

Gradual implementation

The Target2 project looks at creating a true, single pan-European platform, the single shared platform (SSP), and is slated for implementation in phases, beginning November 2007. Target2 could be viewed as the Sepa infrastructure for wholesale payments, facilitating final settlement of pan-European clearing positions.

Put simply, Sepa comprises two principal constituents: standardised pan-European payment schemes, and the pan-European clearing infrastructure or pan-European automated clearing house (Peach).

EBA straight-through euro processing (Step2), operational since July 2003, is the first Peach for mass payments across the eurozone and currently supports credit transfers, with the Pan-European Direct Debits’ (PEDD) pilot launch set for January 2007. It has achieved a near 100% reach (receiver capability) of banks in the EU.

So what will the payments clearing landscape look like in 2010? The vision for payments clearing and settlement in Europe post-Sepa encompasses replacing domestic automated clearing houses (ACHs) with pan-European ACHs, operating on a common payments standard.

Come 2010, Target2 will be fully rolled out and operational, with all EU countries migrating from their existing Target connections to the shared single platform (SSP).

Dutch courage

The Dutch National Bank’s declaration to retire its domestic RTGS clearing, TOP, from the advent of Target2, to settle both domestic and cross-border payments over Target2 has provided a fillip to the ECB objective of phasing out national RTGS systems, and converging large-value payments on Target2.

The ECB has specified a maximum period of four years from the launch of Target2 for countries to change their RTGS payments traffic from national platforms to Target 2. Might the Dutch bank’s decision set a precedent for other central banks to commit themselves to an early move?

Unknown timescale

The mass/retail payments scenario still appears fluid, with a near certainty that there will be multiple Peachs in Europe. The 30-plus ACHs existing in Europe will consolidate, with the emergence of competing Peachs, but the pace of this change is largely unclear at this point.

The market expects such rationalisation to materialise post-2010. There is also a market view that in the end-state there would be three to five competing Peachs through alliances, mergers or buyouts among existing clearing houses.

In any event, interoperability between these systems would be critical. The evolution of the markets in the US to the two ACHs – FED ACH (Federal Reserve ACH) and EPN (Electronic Payments Network of the New York Clearing House) may hold valuable lessons for Europe.

The two primary drivers of the consolidation experience in the US are the common payments standards of the National Automated Clearing House Association (Nacha) and interoperability between multiple platforms that enabled a competitive market scenario.

Interoperable clearing

The Sepa effort thus far has primarily dwelled on a payment standards definition. The development of an interoperable clearing environment must be the next area of focus. A Swift (Society for Worldwide Interbank Financial Telecommunication)-based routing system mirroring the existing Target hub-like structure of linkage may be an avenue worth exploring.

The three largest EU ACH structures – Voca in the UK, InterPay in the Netherlands and the Stet in France (the revamped French ACH SIT, launching in 2007) have positioned themselves as forerunners to the transition into Peachs.

EBA Step2, with its first-mover advantage, is well poised to consolidate its position with some domestic payments traffic already being channelled through its platform.

Luxembourg has moved its retail payments processing to Step2, and a few Italian banks are expected to do the same shortly. Further, EBA has engaged with Spain and Finland to discuss the migration of their domestic payments traffic to Step 2.

In sum, Sepa presents a unique setting to consolidate Europe’s fragmented and disparate clearing infrastructure to a few platforms of scale. These platforms will vie for payment flows, with value-added offerings and differentiated strategies, to the ultimate benefit of the end-user. The million-euro question being: when?

Amarendra Gokhale is senior business analyst, payments center of excellence, at i-flex solutions.

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