FINANCIAL TRANSACTIONS IN THE SEPA ZONE INCUR COSTS IN THE BILLIONS 

By Dr. Hubertus von Poser, executive board member at PPI AG

Processing costs prove expensive for banks engaged in these financial transactions. Credit institutions in the SEPA zone expect total costs of almost 7.5 billion Euro each year. This includes costs for transactions, claims and marketing costs as well as employee salaries. This has been revealed by a benchmark study by PPI and ibi research and by an estimate based on the market expertise of PPI consultants. Many of these expenses can be reduced drastically by limiting the number of physical documents and increasing efficiency of expensive SWIFT payments. Compared to the rest of Europe, Great Britain and Ireland, for instance, still see a very high number of cheque deposits, which are expensive to process. This is because while electronic transfers and direct debits only incur costs of approximately two cents per transaction, cheque deposits and paper-based transfers cost between 28 and 92 cents each. SWIFT transfers costs approximately 4.50 Euro each. Brexit also contributes to increased transfer costs in Great Britain.

Great Britain will find itself in a unique situation as a result of Brexit. As Britain is leaving the EU transfer costs will rise. Universal EU regulations, such as the Payment Services Directive in particular, will then no longer apply. What is more, considerable resources will be tied up in the Brexit project – even at banks. This leaves the financial institutions little room to invest in improving efficiency such as optimising financial transactions, for example. However there are significant savings to be made in this regard as the following cost-report from the study shows.

EURO-based transactions in the SEPA zone 

In 2015, there were a total 72.9 billion financial transactions in the SEPA zone. Card payments constituted the majority of transactions at 40.5 percent, with transfers at 20.8 percent and direct debits at 26.1 percent. While the proportion of other transactions including online transactions increased considerably, they only amounted to 4.6 percent. However, 5.6 percent of all transactions still consisted of paper transactions or cheques, resulting in disproportionately high costs. The total expenses for processing of SEPA transfers amounted to 4.99 billion Euro. This includes all staff, resource and IT costs required for processing, the IT infrastructure, and improvements made to these.

The approximately 68.7 billion electronic transactions (transfers, direct debits, card transactions) incur costs of a mere 1.47 billion Euro, an average of around two cents per transaction. Meanwhile paper-based transfer and cheque deposits are the real cost drivers in financial transactions. The 2.66 billion cheque transactions alone which constitute 3.6 percent of all transactions incur a total of 2.68 billion Euro and 53.7 percent of all transaction costs. The two percent of paper-based transfers costs 655 million Euro and make up 13.1 percent of costs incurred. These figures also illustrate where there are savings to be made in SEPA financial transactions. Driving down the frequency of both of these payment methods alone could reduce the cost of financial transactions by around 67 percent.

Cheques still used too often

The number of internet transfers is rapidly increasing, particularly in retail-banking. The number of paper-based transactions is therefore steadily declining. Though in some SEPA countries this feat has been harder to achieve with cheques. The next solution is perhaps to eliminate checks altogether. The implementation of the Eurocheque guarantee in 2001, for example, proved very effective and resulted in a decline in cheque volume. Cheques are almost defunct in Germany (0.1 percent ). In Great Britain and Ireland (United Kingdom) the cheque is alive and well – with its share among financial transactions at around 1.9 percent in 2016. Despite an even higher proportion of cheques being used in France, Malta and Cyprus, this number is too high when compared with the rest of Europe. However it must be noted that the trend is already moving in the right direction in the United Kingdom too: Compared to the previous year, the number of cheques used in financial transactions fell by 0.5 percent. To compare: While in 2002 an average British citizen would deposit 31 cheques a year, by 2008 this number fell to 14. British banks had decided to completely phase out cheque payments by the end of 2018  after a transition period. After a number of objections this will not be implemented, however cheque payment guarantees using a guarantee card were eliminated in 2011.

In total, the 2.66 billion cheque transactions alone, chiefly in France at a total of 3.6 percent of all transactions, amount to 53.7 percent of the 2.68 billion Euro transaction costs. The two percent of paper-based transfers cost 655 million Euro, making up another 13.1 percent of all costs incurred. These figures also illustrate where there are savings to be made in SEPA financial transactions. Driving down the frequency of both of these payment methods alone could reduce the cost of financial transactions by around 67 percent. Although trends suggest that paper-based transactions are on the decline as a result of a rapid increase in online transfers, this feat is obviously far harder to achieve with cheques.

With the introduction of SEPA the number of claims made in the Euro zone has decreased significantly. On average, for every 14,000 payment orders or so, only one results in a claim now. This is especially true of international SEPA refund transactions where the process has become significantly easier. However, processing still incurs total costs of around 190 million Euro, an average of 35 Euro per transaction. The benchmark study revealed that with modern IT infrastructure and targeted process optimisation, costs can be lowered from 60 (worst case scenario pricing structure) to under 20 Euro.

SWIFT financial transactions are on the decline 

Financial transactions using the SWIFT platform includes express financial transactions in Euro via Target and Euro and foreign currency transactions within the SEPA zone as well as transnational, classic foreign transactions. The introduction of SEPA has resulted in a significant decrease in the number of SWIFT-based foreign transactions. Previously making up 1 percent of all payment orders, this slipped to 0.4 percent with the introduction of the SEPA initiative. Nevertheless, the costs for the necessary IT infrastructure could not be reduced. On the contrary, an increase in compliance requirements led to a significant increase in costs. And although the majority of banks made no radical upgrades or replacements to their systems for foreign payments and so avoided having to make additional cost allowances per unit, the costs of foreign transactions are still disproportionately high. They amount to 1.8 billion Euro, 24.3 percent of the total cost of SEPA financial transactions (the sum of processing and marketing costs). On average, each order incurs 4.50 Euro in costs. Furthermore, cheque payments which still make up a high proportion of transactions cost 15 to 18 Euro each. It is assumed for Austria in particular that the costs for completing non-SEPA transactions are relatively low as Austria is traditionally a strong performer in this respect, effecting a lot of transactions with Eastern Europe.

Significant costs are also incurred as a result of claims processing. On average, the number of claims makes up one percent of all orders in foreign transfers and so is significantly higher than the number of claims made in SEPA financial transactions. This is partly due to the consistently poor conditions in the banking infrastructure in many developing countries, particularly in Africa and parts of Asia and South America. The average costs incurred per claim are therefore in the 80 to 90 Euro range.

Marketing costs in the millions 

There are no reliable figures for Germany or Europe to show the number of employees processing financial transactions. To make a conservative estimate, assuming that there is one employee per credit institution who is exclusively responsible for processing financial transactions, which corresponds to roughly 0.25 percent of the total employees of credit institutions, this would easily result in around 1500 employees. Extrapolating the number in Germany for the whole SEPA zone, this would be a total of 6200 employees involved in processing financial transactions throughout the SEPA zone. If the total costs lie somewhere between 100,000 and 110,000 Euro, the marketing costs will then total 630 million Euro.

Total financial transaction costs

According to a relatively precise estimate, SEPA financial transactions made in Euro amount to almost 5 billion Euro. Payments made via the SWIFT platform add a further estimated 1.8 billion Euro. In addition to this there are the marketing costs which according to a rough but likely all too modest estimate come to at least 630 million Euro. This yields total costs of almost 7.5 billion Euro per year. So we are talking about enormous expenses which could be greatly reduced within a few years by taking measures such as reducing the amount of physical documentation – particularly cheques – and increasing the efficiency of very expensive SWIFT payments. In Great Britain in particular there is potential for cost optimisation in the usage of cheques and expensive foreign payments. Furthermore it is necessary to ensure that in spite of Brexit and its associated costs that arrangements are made to enable the optimisation of financial transactions. This comes down to the financial transaction managers!

About the study:

The estimates are based on PPI’s market expertise and on a benchmark study on SEPA financial transactions in Germany. This study was carried out by PPI and ibi research for the year SEPA was introduced. Eight banks, responsible for around 45 percent of all financial transactions effected in Germany, took part in the study.

On this basis we produced an estimation of the total costs of financial transactions for all banks in the SEPA zone. This includes all SEPA transactions as well as all SWIFT transactions within and those made to outside the SEPA zone, also known as foreign transactions. The costs of SEPA transactions made by non-German banks were estimated based on German figures. National differences and circumstances were also taken into account. The costs of SWIFT transactions were estimated based on the transaction costs of a medium-sized to large bank and then extrapolated for Europe. In addition to this there are the marketing costs for financial transactions for which conservative estimates have been made in the absence of statistical data.