Banks awaiting the resolution of the Eurozone crisis or SEPA end-date regulation before putting in place their SEPA migration strategy may find that it is too late, says Marion Kleiss, Senior Product Manager, Financial Institutions, Commerzbank. Certainly, those banks which fail to take action now face new market entrants eating into their payments market share.
There is reluctance among the European banking industry to make efforts to become ready to process standardised European payments prior to the issuance of the Single Euro Payments Area (SEPA) End Date regulation, which promises to outline a precise deadline for migrating domestic payments instruments on to SEPA standards. The hesitancy is highlighted by migration rates, which two years into the project are 20.5% for SEPA Credit Transfers (SCTs) and a very low 0.1% for SEPA Direct Debits (SDDs).
But by focusing solely on SEPA deadlines, financial institutions are looking at the narrow picture. Undoubtedly, SEPA will reshape the market forcing all participants to re-establish their market position. Many banks are therefore failing to acknowledge the opportunity in the creation of new rules and business models brought about by SEPA.
Elsewhere, the volatility and uncertainty in the Eurozone has added to the lack of urgency among financial institutions to migrate over to SEPA payments, with many focusing attentions on their balance sheets rather than on the breadth of their payments offering. The theory that the SEPA vision will not take shape, stemming from concerns over the future viability of the Eurozone, is gravely misplaced, however. Institutions must take note that the advancement towards standardised payments will continue unaffected by the 'financial crisis'. Therefore, banks awaiting developments in the Eurozone are risking their long-term futures.
Inevitably, SEPA migration will entail necessary costs, including administrative expenses, training of staff, and heavy investment in technology with the ability to support SEPA payment instruments. Understandably, some banks may be unable, or perhaps unwilling, to assume these considerable expenses. In these cases, it is imperative that in order to remain competitive, they find a suitable global banking partner which possesses the technological expertise and SEPA know-how to assist them in devising strategies and deploying payments solutions.
Need for a proactive approach
The opportunities afforded by SEPA are numerous – enabling banks to increase efficiency, lower operational costs and improve quality, value and breadth of services offered to the market. Further to this, SEPA offers them the opportunity to consolidate many payment systems, simplifying the number of processes and resources involved.
Yet, many banks have adopted a reactive approach to SEPA migration and run the risk of finding themselves increasingly isolated in a competitive market. Certainly, businesses with international operations – or aspirations of transnational expansion – are likely to become increasingly disillusioned if their bank is unable to provide efficient SEPA payment support. In this situation, banks face two choices: attempt to make up lost ground by hastily implementing SEPA systems (which will incur considerable costs) or face losing business to more forward-looking competitors. Either way, their reputation is likely to be inextricably tarnished.
Given this danger, a strategic approach is needed. It is essential banks realise that once the end-date has been set, there will only be a short period to become SEPA-ready, with no extension provided. For institutions ignoring the issue and failing to act now, the chance to grasp the opportunities afforded by SEPA may already have passed. For instance, if the end-date were to be confirmed as February 2014 (which seems likely), each financial institution would have a transition phase of just 24 months to handle all payments in the SEPA format.
Banks must be proactive and take steps to educate and inform their corporate clients in regards to SEPA payments. They must ensure their clients understand how they can centralise direct debit processing and drive improvements and efficiencies in their treasury and cash management operations, for instance.
Not just the usual suspects
Banks who fail to view SEPA as more than a compliance exercise are vulnerable to the ambitions of competitors. It is noteworthy that competition no longer presents itself solely in the form of banking institutions. The lowering of barriers under SEPA encourages non-bank payments institutions to enter the market, and it is these that may pose the greater threat.
Crucially, these innovative and consumer-focused non-bank institutions will be attracted towards the high-value, high margin SEPA revenue streams. This will mean banks that are unprepared for such fierce competition will have to operate in the least profitable areas of SEPA such as compliance and settlement. Essentially, banks must regard SEPA as a strategic concern, rather than just a regulatory exercise.
Choosing the right banking partner
Choosing a banking partner with the expertise to advise on wider SEPA strategy and adoption is vital considering the complexities of becoming SEPA-ready. Some banks may opt to acquire their own proprietary systems to process payments in-house. However, outsourcing SEPA migration to the right bank with the technological capabilities to offer efficient SEPA credit transfer and direct debit services can minimise costs and risks. Naturally, this would also remove the burden of ongoing system maintenance to comply with SEPA upgrades.
Leading global banks such as Commerzbank have the expertise and experience to advise on the most appropriate SEPA strategy for an institution. They have the capacity to manage the migration and subsequent operation of SEPA payments in a highly efficient manner, which importantly is transparent to clients. Yet there is only a limited amount of resources afforded by such global banks to help smaller financial institutions migrate their payments processing on to SEPA standards. Banks that delay therefore leave themselves at a significant disadvantage. And given the long list of institutions willing to step into their shoes, this lethargy could be detrimental to their future success.