SEPA was officially launched on January 28 with the successful introduction of the SEPA credit transfer instrument. The regulatory authorities had a clear vision, set in the Lisbon agenda, to make the European financial market the most efficient in the world. This meant that the European financial market, which was very much fragmented along national borders, needed to be harmonised. Simply put, harmonisation brings more transparency to the market. This allows participants across the region to enjoy the same information on offerings to make educated choices on products and services.
Time and money
Harmonisation creates healthy competition between providers of financial products and services which, in turn, improves market efficiency, fosters innovation and dismantles unjustified lock-in situations. Regulators can declare SEPA a success when consumers and businesses have more efficient, openly accessible and easy-to-use payment instruments, in a more competitive and innovative market.
The biggest challenge for regulatory authorities is time. On the one hand, the momentum created by insisting the industry provides an ambitious implementation agenda cannot be sustained indefinitely, and risks disappearing in the soft consensus that past instruments were not so bad after all. A long cohabitation of legacy and SEPA payment products would be extremely costly to everyone. On the other hand, SEPA implementation needs massive and rapid investment, which in several instances clashed with investment cycles of stakeholders. Finally, it has become clear that SEPA roll-out is a succession of steps, starting with credit transfers, giving the impression of open-ended regulatory pressure.
Across Europe, payments represent about a quarter of a bank’s operating revenues and a third of operating costs: payments contribute to less than 12% of a bank’s overall profits. Yet for many banks payments are considered a core business if only because it involves client intimacy and because it provides a steady if unglamorous revenue stream. Although the definition of “core” varies geographically and over time, banks usually rate the quality of infrastructures and sustainability of business models as the two key conditions to making SEPA a success.
Banks expect SEPA will push market infrastructures to be more cost-efficient and agile. Market infrastructures will must be able not only to segment and diversify their offerings, but also to help customers better serve their clients and fight off competitors through faster time-to-market and proactive product innovation.
Last but not least, because payments will have to travel faster and more securely across Europe, banks will not be able to compromise the resilience and security of market infrastructures. In the newly competitive environment created by SEPA, reputation risk will be managed more closely than before.
SEPA is likely to force banks and other stakeholders to raise their game. Banks could look at other industries, such as the automotive, and organise their payment businesses like assembly lines. They could collect and assemble parts from various internal and external sources, force themselves to better identify the various components of the payments value chain, and build a sourcing strategy that supports a wider business strategy. Banks could combine growth and industrial strategies, use and develop white label products and utilise innovation and development resources more efficiently. A number of banks have already taken this entrepreneurial route.
Corporations at the centre
Since the Lisbon agenda agreement, consumers and corporations have been at the centre of the regulator’s attention. Authorities have based most of their SEPA cost-benefit cases on the benefits it will bring to society in general, and to the financial services’ end-user in particular. The main benefit EU authorities usually identify for end-users is a reduction in bank transaction charges for all payments.
Large corporations, with significant activities in different countries, will be satisfied as SEPA benefits go beyond the charge reductions on cross-border payments and the avoidance of new charges on intra-border ones. Many have expressed they are looking for the harmonisation of technology and the customisation of commercial products, for simplification of operating processes and for more differentiation in business relationships, demanding new services like individual electronic signatures, management of mandates or harmonised trade services.
Market infrastructure providers are probably the only SEPA stakeholders for whom 2010, and thereafter, is going to be a zero-sum game. Not only will their numbers reduce substantially, driven by the need for scale to meet the other SEPA stakeholders’ pressure for lower payment processing costs, many will see their own traditional clients compete with them, as large global transaction banks will offer sourcing alternatives to smaller institutions.
Additionally, the market experienced a major value shift, from an applications focus to a network focus. If payment instruments are standardised across SEPA, they can be processed in a fairly standardised way. Financial institutions, particularly the largest ones, want independence from proprietary standards and channels. They want to internalise as much value creation as possible, by focusing upon the major payment routes.
SEPA is an opportunity and it will be up to each participant to find their way through the change to end up on the winning edge. There is hardly ever a business case for each stakeholder to invest in infrastructure, unless it is done in cooperation and with clear leadership. The purely competitive approach as well as the soft and wide consensual method have both shown limitations when it comes to radically change an industry with strong legacy systems. Participants must be ready to engage in a new cooperation/competition model.
In conclusion, it has become clear that if the future of SEPA depends on known and unknown elements, four major ingredients are required for it success: harmonisation of standards and interface; a network with extended reach in terms of geography, stakeholders and business activities; a reliable provider of reference data; and a catalyst for win-win developments. SWIFT will continue to foster these ingredients in support of the SEPA community.
SEPA will succeed if financial institutions continue to provide leadership through an effective and neutral governance structure. They could build on the embryonic structure they set up around SEPA standards testing. They could bring it to the next level – a structure ‘beyond compliance.’