SEPA has been planned for years and is a vital component of political ambitions to create a single financial market in Europe. On paper at least, SEPA is offering real benefits for both the Corporates and consumers, but in reality the lack of a business case for banks has led to minimal activity in SEPA Credit Transfers, since its live date last January.

It was a strange SIBOS, there were many banks announcing SEPA-related initiatives with a number of vendors and with an upbeat message being presented to the media that all in the SEPA world looks rosy.

However, B.I.S.S. Research found that over 60% of software vendors marketing SEPA systems solutions have not yet concluded deals with any banks. There was a notable downbeat message coming from the vast majority of software vendors frustrated by the banks inability or reluctance to conclude purchases of SEPA software. This was a marked changed from last years SIBOS in Boston where there was a real optimism from vendors anticipating a busy year of implementations.

If most banks are developing their own systems solutions, it is a fact well covered up as research shows that even if they have a SEPA project to appease the regulators, they are expending very little energy towards implementation and even less towards offering corporate customers new commercial rates or services.

And is there even a desire for banks to complete SEPA developments, as the likely slashing of IT budgets emanating from the financial crisis will provide a ready-made excuse to can projects?

Without any sanctions yet for non-compliance and unless there is pressure brought upon banks by governments, it’s difficult to see how the situation will change.

Most vendors interviewed by B.I.S.S. Research at SIBOS stated that they found apathy from banks for SEPA Credit Transfers.

Since the live date for SEPA Credit Transfers, the published volumes are a fraction of those predicted last year. There has always been the worry that, there was a lack of any real business case for banks to create a development budget, bar the regulatory necessity and that appears to have been easily avoided. In addition, SEPA Credit Transfers have limited appeal for the Corporates, if they entail more cost in either systems, operations or changes in procedure.

It also appears that only a limited numbers of Corporates are aware of SEPA, with the vast majority oblivious to the benefits of SEPA as their banks have not been actively marketing and selling it to them. This is beginning to look like a Catch 22! As with no commercial basis to determine if Corporates should be using SEPA Credit Transfers, it is certain that they will be unwilling to engage in any in-house changes to systems or procedures.

Why then was SEPA created and implemented as an industry project for the payments industry without first establishing the benefit for both banks and their corporate customers. Making laws is a pointless exercise unless there are definite sanctions for those breaking them.

SEPA has created the environment where banks can change their services and commercial structures, offering improved services and pricing for customers and producing greater liquidity to the EU financial markets and those clients using them. But part of the trouble is the timing, with the financial markets struggling and the banks protecting whatever revenue they can and of course the ease with which banks can avoid change.

So, this apathy and missing business case has been compounded by the lack of demand for SEPA Credit Transfers by the Corporates bringing sales inertia for the software vendors. For some vendors this has brought extreme risk, as they have invested heavily in the development of software. For others the scenario is different as a large number have still not produced workable systems. Many software vendors at SIBOS over the last three years have clearly demonstrated that there has been a severe case of vapourware pervading the exhibition floor. Perhaps SWIFT should only allow tested and approved systems to exhibit?

However, we should not be too quick to denounce these vendors for using the smoke and mirrors style of development, as they have clearly read the lack of demand in the market very well. And some people are willing to believe anything if it comes with a government heading and it is pitched for the greater good of the European Union. But the reality is that there is a chasm between political will and hard-nosed market reality.

Unfortunately for many banks, SEPA is both a threat and an opportunity, with the threat an extremely unwelcome attack on established services and pricing structure with the opportunity restricted to those banks willing to invest heavily in mass change to their operations and services that they hope will equate to increased revenues and an enhanced business position. Not all banks can win and with the market in turmoil not many are willing to take risks, cementing the inertia.

It’s a well-known fact that banks make more money from operational inefficiency in the market and the ineptitude of their customers. SEPA brings efficiencies and cost reductions which appear not to be in the interests of the banks. So the strategy seems to be a crawl towards SEPA implementation, arguing and lobbying for changes and keeping the customer in the dark thus reducing demand.

It also seems that banks are quite willing to risk any possible future sanctions as a collective industry defying regulators and political agencies at the moment, but what if banks breaking regulations suffered tough sanctions? Would this change the banking anarchy in force? Banks publicly proclaim SEPA support but in reality undertake very few practical moves to introduce new services and reduced pricing for the Corporates.

Many of the best software vendors in the payments space are fully aware of these issues and are lobbying where they can to move the market. However, this is extremely difficult from their position and they are reliant on the regulators becoming more visible and active. What is required is a benchmark price set by a regulator, which forces banks to establish a SEPA pricing policy for the corporates at or below the level set. But is this too prescriptive and draconian for a free market or something that would force an unwilling industry to change and offer the customers what is possible and meet the aims of Brussels.

One of the top software vendors in the market is ACI and theirs is not a smoke and mirrors product. They are currently working with a number of banks on developing their SEPA solutions. With a large share of the banking industry as customers, ACI is better placed than most to gauge the true situation in the market. ACI sees the reality of the industry situation and where the banks are placed with their SEPA projects. Craig Ramsey of ACI clearly knows the market conditions and recognises that there must be further discussion of how the basic SEPA product can be enhanced without creating market fragmentation - the very antithesis of SEPA. It is widely accepted that the SEPA instruments fall short of many domestic products in terms of sophistication and functionality. Moreover, additional optional services need to be offered in order to bring the corporates on board.

Ramsey comments, “SEPA started as a framework to benefit corporates and consumers but has morphed into an interbank framework that has been moulded primarily by the banks. As a result, migration to the SEPA instruments has been disappointing to date. Perhaps it's time for an ‘external’ body to help make SEPA a more attractive proposition for corporates. SWIFT, the bank-owned co-operative, is now well placed to work with the banking industry and also with the corporates to help formulate a business case for corporates’ SEPA migration. Such an approach would also help avoid the ‘mini-SEPA’ dreaded by the regulators, where significant regional or country-specific variations exist.

If given the opportunity, SWIFT could develop and promote industry-wide standards and market practices, including a common e-invoicing standard, on top of the new standard SEPA payment instruments. This would help to deliver end-to-end straight-through-processing (STP) for corporates. SWIFT's standards are also global, so the benefits would extend beyond SEPA,” Ramsey concludes “SEPA is a welcome development within the industry and should ultimately make the lives of banks, corporates and consumers easier. However, in order to fulfil its potential, it has become clear that an outside body needs to intervene to ensure that SEPA delivers on its promises. For those that remember, the Heathrow Group stepped into an industry vacuum some years ago - perhaps it's time for SWIFT to do the same with SEPA.”

B.I.S.S. Research is aware that ACI and other software companies are doing their utmost to ensure the market has quality SEPA software and are engaging the banks with thought leadership. But the banks have to play ball and be open to engaging in dialogue with their corporate customers to implement SEPA operations and utilise technology in the best possible way. This is a challenging time for banks as they will have a mountain of new priorities from the financial crisis but SEPA is a long term strategic opportunity that they must understand and action despite the many problems they face.

ACI are one of the software companies able to articulate the long term benefits of SEPA and show that short term risks need to be managed. Banks should include a plan for SEPA to try to gain longer term revenue and enhance their market position. For successful banks the rewards will flow but the danger must be that with current market conditions the chance will be lost.

It would be helpful in the long run, if Banks are forced to implement full SEPA operations but this will need tough sanctions from the Regulators. Otherwise the banks will continue to present a SEPA mirage in the media, giving only the impression of compliance while their eyes are focused elsewhere.    

By Gary Wright, M.S.I.