Banks not ready for Sepa, says report

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PARIS – Business management software provider ILOG has released a new white paper, The Single European Payments Area (Sepa): now and into the future. It assesses the state of readiness for the Single Euro Payments Area initiative across the 31 affected European countries and the steps they are taking towards implementation.

Sepa aims to harmonise national payment systems to provide an efficient and simple way to make cross-border credit transfers, direct debits, and credit and debit card payments in euros from any country in the EU. It comes into force for credit transfers from January 1, 2008, with the hope of attaining critical mass by 2011.

The European Commission is encouraging swift and coherent compliance by member states to the Payment Services Directive, which, by September 1, 2009, will provide the legal foundation for Sepa’s implementation.

The ILOG report underlines some of the operational risks that banks could face as Sepa is implemented. Some of the largest exposures are for banks that do not fall neatly into one of the two categories, which cover firms that carry out many cross-border payments and are implementing Sepa, and firms that handle few cross-border payments and can easily outsource these activities.

Many European institutions, by delaying and avoiding reaction to Sepa, have failed to develop the strategies and instruments necessary for survival in the post-Sepa market. The report highlights the tough choices to be made by these banks, as the costs of compliance (or non-compliance) will hit them hard as Sepa approaches.

Sepa implementation will probably result in a reduction in the number of EU banks, as some institutions fail to adapt, others achieve their goals through mergers and acquisitions, and the biggest banks (who already dominate foreign transactions) consolidate their market presence.

“The opportunity is mainly for large banks that can have a very aggressive strategy, and we will see further consolidation across Europe,” says Jean-Christophe Jardinier, ILOG’s marketing programme manager.

Outsourcing the automated elements of the payments process will provide the lifeline for smaller banks, which will need to focus on developing customer-tailored products and demonstrating Sepa’s benefits to the European consumer.

Organisations might also need to consider outsourcing to provide adequate security. As payment flows are reconfigured across Europe, firms will be exposed to increased risk of financial crime. New models for fraud behaviour will be required.

“You have a very short window to prevent fraud. Both SEPA and the UK’s Faster Payments initiative will have an impact on fraud and the way UK banks should look at fraud management,” said Jardinier.

One potential benefit of automation, with its improved speed and efficiency, relates to corporate payments, and the straight-through processing rate (STP) banks can offer to their corporate clients.

“If we look at the STP rate for bank-to-bank payments, it’s typically above 90%. STP ratios for corporate-to-corporate payments are typically below 40%. There is a tremendous value to be brought to business customers by banks in increasing the STP rate,” said Jardinier.