Is SEPA a boon or a bane to Banks ?


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Is SEPA a boon or a bane to Banks ?

  1. 1. Is SEPA a Boon or Bane to Banks? Page 1 of 7 Abstract............................................................................ 2 SEPA Compliance – The New Mandate for Banks............................. 2 Key Challenges.................................................................... 4 Conclusion......................................................................... 5 References ........................................................................ 6 About the Author ................................................................. 7 About L&T Infotech .............................................................. 7 contents Is SEPA a Boon or Bane to Banks? A U T H O R : S W A P A N P A L I T
  2. 2. Is SEPA a Boon or Bane to Banks? Page 2 of 7 Abstract Post the global financial crisis, as banks struggle to survive and grow, SEPA presents an impending opportunity to increase their customer footprint. SEPA compliance is becoming a mandate, and while banks have to satisfy a number of requirements to become SEPA- complaint, it is best for them to seek support from external entities to assess their requirements and work out the right strategy for compliance. Transition to SEPA remains the foremost concern today with the European Parliament and EU Council imposing mandatory uptake deadlines for SEPA-compliant Credit Transfers (SCTs) and SEPA-compliant Direct Debits (SDDs). As per the SEPA migration report published by ECB in March 2013, payment service providers are lagging behind with preparations for SCTs and SDDs. While SEPA offers a number of benefits and opportunities, it also brings up a number of issues that banks must deal with. To address these issues, banks will have to effectively collaborate with their customers and accordingly develop innovative products and services that can provide a viable source of income as well as a sustainable competitive advantage. Specifically, banks need to engage with their corporate clients if they are to realize wider opportunities made available by SEPA. SEPA Compliance – The New Mandate for Banks In the aftermath of the global financial crisis, as banks struggle to survive and grow, it has become imperative for them to focus on their business fundamentals like profitability and client relationship management. Hence, banks have increasingly begun looking for ways to reduce operational costs, improve client retention and acquire new customers. In such a scenario, SEPA compliance presents an impending opportunity to increase customer footprint through superior value proposition, lower costs and simplified processes. SEPA or the Single Euro Payments Area is a payment-integration initiative of the European Union for simplification of bank transfers denominated in euros. The project deals with the implementation of the Euro across Europe and consists of a series of initiatives that attempt to eliminate the difference between cross-border and domestic euro payments. In order to accomplish its goal, SEPA has introduced a set of common instruments and infrastructure for retail payments along with a set of rulebooks and frameworks that govern the working of the same. These instruments, infrastructure and standards together allow users to make both domestic and cross-border euro payments across Europe under the same terms and conditions. Under SEPA, it will be possible for users located anywhere in Europe to make euro payments anywhere across Europe using a single bank account and a single set of payment instruments. One of the key benefits that SEPA offers to banks is the ability to use the same instruments and infrastructure to make payments across Europe irrespective of their location within the continent. This means that a bank operating in multiple European countries can now follow a single set of standards for euro payments across all these countries. In other words, all its systems across different European countries can now speak the same language. This standardization and simplification of payment processes can result in huge operational savings. Further, a common set of payment standards also offers an opportunity for banks to expand business and offer their euro services to customers located across Europe. Banks will be able to offer their euro services to anyone in the SEPA region (subject to licenses and regulatory approvals). This in turn will result in higher revenues for the banks and better products and services for end users. Ultimately, it may lead to foreign banks entering new countries, leading to increased competition, improved interest rates for consumers and wider choice of access across Europe.
  3. 3. Is SEPA a Boon or Bane to Banks? Page 3 of 7 Transition to SEPA remains the foremost concern today with the latest SEPA newsletter estimating the share of SEPA-compliant Credit Transfers (SCTs) and SEPA-compliant Direct Debits (SDDs) as a percentage of the total volume of credit transfers and direct debits generated by bank customers at 38.2% and 2.3% respectively. This consistently low uptake record resulted in the European Parliament and EU Council imposing mandatory uptake deadlines for SCTs & SDDs last year. A deadline of 1st February 2014 has been set for Euro area countries while the deadline for member states with other currencies has been set to 31st October 2016. SEPA compliance is a mandate for a bank that wishes to offer euro payment services to customers in a SEPA country with all its payment products and back-office payment processes meeting the new SEPA requirements set out by the SEPA Rulebooks. The following requirements have been defined by the European legislation and SEPA Rulebooks:  Become SEPA Scheme Participant by signing the respective Scheme Adherence Agreement  Become operationally ready to process SEPA compliant payments  Connect to a SEPA-compliant PE-ACH so that the bank is reachable to any other bank in the SEPA region, and similarly, is able to reach out to any other bank in the SEPA region In order to become operationally ready, a Bank needs the following solutions:  Software for processing SEPA Credit Transfer and SEPA Direct Debit payments  Software for converting and validating IBAN and BIC formats  Software for connecting and integrating various stakeholders in the payments value chain In addition to the above, in order to exploit the various benefits that SEPA offers, banks might also opt for the implementation of a payment services hub that would enable them to process all payments from a central location. An AT Kearney study suggests that many banks had initially underestimated the challenge of renewing payment applications with the necessary industrial strength to last. Further, according to the research, most banks today are seeking to strengthen their applications by using converters or are unveiling completely new applications. Also, some banks are taking SEPA as an opportunity to reconsider their payment and collection strategies. In our opinion, in order to fully explore benefits that SEPA can offer, banks should seek external support; a partner capable of studying their requirements, determining their state of readiness, evaluating various strategic options and identifying the right strategy for SEPA compliance. SEPA migration varies from country to country and as per the SEPA migration report published by ECB in March 2013, Payment Service Providers (PSPs) are yet to complete preparations for SCTS and SDDs. Limited progress has been noticed for both, SCTs and SDDs, in making customer servicing channels SEPA-compliant. In fact, progress of preparation for SDDs is even lower than that of SCTs. This is a major area of concern since all payment orders that are not submitted to the respective PSP in the formats stipulated by the SEPA Migration End-date Regulation will be rejected by the PSP. After the migration end date, banks will no longer transfer non-compliant payments to clearing houses and failure to use the SEPA-compliant format will result in unnecessary delays and costs for the bank’s customers.
  4. 4. Is SEPA a Boon or Bane to Banks? Page 4 of 7 Key Challenges Banks implementing SEPA are being confronted with a number of issues today. Major concerns include:  The need to replace revenue lost from lower cross-border transaction charges  Meeting the cost of compliance  Dealing with new competitors In order to address these challenges, banks will have to collaboratively work with their customers and develop innovative products and services that cater to all customer requirements. While banks reconnect with their customers, understand their requirements and address them, they will also have to ensure the new products and services create sustainable competitive advantage and a viable source of income for themselves. Learning the art of effectively cross-selling products to different customer groups will also be very essential. In other words, SEPA is forcing banks to become more innovative and efficient in managing their payments businesses. SEPA offers a plethora of opportunities that enable banks to grab significant corporate market share. Banks can take maximum advantage of the situation to expand their business and cater to customers across Europe while simultaneously reducing costs by using a single set of SEPA instruments and simplified payment processes. Additionally, by offering various value-added services like e-invoicing and e-reconciliation, in conjunction with the SEPA instruments, banks can significantly improve the value proposition of their offerings.
  5. 5. Is SEPA a Boon or Bane to Banks? Page 5 of 7 paymentnotification Debtor Bank CustomerCustomer Creditor Bank paym entnotification ABC Company Country A ABC Comapny Country B Collections management Mandate management e-invoice One or more service providers e-invoice Creditor mandate flow Fund management Money Market Invoice Management SDD Clearing and Settlement SystemReconciliation Service Net Bank e-invoice e-invoice ERP System CRM System A standingorder statement mandate Consider a scenario where a bank offers a number of value-added services like mandate management, invoice processing, payments reconciliation and fund management in addition to basic payments and collections processing in an outsourced payment factory-style setup. In the SEPA world, such an arrangement would not only decrease the corporate burden but would also provide a viable source of income to the bank. Once migration to the new SEPA payment instruments is complete, banks will be able to increasingly shift their focus towards offering such additional optional services that can be built on the foundation of these SEPA instruments. Conclusion SEPA is by no means the end of payment regulation in Europe. Authorities are already planning additional regulations. For example, the Payment Services Directive (PSD) is currently being reviewed by the Commission. SEPA also needs to be leveraged and introduced to new sectors of the economy such as e-commerce and m-payments. This would offer more opportunities for banks to build and offer innovative products and services that will enable them to grow and acquire new customers. Furthermore, such developments will also give a new impetus to SCT and SDD as payment methods and improve their uptake. While ’change’ is soon approaching, Building Societies need to carefully consider their payment strategies against the backdrop of this shifting European landscape.
  6. 6. Is SEPA a Boon or Bane to Banks? Page 6 of 7 Abbreviations and Acronyms EU European Union ECB European Central Bank SEPA Single Euro Payments Area PE-ACH Pan-European Automated Clearing House SCT SEPA-compliant Credit Transfer SDD SEPA-compliant Direct Debit IBAN International Bank Account Number BIC Bank Identifier Code PSP Payment Service Provider PSD Payment Services Directive GUI Graphical User Interface References SEPA Migration Report, ECB, March 2013 Banks Preparing for SEPA, Issues to Be Addressed to Achieve SEPA Compliance, Updated Version, EBA SEPA – Information for IT providers, Version 1.0, September 2009, EPC Are Europe’s Banks ready for SEPA and Beyond, AT Kearney SEPA Newsletter, April 13, EPC SEPA: Reaping the benefits of strategic payments management, CSC
  7. 7. Is SEPA a Boon or Bane to Banks? Page 7 of 7 About the Author Swapan Palit is a Senior Consultant in the payments space with L&T Infotech. He has been with L&T Infotech since 2006 and brings along an overall experience of over 10 years in IT and financial services. He has extensive experience in requirements management and has successfully executed various payment-related assignments. Swapan has an MBA from San Diego State University, USA. He is also an AIPMM Certified Product Manager. About L&T Infotech L&T Infotech is a wholly-owned subsidiary of the USD 14 billion Larsen & Toubro (ranked 9th by Forbes among World’s Most Innovative Companies in a 2012 study of global corporations) which has a presence in construction, engineering, manufacturing and financial services. One of the fastest growing IT Services companies, L&T Infotech is ranked by NASSCOM as the 9th largest software & services exporter from India and among the top 20 IT BPO employers. L&T Infotech provides end-to-end solutions and services in the following verticals: Banking & Financial Services; Insurance; Travel & Logistics, Media & Entertainment, Healthcare, Manufacturing, Energy & Process, Utilities, E&C, Hi-tech & Consumer Electronics, Product Engineering Services (PES), Consumer Packaged Goods, Retail & Pharmaceuticals, Auto & Aerospace, and Industrial Products. L&T Infotech also delivers business solutions to its clients in the following horizontals/service lines: Testing, Mobility, Infrastructure Management System; Business Intelligence/Data Warehousing, SAP, Oracle and Microsoft , Enterprise Integration and Manufacturing Execution Systems, in addition to an innovative CIO-thought partnership program that provides a value- driven edge to clients. L&T Infotech’s horizon is filled with the promise of new and cutting edge offerings in the technology space including an end-to-end cloud computing adoption toolkit and cloud advisory consulting services; enterprise mobility solutions covering a smart access platform; big data advisory services; and in-memory computing. L&T Infotech has developed intellectual properties (IPs) in all the vertical and horizontal service lines and leverages them to provide IP-led solutions. L&T Infotech, headquartered in Mumbai, India, has a global presence across continents. The Company prides itself on a culture of training and mentoring. Coupled with a work ethos that encourages innovation, the Company lists high among the best companies to work for. L&T Infotech is differentiated by its unique Business-to-IT Connect which emerges out of its rich corporate heritage. For more information, visit us at or email us at Follow L&T Infotech on: *All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from L&T Infotech.