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SEPA: Friend or foe of innovation in Europe?

Alex Mifsud

Alex-MifsudAlex Mifsud is CEO at Ixaris

Europe is firmly on the map as a hub of payments innovation, as a host of new finance companies start to emerge from within the continents burgeoning economies. Take Finovate Europe as an example – initially designed as a small event to showcase the most ground-breaking start-ups in the financial technology space, it has now thrived in just three years to a two-day conference with over sixty companies in attendance, many of which are in the payments sphere.

The Nordics in particular are at the forefront of this movement, with Holvi just one payments success story to come from the region. Holvi is a banking service that uses a single interface to allow its users to manage multiple accounts at once, giving them a clearer picture of their finances. UK-based start up The Currency Cloud is another example of the type of challengers emerging against the traditional landscape. In making international payments cheaper for businesses by offering significantly reduced currency exchange and conversion charges, businesses no longer have to rely on the extortionate rates of the banks.

Regulation: the bigger picture
A joint initiative by the European Commission, European Central Bank and European Payments Council, the Single Euro Payments Area (SEPA) framework was first launched in January 2008. It effectively means that all individuals and businesses falling within the SEPA area (all EU countries including Norway, Iceland and Liechtenstein) will be able to make and receive card and electronic payments in Euro. In creating an integrated euro payments market, SEPA will enable the market to move to a set of common, standardised payment schemes, simplifying how payments are processed across Europe. The SEPA Transfer Credit Scheme was the first aspect of the new regulation to be implemented, enabling service providers to offer a basic credit transfer service in Euros for both single and bulk payments. The SEPA Direct Debit Scheme, launched in November 2009, was next. This created the first payment instrument that could be used for both domestic and cross-border collections in Euros. By this time next year, all non-urgent euro payment schemes will be operating through SEPA in Euro countries, and by October 2016 national migration to SEPA will be initiated for non-euro countries.

Under a general drive to create a uniform European payments market, SEPA has created a fundamentally changed landscape for banks and payments companies in the region. By allowing payment service providers to offer their services across the EU’s borders, SEPA fosters competition, and in turn spurs innovation, in the payment sector. Many believe that the real home-grown factor for innovation on the European payments scene is regulatory change such as SEPA.

The recent MasterCard ruling is another example of how the EU is trying to create a more competitive payments market. Last year the provider was banned from imposing its cross-border multilateral interchange fee (MIF) on the grounds that it breached EU antitrust rules and was unfair to competitors. The ban was in line with the wider EU initiative to create a more unified European Union, and break down barriers to e-commerce, cutting costs for businesses in the EU. Visa and MasterCard, the two largest operators, have since been invited to consider how best to bring the European multilateral interchanges fees in line with competition. In this case, regulation has played a key role in encouraging competition and fostering innovation.

SEPAThere are benefits, but businesses must act quickly
However, regulation is rarely greeted with open arms, and SEPA is no different. Most parties view SEPA as yet another burdensome process, bringing with it costly implementation, a potential drain on company resources, and fears that it will place insurmountable pressure on secure business models – surely this would hinder innovation, not encourage it. However, the most recent World Payments Report found that the opposite was true. Out of the thirty two regulatory initiatives analysed, the report found that sixteen of those imposed had a predominantly positive effect. Those designed to promote competition – by levelling the playing field or boosting social inclusion, were those most likely to drive innovation.

SEPA is in part being implemented to try and foster this EU competition, and in turn, innovation. Not only will it help European businesses to compete by making it simpler and cheaper to send and receive Euro payments, but for larger businesses in particular it will make it much easier to operate on a pan-European basis. Additionally, the foundations laid by SEPA should provide the support needed for new ways of processing payments to emerge, such as electronic and mobile payments. For instance, a report by RBS this year argues that one of the leading innovations to come out of SEPA could be e-invoicing. Cheaper and faster than traditional paper invoicing, such a service would bring greater efficiency to clients and providers.

What next? SEPA and the future of payments
For SEPA to provide the foundation for innovative payment services in Europe, businesses must embrace it. A report released by Steria, the leading provider of IT-enabled business services, concluded that over half of European businesses agree that the SEPA Direct Debit scheme will bring greater benefit to organisations, but if they fail to implement it in time it could become a mammoth task. In failing to allow enough time for implementation companies are running the risk of making potentially costly errors. SEPA will allow businesses to plan ahead and harness greater co-operation between business units – a key benefit in today’s economy. However the Steria report also revealed that as many as a fifth of European businesses were unaware of SEPA direct debit, and just a third of organisations had, or were in the process of migrating – including only 3% in the UK. More than 60% of those UK businesses hadn’t even started to work on migration (December 2012). Additionally, Experian research this week estimated that the potential costs from failing to address data errors in Europe could cost as much as €20bn.

Compliance with ever changing regulation might be an inevitable pain. But implementation doesn’t just have to be about ticking the boxes – it can also offer opportunities for innovation and for gaining competitive advantage. Planning thoroughly and migrating properly will ensure that the benefits available will ultimately outweigh the costs.

About Ixaris
Founded in 2002, Ixaris develops innovative global payment applications based on open-loop (Visa and MasterCard) prepaid card schemes. Headquartered in London, Ixaris has technology and customer operations divisions in Malta. Ixaris is a privately-held company, funded by leading UK institutional investors.

The company makes complex global payments fast, easy and accessible, and its technology enables enterprises within the incentive, travel, market research and financial services industries to send prepaid global payments instantly. The Ixaris brands; Opn and EntroPay, allows companies and third-party developers to create and run their own global payment applications using open-loop virtual or physical cards under the Visa and MasterCard schemes. Opn shields developers from the complexities of global financial services, allowing them to bring solutions to market quickly and cost effectively.

About Alex Mifsud, CEO and co-founder of Ixaris
Alex Mifsud founded Ixaris with colleagues William Lorenz and Damon Hart in 2002. Before Ixaris, Alex worked as a senior consultant in the Cambridge-based technology practice of Arthur D. Little, a global management consultancy. He has lectured in the University of Malta’s Department of Computer Science and Artificial Intelligence.

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