Is SEPA going to ring fence the European payments business and stifle competition between EU banks, opening up opportunities to countries with less regulation and cheaper costs? Could SEPA allow China and other less regulated markets to win business through the back door?

 

Most people will agree that it is desirable for Europe to have a strong regulatory infrastructure, which is client protective and produces an environment of increased value added services. However, could this cause a restriction to winning international business, where other countries open up a more flexible and bespoke opportunity? Markets with limited constraints can sometimes be more attractive when traded off against the cumbersome, heavily regulated and expensive ones.

 

SEPA has many laudable benefits for the European payments industry, including the abolition of the existing, fragmented market for payments and the consolidation of accounts by corporate customers; banks however, regard these as a big threat. Nonetheless all banks have to identify where the big wins will occur and develop their business strategy to be able to take advantage.

 

The reduced latency between payments is greatly reduced and the abolition of value dated payments will certainly increase the competition within the payments industry. This is a good thing and achieves one of the main political objectives set in Brussels. The elimination of cost, or put another way, banking profit centres, which should throw greater emphasis on the ancillary value added services to the customer. Although be aware that the end of free banking is nigh offering the banking industry a counter balance to the potential loss caused by SEPA.

 

The securities industry gains very heavily with SEPA and as MiFID is implemented and the clearing and settlement infrastructures consolidate, it should enable the creation of a genuine DVP (Delivery Verses Payment) capability, which would reduce client and market risk to acceptable proportions. This model looks more advanced than the one in the USA, where immobilisation and batch are key sticking points to true risk reduction.

 

Banks need to incorporate SEPA as soon as possible into their future business strategy, where the creation of real value added client services will become a main stay in retaining clients and winning new ones. Unless all banks are able to adapt to SEPA and concentrate on the positive aspects to their business, it is very likely that countries like China will come up on the rails and grab a large slice of the increasingly global, financial services business. 

 

SEPA is a fundamental ingredient of the new European market, but its implementation has brought forward different views on who benefits. It is true that some banks, who fail to take the positive line and change, will lose out in the end. It’s also true that corporate customers can look forward to a world of consolidated bank accounts, reduced reconciliation, cheaper cross border payments and enhanced banking services. All this in a market where risk reduction is a certainty.

 

Arguably the banking clients will be the biggest winners. Although the end benefits may take some time to filter through, they will assuredly materialise in due course.

 

Although the large payment banks are hardly likely to lose out in the end - they never do - there is a tangible risk for large banking institutions. They need to face up to the long term threat to their business of demanding customers and lowering profit margins as the historical profit gained from banking access to customer free money to zero payment latency. The high processing costs will become industry commoditised and focus banking on the provision of good money value on day deposits for their customers and equally improve good value customer services. It is inconceivable that the leading banking institutions are not aware of the opportunity or the threat that new market regulations produce, but their answers to date remain within the boardroom. Not for long I suspect, as banking competition will explode upon the implementation of the new market laws and regulations.

 

Whatever the post SEPA world looks like, the medium tier two and three banking firms may have most to do, to ensure their business remains profitable. They will have to develop a more imaginative strategy than in the past, as the new order of post SEPA, causes their customers to re-evaluate their banking services.

 

With the threat of China entering the financial services industry via Hong Kong and the mainland continuing its rapid expansion of capabilities, it will be more than likely to win significant global business in the future. If China moves faster in providing real competition in payment services, without the legacy of the European model, they could emerge as a major international centre that would really stir up the industry.

 

Fundtech are taking a very consultative approach to the huge and historical changes that are being implemented. This is a very wise move, as the vast majority appear to be concentrating on the immediate issue of compliance. This is hindering the ability of senior management to see that as the financial services market undergoes the regulatory changes and emerges as an industry far more conscious of customer services, there is a huge opportunity to increase their business via new products, markets and clients. A business strategic plan coupled with technology to move forward from archaic legacy infrastructures and practices would seem a pre requisite! However, concentrating too much on simple compliance will open the opportunity to competition and that may not come from an existing financial services company. Look out for an increase in high street supermarket intrusion into the financial services market place and potentially companies like Google, EBay and other companies that have command of huge databases and the technology to process financial transactions.

 

The suite of Fundtech system solutions appears to cover many of the possible strategic business changes that most of the banks and possibly others will need to implement. The technology is really not in question at this stage, but the boardroom competence in assessing SEPA most certainly is. It’s easy to be negative about changes and to set up barriers to prevent or slow down implementation processes.

 

After all, most changes are nearly always considered to be threats, especially by weak managers, who continue to burden the financial services industry. The positive impacts of SEPA demands a more fertile brain with a greater industry knowledge, which is coupled with a deep understanding of the particular banks’ business and technical environment. It is ironic that Fundtech is already outlining a vision that could be considered farsighted for many banks.

 

Failure by banks to move into a positive frame of mind and concentrate on developing a new business strategy will open the door to their competitors in China and the many other countries eager to move fast and be aggressive.

 

At SIBOS Fundtech was able to present many of the technology solutions that banks need to ensure they play a part in an exciting future. They also demonstrated a greater appreciation of the potential for SEPA than some of the attending banks. It’s a pretty sad day when the software supplier begins to lead the banks and sad to say an indictment of some of today’s banks and their management capability.

 

SEPA is coming in 2008 and there is a shortening time frame for all banks to make plans. The challenge for banks will need to produce a business plan and match it with I.T. development plans, allowing for business continuity in a brand new payments landscape.  They need to build a plan to enhance their value added services to customers and educate them on the new SEPA cards.

 

SEPA XML ISO20022 must be introduced and they must identify the relevant payment system that can communicate with all banks. New SEPA instruments (Credit and Direct Debit) must be incorporated within the system and equally within the banking processes.

 

Fundtech’s consultative approach to selling their products will certainly make them work overtime in the next few years, but this should result in rich rewards with no doubt the big bonuses that come with success.    

 

By Gary Wright