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Asia-PacificJuly 2 2006

The science of compliance

Swati Bhide and Pavan Haldia explain how banks can minimise the technological costs associated with Single Euro Payments Area compliance.
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The introduction of the euro was the first step towards the Single Euro Payments Area (Sepa). Despite this transition, the fragmented nature of payment services and instruments across borders proved to be a barrier in creating a single, integrated payments structure in Europe.

Sepa will see the advent of a single domestic payments market where citizens and businesses will be able to make cross-border payments as securely, inexpensively and efficiently as payments within national borders. Sepa’s implementation is significant in that it will raise efficiency levels in the payments industry, thereby providing significant savings and benefits to the European economy.

Cost of compliance

Compliance with Sepa will prove more challenging than the introduction of the euro itself. Banks are under tremendous pressure as they face new accounting rules (IAS), new securities trading rules (MiFID), and new capital adequacy rules (Basel II). The costs involved in implementing these regulations are phenomenal as compliance necessitates automating several processes.

Costs will continue to spiral as the price compression of payment services with the introduction of the 2560/2001 EU regulations also affects the revenues of banks. Earlier, a cross-border withdrawal would invite a surcharge of approximately €4 for every €100. Now such a withdrawal is treated as a domestic payment that is free, or with a negligible service charge.

To build processing scale, banks must make decisions on whether to outsource their payment processes or source them from other banks. In short, every bank with euro payments activity should determine what Sepa means to their business, and assess its strategic options.

Refurbishing IT infrastructures

Sepa compliance brings with it mammoth technological challenges for banks. They are faced with an option of adopting a conservative approach and complying with Sepa because of its mandatory nature, or of working proactively to harness this strategic opportunity. Banks will need to look at integrated straight-through processing (STP) systems that add value and reduce costs and possibly even look at replacing ageing legacy systems. In short, along with the re-engineering of payment processes, a bank’s IT infrastructure may require a complete overhaul.

Consolidating payments

Technology is undoubtedly a reckoning factor in the evolution of infrastructure to support Sepa, but more important are factors such as customer expectations that will drive competition. Customers will be spurred by Sepa to reconsider their banking relationships. In response to demands for consolidation – for instance, in the payments and treasury operations – banks may have to combine high and low-value payments with regional and global entities into a single system. Banks may consider maintaining a single system for external transactions instead of duplicating applications across multiple locations.

Managing liquidity

Without the need to maintain multiple bank accounts in each country in the eurozone for local transactions, liquidity management processes take centre stage. Banks, and customers, can do well riding the oncoming wave of liquidity optimisation.

A single point of access

One of the most cost-effective methods for implementing Sepa is for a bank to retain its existing systems and superimpose an additional layer consisting of a Sepa messaging hub that would act as a single window for all transactions. Such an approach would take care of technical changes, network connectivity (SwiftNet), and support basic services such as FileAct, Interact and Browse, with minimum impact on the bank’s technology budgets.

Taking action

Sepa requires banks to invest and innovate amid an environment of increased competition and stringent regulatory norms. The challenge for banks is to ensure that any cost benefits from streamlined processes are not outweighed by the obligatory investment to create a new domestic euro market. For some, re-engineering the entire payments process and replacing systems may be a good option, but it may not be feasible considering the high costs involved. A single-window solution, such as the messaging hub outlined in this article, will help banks target Sepa compliance, in addition to reducing costs.

Swati Bhide and Pavan Haldia are consultants at the payments center of excellence at i-flex solutions.

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