Mark Dunleavy looks at how EU rules under SEPA are pushing banks to improve payment services to companies. While compliance issues may have been tackled, solid solutions still need to be developed and there remain idiosyncrasies.

The relatively calm reception that has greeted the Single European Payments Area (SEPA) since its introduction on 28 January 2008 brings to mind the image of a gliding swan. What seems serene on the surface actually conceals a lot of hard work.

When plans for SEPA were finalised by European Union (EU) finance ministers in May 2007, it was claimed that its creation would liberate commerce in the EU, saving its combined economies between €50m and €100m every year. Both businesses and consumers welcomed the reduction in red tape that came with being able to make and receive payments across international boundaries from their domestic bank accounts.

A major SEPA 'winner' would, for example, be an import/export company operating in the Euro zone, which could now consolidate its existing bank accounts as it no longer needed to maintain accounts abroad.

Compliance, but what next?

The resulting picture for the banks is much more complex. Coming after a decade of near-constant legislative changes, it is no surprise that many banks have exhibited signs of SEPA fatigue, electing to modify their internal systems to reach 'just over the line' compliance. While such solutions are not efficient in the long-term they do achieve one important short-term aim: buy an organisation time until it can adopt the right platform to meet its ongoing needs.

How the credit crunch will impact future and ongoing development projects is open to debate.

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The first stage of SEPA may have gone live this year, but European banks must still comply with the Payment Services Directive (PSD) and SEPA direct debits (SDDs). Here their greatest challenge is dealing with a complex system of disparate parts across multiple formats, which isn't scalable as the financial services market becomes increasingly globalised and the sector faces another round of mergers and acquisitions. In such an environment, the natural inclination among banks is to spend less on processes, when in fact this needs to be balanced with investment to enhance them.

How we can arrive at such a balance is of particular concern to mid-tier banks, which have fewer resources to adapt their systems to the changes required by SEPA. Larger banks, however, have already committed substantial investment to meeting the needs of corporate customers in the post-SEPA world, recognising that it may bring other related business opportunities. A standardised pan-EU payment system is not only more cost effective for client businesses, but in time could also allow the larger banks to develop payment platforms which can then be sold on to their smaller counterparts.

As economies of scale become more important, this may result in increased market consolidation, perhaps to the point where the bulk of payments made within the EU are handled by between as few as 20 to 30 banks.

The quest for data value

The key question here is when and by whom will these platforms be developed. It also goes some way to explaining why banks may have been content to focus their efforts on achieving compliance rather than gaining efficiencies in SEPA's first year. Quite simply, the banks are likely to be using this time to identify the best-of-breed solution and committing budget to implement more beneficial changes from 2009. There is a growing demand from financial services providers that have identified investment in technologies such as data integration as a key part of making their payment platforms more efficient. These payment platforms use our technologies to make them more flexible to facilitate rapid and cost effective new client on-boarding. There is also a drive to turn them into revenue streams in their own right over time.

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Another driver towards investments that can reduce payment processing costs is the will to engage more effectively with major multinationals. These large companies are already very proficient in processing international payments effectively. Their efficient local collection processes typically ensure maximum liquidity, meaning that they already effectively have their own version of SEPA. This does not mean that multinationals will be able to ignore the SEPA standard altogether: they will still have to comply in the long term. The speed with which they move towards it, however, depends on whether the banks can persuade them that SEPA-compliant processes are cheaper and more efficient than their own.

Banks have the opportunity to position themselves as being an integral part of the SEPA forward-planning process, which means establishing themselves as corporations' preferred service partners. This will then allow them to reap the rewards of repeat revenue. By taking a consultative view, for example, and advising multinationals to align SEPA practices with their existing investment cycles, banks can help their commercial customers to better absorb the impact associated with moving to a new payment platform.

Next steps for SEPA

While business opportunities are beginning to emerge in the private sector through SEPA, there is continued uncertainty as to how it will impact on payments processed by public sector organisations. There is a certain irony in that even though European governments regard SEPA as a victory in terms of opening up the payment market, it is not yet possible for banks to tender for the payments business of government departments and their related institutions. These organisations handle vast numbers of electronic payments on a daily basis, and the banks' inability to access this business puts an upper limit on the adoption of SEPA-compliant processes. How governments, public sector organisations and banks work together to move from the current situation towards a common standard will play a critical role in determining SEPA's ultimate success.

The fact is that there is no going back from SEPA. A necessary response to doing business in a globalised world, its creation has presented financial services providers with a number of challenges as well as new business opportunities and, perhaps, the chance to rationalise certain non-core services. Many banks may have only made baby steps over the compliance line so far, but this is about to change, transforming the way that businesses and banks process payments forever.

Mark Dunleavy is the financial services manager of data integration specialist, Informatica [4].