SEPA: Investing in the future

What strategic considerations and practical choices do banks and corporates need to consider in order to take advantage of the SEPA opportunity?
Written by Naveed Sultan, cash management head, Europe Middle East and Africa, Citigroup Global Transaction Services.

The on-going evolution of SEPA has many banks and corporates asking: ôWhat is the business benefit?ö Banks are grappling with the financial contradiction of dedicating a significant portion of their investment budgets to a project that could reduce revenues while corporates are trying to determine the amount of technology and process changes needed to invest in order to exploit the changes.

What strategic considerations and practical choices do banks and corporates need to consider in order to take advantage of the SEPA opportunity? For both, the issue should not necessarily be how much it is going to invest in SEPA, but rather, how it is going to invest in SEPA.

For banks, the key question is: ôWill the investment be in in-house solutions or partnerships with other banks and service providers involving white labelling, outsourcing, or acquisition?ö The decision should be determined by how a bank wants to invest its time and build its business. If a bank wants to make payments a core competency, then investing in the resources necessary to build the infrastructure would make sense.

Other banks, however, may see SEPA as an opportunity to focus on their client base by delivering a better product capability at a reduced cost. By partnering with larger banks to gain the efficiencies of a pan-European player without rewiring their existing infrastructure, smaller banks can reap the benefits of SEPA by reducing their infrastructure spending to invest in their clients.

A recent McKinsey study estimated that if banks can reduce unit costs to within 20% of the levels achieved by the best institutions in Europe, there is then an additional margin opportunity of Ç9 billion per year. The long-term benefit for all banks is there; it is then determining the right strategy to realise those results.

For corporates, the cost benefit of SEPA is clearer as the initiative is very closely aligned with the goals of most corporate treasurers û simplifying, standardising and centralising financial supply chain management. However, to take advantage of the changes, corporates need to determine the best way to invest in the future while evaluating how to integrate SEPA requirements into current or future ERP systems and financial processes.

Fundamentals that all corporates should consider are embedding the collection and use of BICs and IBANs in sell and buy side processes, engaging technology partners to ensure seamless integration, and consulting with customers and suppliers to ensure all systems and processes are connected end to end.

While the initial financial implications of SEPA may seem daunting for both banks and corporates alike, it is important to take a long-term view and look at the opportunities SEPA presents. It is thus time for banks and corporates to explore these opportunities and to develop a strategy that will deliver a return on investment and yield results.
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