What Does SEPA Signify For The Payments Industry?

If I sound a little skeptical, it’s because I wonder why there is such excitement over the fact, that there is now a final date, via a European Directive, to implement SEPA Credit Transfers and Euro Direct Debits.

I did a quick scan of the recent press around these announcements and summarized some of the more insightful comments by credible industry observers.

• SWIFT: “Even with the end date set, it is likely that the migration will not be homogeneous across Europe.”

 

• Celent: ”In delivering SEPA many banks are potentially signing their own death warrants and paying for the privilege.”

 

• Vocalink: “Phasing out SEPA services”

 

• Celent: “SEPA will lead to a fundamental rebuild of the payments business.”

 

• Euro Commerce: ”SEPA needs a new governance structure.”

 

Given these responses, I asked myself, where does SEPA really fit in the world of global payments?

Regulatory Significance:

Outside of those of us who are “payments junkies” the idea of having to spend more money on a regulatory initiative that most senior bankers believed had already been paid for, is unlikely to result in any positive feed back either from the bosses or from those businesses who will have to forgo new product development due to limited budget and technical resources.

Some of the other regulatory requirements involving payments include:

• Recovery and Resolution Plans (RRP), where the ability for a covered financial institution, to demonstrate that it can separate a significant business or critical economic function, over a 48 hour weekend, will be highly dependent on the decisions taken on the future architecture of their payments system.

 

• Ring Fencing and the need for Operational Subsidiaries. One could speculate that the recent public outcry against UK banks, precipitated by the Libor debacle and failure of RBS to execute payments due to a systems failure could accelerate the implementation of the separation through ring-fencing of the retail and investment banking business in the UK.

 

• Requirements for banks to be able to more effectively measure and manage intraday liquidity and counterparty risk for their own business as well as the risk related to their membership of Financial Market Infrastructures (FMI’s).

 

The priority for more investments in SEPA will certainly not be at the top of the list for many of the banks that will be required to spend billions of dollars on Living Wills compliance.

Business Significance:

The ability of payment executives to respond satisfactorily to the question regarding the business case for further investment in SEPA, will cause problems in many budget meetings which are about to kick off in the next month or so.

The answer to this question may well lay in deciding if SEPA compliance and the ability to generate appropriate returns from these investments have any significant relationship. Based on the comments I have read, I would say that any payments executive committing significant new revenues from SEPA is a very brave person.

SWIFT speaks of: “problems in cross border direct debits for Euro wide collections.”

Euro Commerce points out that the card issues have not been solved. In particular as it relates to multilateral interchange fees (MIF)

While Europe is discussing where mcom, and ecom fit into the SEPA framework, mcom players in the emerging markets are innovating at a pace which may well result in final decisions in Europe being obsolete from a market perspective by the time they are agreed to by all stakeholders.

While most of us agree that we are living in a world where technology, in the words of Tom Friedman, makes the world flat, why is the discussion on mcom and ecom a SEPA issue rather than an opportunity to focus on global growth through, global interoperability?

Payments Infrastructure Significance:

And so back to my opening comment on Silo Engineered Payments Approach.

I would propose that the industries approach to payments is a mirror reflection of the way in which payments are organized in the banking community. We have consumer payments, corporate payments, card payments and cash; all usually sitting within different profit centers and businesses. Where there is a central payments function it usually is a cost center with little influence on the product areas.

Assuming this to be somewhat reflective of the industries major players, I believe that the individuals representing the banks on the various SEPA committees are more likely to come from the Global Transaction Banking groups than the card business.

There are many experts in the payments world who might agree that the historical segmentation of the payments market into, consumer and corporate or high value and low value, does little to help innovation. A strong argument could be made that the future clearing and settlement infrastructure supporting global payments will be a ubiquitous, real time, multicurrency, RTGS system supporting all payment types.

In fact I would propose that Faster Payments in the UK has most of this infrastructure already built. With the recent announcement of mobile payments being available through the scheme, the ability to provide account-to-account transfers at point of sale will put pressure on the interchange model and perhaps be the impetus for the silos to be broken.

One can only hope.

Colin Klipin, Managing Partner, Global Economics Group. Colin is a seasoned senior consulting and banking executive, with broad international financial services experience. He is recognized as an industry expert in the area of Global Payments and has held board directorships in both private and public sector payments organizations.