Using conversion engines and attaining reachability for SEPA payments may well work for the short-term but, as Frances Maguire finds, attaining a longer-term solution for the new SEPA payments standard will come through partnering and collaboration.
In its 2009 Annual Report, the European Payments Council (EPC) says that whilst banks are “gradually” starting to deliver SEPA Direct Debit services to their customers, it welcomes the fact that EU finance ministers recognise that setting a deadline for migration to SEPA would provide the clarity and the incentive needed by the market. EPC chairman, Gerard Hartsink, says: “Mandating an EU-wide end date requires EU legislation.”
The realisation of SEPA requires agreement on a common set of data to be exchanged in a common syntax. Unfortunately, SEPA is still seen by many local banks as a cross-border initiative rather than as the new domestic standard.
Simon Colboc, Head of Strategy, Steering and Quality at BNP Paribas Cash Management, says the launch of the SEPA Credit Transfer did not provide the watershed that was expected but that the need to comply with the Payments Services Directive (PSD) has forced banks to rethink their payments operations. In addition, he says, there is a higher amount of interest from corporate clients about the SEPA Direct Debit, which is forcing banks to respond.
He says: “The PSD makes the market more transparent and eliminates quite a bit of the float that maybe banks have been relying on in the past. Now banks have got to address their payments strategies.”
BNP Paribas Group has built a common SEPA Direct Debit platform that will service clients from its entire European network.
Colboc says the corporates that will be directly impacted by the introduction of the SEPA Direct Debit first will be those in the business-to-business environment, as they cannot afford to risk transactions being rejected by the banks due to the move to the new standard.
B2C companies (utilities and telcos) will also be strongly impacted. He says: “It is not so much that they actively want to move to the SEPA Direct Debit – it does not make their life easier – but they have seen that with the PSD many domestic schemes will have to be replaced by the SDD as it is too difficult to make them compliant. Billers have seen the writing on the wall and are taking the opportunity to think about how they can make their direct debits work better, and integrate it into their ERP and billing systems. And they are looking at banks to help them.”
It is generally thought that running two internal payment processing systems during the transition period, for legacy and SEPA compliant payments, would be costly and inefficient for banks, but Ruth Wandhofer, EMEA Head of Payment Strategy & Market Policy, Global Transaction Services, at Citi, says that, in reality, most banks are not yet running two systems.
She says that for the SEPA Credit Transfers, although currently 4464 banks have adhered to the reachability requirements many have in reality been rather passive to date, in the sense that as yet they can only receive an SCT but not yet send, and the majority are not yet truly XML compliant.
“Many have yet not created internal XML processing platforms to handle their SEPA CTs, preferring initially to use so-called ‘converters’ in front of their payment engines so that when they send a payment message in the old format it converts into XML before sending it into the market (and vice versa on receipt).”
However, the additional benefits and richness of the new XML message standards are not included in these legacy message formats. This will particularly affect larger businesses, which as a consequence may not get all the additional information available in the SEPA payment message, which they need in order to reconcile data in an automated way.
Wandhofer says: “The fact that this situation has occurred is no surprise as the SEPA adherence processes always recognised the need to get as many banks on board as quickly as possible by allowing them time to adapt their internal systems. The point though is that this needs to be a brief transition phase before fully adopting the new XML standards end-to-end”
Trying to use old message formats and converters internally for the SEPA Direct Debit (SDD) service will be much trickier, due to the wider range of new message types created for SDD – plus of course the existence of value-added service options to create e-mandates and deliver further information to customers. To date, only about 30% of banks in the eurozone have signed up the SDD scheme and although many more can be expected to do so during the rest of 2010 Wandhofer still does not expect that many banks will have full XML-based solutions by this point.
Says Wandhofer: “To really deliver a comprehensive SEPA Direct Debit service, an internal XML processing platform is needed, but it is likely that many banks will be planning to use converters initially whilst volumes still remain low – and as a consequence may also not be in a position to actively promote SEPA services to their clients.”
For Citi, part of its initial SEPA offering to other banks was to provide them with conversion services to shield them from the initial requirement to invest in XML. “Some banks are connected to us for conversion and processing, so we are the clearing provider and they are the indirect participants, and they get the conversion. We also have a lighter version for banks connected to us just for European SEPA clearing – where they can send XML files, but do not want to manage the clearing relationships.”
Wandhofer believes that all banks should be moving to XML solutions in due course – either by investing in their own end-to-end XML platform or through a partnership approach with another institution that has done so.
“Building an internal end-to-end XML payment processing capability is a significant investment,” says Wandhofer. “There is a clear trend emerging towards outsourcing and partnering. The small and medium-sized bank segments are likely to investigate the option of outsourcing their SEPA payment processing, either wholly or partially, while larger commercial banks are likely to look at becoming the outsourcing party, by providing services which allow smaller institutions to tap into their scale volumes and their technology solutions.”
For banks in the eurozone, SDD ‘reachability’ is mandatory as of Nov 2010 while banks in the remaining EU countries have to be reachable for SDD by Nov 2014.
Marcus Sehr, head of Wholesale Solutions, Global Transaction Banking, at Deutsche Bank says banks should be asking themselves how they should comply with the mandatory requirement and how this will fit into their overall strategy. He says: “It’s a question of whether they should apply a tactical solution until SEPA really kicks off or whether they should be a first mover and deploy a fully fledged strategic solution as of day one.”
This decision will be influenced by many factors, such as the demand of the own client base, the investment appetite, interference with other projects and the availability of their own IT staff.
“Banks with multi national corporates will have to offer a comprehensive solution as of day one while banks with the bulk of their client base on the debtor side could implement a low cost tactical solution whilst waiting for SEPA to unfold its full potential,” says Sehr.
Deutsche Bank is offering everything from a ‘tactical’ solution through to a fully-fledged SEPA outsourcing service, by taking a consultative approach with its clients to find solutions that best fit today, and in the longer term. Sehr says: “Our clients can build a profitable business model by leveraging the investments of a global partner benefiting from scale advantages.”
SEPA is a catalyst for outsourcing, but Sehr believes it is not the only one. Over the last couple of years new business models have merged as banks have become more open to re-thinking their value chain and realise it is no longer imperative for them to have every process kept in-house.
Says Sehr: “The key requirements of a typical institutions can be boiled down to four core elements: revenue generation, cost reduction, risk mitigation, and regulation and compliance. How to achieve these targets while ensuring they continue to meet the demand of their underlying client base is a challenge for every bank, regardless of size or location.”
According to Sehr, to deal with these challenges banks need to have a clear business model, know what they are and what they are not, and identify their key growth opportunities and critical obstacles to manage the cost drivers and the investment budget. “They also need to know where they are going and how they plan to get there. Hence, they have to identify what they are doing themselves and where they leverage partners. And – most importantly – they need to choose their partners carefully.”