SEPA will lead to consolidation and lower profits

Could you explain the origin of the Single Euro Payment Area (SEPA)?

SEPA is a European Union (EU) objective and part of a wider political agenda to create a single market in Europe. The second part of the Lisbon agenda is to make Europe more competitive and create a level playing field. It is important to note that SEPA is not legislation, it is a banking industry solution in response to a challenge from the European Commission. When the Euro was introduced in 2001, it didn’t take down the payment boundaries between the various countries in Europe. The payments systems in Europe are still very different. For example, in France people use cheques extensively, while in the Scandinavian countries and the Netherlands, cheques have been replaced by electronic transfers.

At the moment, you have individual countries with one or more automated clearing houses (ACHs). However in Europe, we won’t need a ACH in every country, arguably, post-SEPA, we will only need one. However, one will not be competitive and as Europe is all about free market forces, this will not happen. We will see mergers, some will go out of business and in the end there will, perhaps, two or three, handling all the clearing.

What will be the consequence of this?

The consequence is that European banks in certain countries will start competing for domestic business outside their home base. Payments in Europe are much more expensive in some countries than in others. This will mean that the prices will fall in the high cost countries and, as a result, some banks will not want to be in the low value payment business because it will be unprofitable for them. Consolidation will favour larger players and we see ourselves as well positioned for SEPA. On 1 January 2008, all banks must be able to receive payments. We are not expecting huge traffic on day one but by 2010 around 80% of all traffic will be in the new instruments.

If you look at the new instruments and look at all the work that needs to be done there are a few things to remember. Around 85% of all transactions in Europe are already “SEPA like”. Of those, around 43% of the transactions need a slight adjustment to become SEPA compliant they will need, perhaps, some additional reconciliation fields or a slight change in the number of clearing days. The rest of the transactions will probably not be converted. In each individual country the national bank associations need to start getting together and figure out how they can go from the old instruments to the new instruments. Some countries will decide to all move a certain day while in other countries banks will have to encourage consumers to move to the new instruments.

What is the relevance of SEPA to Asian companies?

Companies doing business in Europe have previously seen the area as a bunch of countries all doing things differently. Probably, they had an operation in each country in order to collect from consumers and in each country, they would be dealing with different banks and a different set of solutions. Now Asian companies can see Europe as one area and if they are entering Europe, they can operate, collect and do business in Europe from one base. If they are already in Europe operating from multiple countries instead of having each system connecting to a different bank in each country, they will now be able to consolidate their business.

Are there differences in how financial institutions and corporates will benefit from and find challenges with SEPA?

For financial institutions, they need to get ready for SEPA, but that is not the biggest problem they face. The biggest challenge for financial institutions will be maintaining profitability post-SEPA. After SEPA the price for transacting the domestic business will fall in the face of market pressures. In the international business, cross-border payments within Europe will become domestic payments and therefore half the international volume will disappear overnight. So post SEPA, a foreign bank in Europe making money on international payments will only have half the volumes of today. It is a question of making money and people will outsource their payments business because in future they simply will not be able to make money out of payments any more anymore.

In Asia, how is the corporate world reacting to SEPA and what concerns are you hearing from them?

You have to have a certain profile for SEPA to work for you. For companies there will be an investment needed and then there will be a payback of two-to-three years where they will get benefits from better pricing and consolidation of operations. A lot of corporates will have to re-mandate their client base, which is expensive, but if you actually build in moving to SEPA as part of your overall programme, it will work. What I’m telling our corporate clients in Europe is to plan out what they intend to do in their business in the next two years and put SEPA on top of that. If you are upgrading your ERP systems, for example, make sure you include changes necessary for SEPA. The same goes when companies are talking to their clients. Corporates have an obligation to educate their clients, while the banks have an obligation to educate the corporates and their clients.

In Asia, I think it is being seen in two ways. Firstly, banks need to figure out how they are going to get access to SEPA payments. If they have operations in Europe, Asian banks need to figure out how they will make money in the new world and how they have to start talking to people who can help.

From an Asian corporate point of view, if they are no longer doing domestic business in Europe, the transition will be easy. If they are operating in more than one country in Europe they should see this as a way to rationalize their operations. For them to reap the benefits, Asian corporates need to start doing these things now. Some of the reaction in Asia has been that it is only a regulatory thing or a compliance issue, which it is not. When corporates in Asia understand this they start to see how they can restructure their operations, reduce costs and consolidate and conduct business more easily. As a bank, we need to educate our clients and when they see the benefit, SEPA must come to the forefront.

What should Asian corporates be doing to be more prepared for SEPA?

If they are already in Europe, Asian corporates need to have someone on their staff who understands SEPA. They should be getting IBANs on their invoices and they also start figuring out who their big bank relationships are with and talk through their plans. Asian corporates should also start talking to clients about communications and about IT. They should also find out if their industry is going to be a leader or follower with SEPA and they need to get the timing right. Most importantly, the corporates in Asia should make sure that their banks are having detailed discussions with them. This is about all payments in Europe, not just intra-Europe payments.