SEPA: Lost in Transposition?

27 Jan 2009

SEPA implementation is still moving forward, if a little slowly. What obstacles stand in the way of payments harmonisation across the eurozone?

One year after the introduction of the single euro payments area (SEPA) Credit Transfer (SCT) scheme and SEPA Cards Framework, there still is much work to be done, including the more challenging implementation of the SEPA Direct Debit (SDD) scheme in November this year. It is important at this point not only to survey what has happened during the past year, but also to step back and remind ourselves of SEPA's main objective: to increase payment harmonisation across the eurozone.

Paul Taylor, managing director Europe at VocaLink, points out that SEPA is a political initiative to make the eurozone more competitive holistically than having a number of countries operating independently of each other. "Having achieved the miracle on the single currency, bringing the banking industry in line was an obvious next step," he says.

To that end, the payment industry came together to create industry bodies, such as the European Payments Council (EPC), to allow the industry to self-regulate. "This meant that the industry could respond to different challenges, be proactive and decide its preferred outcome. It came up with SEPA, put a vision in place backed by core principles and rulebooks," explains Taylor.

Taylor says that the launch of SCT on 28 January 2008 was a success, but that many in the industry felt a little deflated by the lack of reaction and uptake from the market. "I remember going to the SEPA launch meeting in Brussels last year and observing the different stakeholders all pointing at each other in regards to what was needed to happen in order to make SEPA successful," he says. "The corporates were pointing to the banks saying that they haven't delivered any products so why should they be interested; the banks were pointing to the governments saying that they haven't regulated this or made it mandatory for people to use it, so why should any of their customers want it; and the governments were pointing back to the corporates and asking why they weren't demanding it?"

This split between stakeholders has to be overcome in order to increase SEPA's uptake. In his article SEPA Migration Needs Commitment from All Stakeholders, SIA-SSB's Mario de Lorenzo argues that there are still a number of issues to be solved in terms of regulation and new instrument features before all the stakeholders will come to the table. Among the main issues are: SDD mandate management and migration and the multilateral interchange fee (MIF) structure; the extent of the Payment Service Directive (PSD) transposition in November 2009, which is subject to different national interpretations by the 30 countries (EU27 + European Economic Area); corporates requests and complaints about their inadequate involvement in SEPA's product definitions; and finally, the thorny issue of the commitment level of public authorities.

De Lorenzo adds: "Obviously, completing SEPA migration requires the commitment of all the stakeholders. Promoting the use of new SEPA services and setting a deadline for the migration as soon as possible can facilitate this process."

VocaLink's Taylor believes that the fact that there isn't an end date is a proxy for the fact that the industry as a whole hasn't been able to establish any discernible value from implementing SEPA. "No one can guarantee that there will be a mandate [to turn off legacy payments]. But it is far better to be proactive and take the opportunity created by SEPA to develop new products and services that add customer value and healthy new return for the banks. The lack of an end date is effectively a lack of confidence."

SEPA Direct Debits: In the Home Stretch?
Citi's Rajesh Mehta agrees that SCTs has made some progress in the past year, and believes that will improve with the launch of a new version of SCT next month, which embeds optional fields that will enhance reconciliation and straight-through processing (STP) levels for corporate users. In his article SEPA: Challenges and Opportunities for 2009, he also agrees that SEPA is still far from being a reality and says that it will be "necessary for some time for large pan-European corporates to be able to pay and receive via national legacy channels and payment systems, as well as moving initial volumes where possible onto SEPA products."

He highlights some of the issues still to be dealt with in terms of SDDs. "From a corporate client perspective, one of the chief priorities is that a way is found to migrate existing 'legacy' direct debit mandates in each eurozone country over to the SDD scheme in a way that ensures their ongoing legal validity, thereby avoiding the costly exercise of requiring debtors to sign fresh mandates," he says. "It is clear that resolving this issue will require different approaches in different countries - in some cases a legal solution will be necessary while in others a contractual solution might be feasible."

As a payment instrument, a direct debit is more complex in its construction than a credit transfer. Whereas a credit transfer is a push payment, where a company decides to send money to another entity, a direct debit is a pull payment where a company or person effectively gives another entity permission to go into their account and take money on a predictable basis. This requires common standards and a significant legal framework, particularly if this is to be done across markets.

VocaLink's Taylor says that this has created a greater level of concern within the banks around how the SDD process will work – and this is coupled with the concern that the market is not all that interested. "If there is no market demand and no government regulation to force the banks to do it, and if the proposed solutions that the industry is looking at will run into the millions, while the implementation will tie up the IT team for months and there is no guarantee of business at the end of it, then it makes it difficult for banks to feel compelled to do it," he says.

Guillaume de Longeaux at AND'co, in his article How to Build Confidence for a Successful SDD Appropriation, believes that it has already been widely advertised that creditors will face a heavy adaptation effort, only to be followed by a heavier daily management burden. His article presents a few practical examples from Germany to illustrate local best practices that already allow German payers to easily dispute direct debits.

James Clark at Pegasytems points out one concern that hasn't been widely publicised around the introduction of the SDD scheme - debit fraud risk - in SEPA Direct Debit: Meeting the Challenge. However, he makes the case that SDD offers benefits to all participants (creditors, debtors and their respective banks) in terms of lower cost, higher STP rates and reduced risk.

Clark says that corporate treasurers need to decide whether they wish to participate in the SEPA scheme from a pre-determined date and that this decision should be undertaken in close collaboration with several banking partners. "The reason for this is straightforward and pragmatic, as the unprecedented volatility of today's financial markets means that the risk of 'putting all one's eggs in one bank's basket' is a much tougher decision than might have been the case just 12 months ago," he says. "At the same time, corporate treasurers will want to understand the pricing impacts in each case, to ensure that the attractive headline of being 'able to do international business at a national price' will in reality deliver the savings indicated."

Payment Services Directive
In his article, 2009: A Good Year for Corporate Users of Payment Services, Tom Buschman from TWIST, the Transaction Workflow Innovation Standards Team which focuses on XML standards, says that the SEPA project has reached the point of no return with the driving force of the PSD, which will be also transposed into national law on 1 November. He says that there is a lot to be learned from other similar initiatives, such as the highly collaborative Australian roadmap for low value payments.

Buschman argues that corporate customers need to proactively ask for harmonised and PSD-updated services in tenders for payment services. "How can they ensure they ask for the right thing and do not push banks towards proprietary and expensive offerings? A good starting point can be a joint review with individual bank providers of the Australian list of high-level requirements. This list covers many of the items embedded in the PSD and points to fairly common requirements across the globe," he says. "Service providers must listen to their corporate clients. In 2009, banks in 29 European countries need to start proactively responding to long-standing corporate customer demands."

Impact of the Credit Crisis
George Ravich, chief marketing officer at Fundtech, made the point in an interview with gtnews that SEPA is "lost in conversation" because a more important conversation is happening – the one about survival. "In good times, there was time to talk about such things as how to get the best out of new regulations, but now there is another conversation happening," he says. He believes that some banks have done a little to make the changes needed for SEPA implementation, but most haven't done enough.

Simon Shephard at ING looks at SEPA and PSD from the perspective of the banks in his article The Impact of the Credit Crisis on SEPA Implementation – and how these new regulations will effectively cost a lot of money to roll out while at the same time cutting revenue across the payments business. "The extra compliance and regulatory pressure will create problems for a number of financial institutions because in order to adapt they will need to invest. But many banks will not want to invest at this time as their margins are being squeezed. At the end of the day, they will be forced to invest in regulatory compliance because it is mandatory, and therefore some investment will be tied up in compliance rather than investing in building the systems and infrastructure they need in order to grow," says Shepard.

He argues that now is the time for banks to reconsider their business model and look to outsource what is not core to their business to other providers. "Many of the smaller banks will be looking at an alternative, such as using a major provider as an agent to handle payments. They will save money by discontinuing investment in their legacy systems and also have a future-proof solution by outsourcing the problem to someone else. A larger bank has the critical mass in terms of volume and, although there will still be the pressure on its margins, getting a greater market share will compensate for reduced margins because it effectively reduces costs per item," he says.

Shephard believes that the payments landscape will not change dramatically in 2009, but that the year will see a continuance of the 'wait and see' approach, until a few financial institutions take the plunge and outsource their payments to another institution.

In his article Carpe Diem: the Business Case for SEPA and the PSD During an Economic Slowdown, Slava Gnevko at AlphaNostrum argues that the business case for both SEPA and PSD must be reviewed because the business cases have evolved under the changing economic conditions. He believes that the deterioration in the European and world economy and decline in the financial services markets can jeopardise the timeline and level of investment in SEPA and PSD.

"It is time for the European Commission and European Central Bank to reinforce the efforts of the national regulators with establishing a strong centre for co-ordination of the pan-European migration," says Gnevko. "The question we all face now is: would regulators be able to pick up the reigns of power and maintain the pace and benefits of migration for SEPA and PSD?"

Conclusion: The Challenges in 2009
As SEPA migration in some countries looks like it may be lapsing due to economic conditions, Paul Styles at ACI Worldwide outlines four main areas that need to be addressed to help SEPA regain some momentum in his article Is Outside Regulation the Answer to a Stagnating SEPA?. He calls on the EPC to bring together all stakeholders in order to move SEPA to the next critical stage; raises the need to set the end date for the retirement of the legacy payment instruments; raises the need for a discussion on how the basic SEPA product can be enhanced without creating market fragmentation; and lastly says that banks need to collaborate with each other more if SEPA is to be a success.

Styles believes that appropriate levels of regulation, administered perhaps by a body such as SWIFT, might just be the right ingredient to ensure that SEPA delivers on its promises. Citi's Mehta also believes that a focussed regulatory and market push, combined with a growing awareness of SEPA benefits among key clients including public sector entities, has the potential to have a significant impact on the pace of SEPA adoption during 2009 and into 2010.

At a time when Charlie McCreevy, European Commissioner for Internal Market and Services, speaking at the EP Committee on Internal Market and Consumer Protection (IMCO) on tackling the crisis, said point blank: "My message to you today is that ... the single market is one of Europe's 'most valuable assets'", the push to make SEPA a reality is top of the political agenda.

In the case of both SEPA products, the key to success is attaching the capabilities that have been created to some customer value. "The industry has not yet got its head around what is the customer proposition is or the customer problem that we are trying to solve," says VocaLink's Taylor. "Rather than starting from a political agenda, we need to move to situation where standardisation on this scale could lead to corporates having visibility of their cash management or liquidity, not country-by-country, but actually pan-European visibility, which would vastly improve their ability to predict their creditworthiness and liquidity and reduce the cost of banking for corporates who wouldn't be forced to operate separate bank accounts and separate infrastructures in separate countries."

First published on www.gtnews.com