SEPA: Time to Light the Fire

The Single Euro Payments Area (SEPA) is having profound implications on a multitude of market participants. Financial institutions, corporations and individuals, as well as the numerous entities and governing bodies, are entrenched in preparation, organization, debate and confusion over what SEPA really means. The underlying issue revolves around the pricing of domestic and cross-border payments, but the implications of SEPA are far-reaching and encompass organizational, political, economic and technical issues.

Although the consequences of SEPA clearly are unique to each of the involved parties, a common theme resounds: SEPA is both present and future, and those not already involved must immediately jump onto the collaborative bandwagon. Failure to be adequately prepared for and involved in SEPA can spell disaster.

Although SEPA can, in fact, bring a myriad of market benefits, banks' payment revenues are at stake. EU Regulation 2560/2001 requires that euro cross-border payments of up to ¤12,500 (approximately U.S. $15,000) be treated the same as domestic payments (this amount increased to ¤50,000 -- approximately U.S. $60,000 -- in January 2006). It does not take long to realize that the healthy revenues associated with cross-border payments have been and will continue to be slashed. This places banks in a new and challenging position -- one that can be quite difficult to overcome given the multitude of factors that are involved. This attack on the bottom line is one that banks will have difficulty overcoming in the short term.

In addition to revenue pressures associated with SEPA, banks will have to fire up their competitive engines. As borders fall, the competitive landscape slowly will enlarge and change. Quick and aggressive responses are called for, and banks need to gear up to climb this mountain. How are financial institutions going to approach these sensitive issues? Are they prepared for the critical steps they need to take? Will these actions be taken in a timely manner?

European banks are, for the most part, aware of the burdens and benefits associated with SEPA. Financial institutions have been planning for SEPA for some time, and most have strategic teams in place in order to accurately understand and plan for the associated goals, challenges and opportunities. However, what banks are actually acting on and how quickly they are prepared to react are open questions.

In addition to ensuring that they can accommodate international bank account numbers (IBANs) and bank identifier codes (BICs), financial institutions need to modify or replace existing infrastructures in order to reduce processing costs -- but these challenges also present an opportunity. While systems replacement certainly is a costly and daunting experience, SEPA is opening up doors that banks may never have considered entering.

Many banks still are riddled with numerous, fragmented legacy systems that may get the job done, but are expensive to maintain and run. These also contribute to lack of automation, integration with processes and optimization of the financial supply chain. Such inefficiencies hinder banks' ability to respond to the requirements of increasingly demanding corporate clients. While plans are in the works to tackle these issues, most banks simply aren't reacting quickly enough to the market shifts and disruptions imposed by SEPA. Financial institutions need to turn planning items into action items and ensure that senior management will strategically guide them to the finish line in a timely manner.

This is easier said than done, however, as the complexities and confusion associated with SEPA have made the process slow going. Still, the dust from this phase is beginning to settle and the situation is starting to come into focus for financial institutions.

Corporate Culture

No doubt, the new directive will have financial institutions scrambling in numerous areas. In addition to strategic planning and taking actionable steps related to systems infrastructure, banks will need to work with and understand a key contributor to the bottom line -- corporate clients. As competition heats up in the banking industry, corporations are realizing the power that they possess. Many large corporations have decided that they will be the ones to control the relationship and are exerting pressure on their financial institutions. With fees already squashed by corporate demands, the pressures of SEPA will place additional stress on banks. In order to level the playing field and ensure that the blows don't hit too hard, banks will need to recognize and work with corporate requirements immediately.

One might think that most corporations have fully planned for and are poised to accept the challenges and absorb the benefits that come along with SEPA. This is simply not the case. Corporations find themselves in a position similar to that of financial institutions, but with different issues to tackle. They are perplexed as to what SEPA really means, and most are not at all sure how they should position themselves and plan for the future.

While SEPA does, in fact, provide a host of benefits to corporations, most have not yet adequately planned or taken the required actions to capitalize on these benefits. Corporations need to stick their necks out and involve themselves in SEPA-related issues. The first step revolves around improving straight-through processing through the use of IBANs and BICs. Additional benefits for proactive corporations include reduced payments costs, the ability to make quicker payments and improvements in automation. Like banks, corporations will need to ensure that they are up to the SEPA challenge, and must immediately work on evolving processes and systems that are tied to payments.

Bank/Client Collaboration

SEPA brings both numerous challenges and numerous parties to the table. Collaboration has thus become a daunting task. Financial institutions, corporations and individuals, as well as the EBA (Euro Banking Association), EPC (European Payments Council) and ECB (European Central Bank), are enmeshed in their respective issues and are having a hard time dealing with the larger, collaborative picture. Additionally, for the most part, banks and corporations are not working together to figure out the challenges and opportunities associated with SEPA.

At the end of the day, SEPA will come down to standards: Standardized payment processing is the name of the game, and it takes cohesiveness and collaboration to light the fire. Leading torchbearers for next-generation, XML-based standards for payment-related transactions include TWIST and SWIFT.

SEPA extends far beyond the intricacies of credit transfers, direct debits and card frameworks. While these all are important aspects of SEPA and are critical parts of the process, there are higher-level issues that need to be dealt with. Reducing processing costs by upgrading or replacing systems, tapping into corporate requirements and demands, and adopting common standards are all part of the bigger picture that will propel banks forward. This nirvana will not be reached overnight, nor will it necessarily be achieved for the 2010 deadline, unless parties can efficiently and systematically diminish confusion and work in unison.