After demolishing trade barriers for everything from melons to machine tools, the European Commission has financial services firmly in its sights. Its Single Euro Payments Area initiative – SEPA – aims to turn fragmented national markets for payments processing into a single domestic market across all member states. The objective is to give consumers a better deal by promoting competition on a Europe-wide scale, with more choice, more transparency of pricing, greater efficiency and lower costs, writes Liz Benison Vice President – Global Director of Operations, aqt the Capgemini Financial Services Business Unit.
It is clear that for the banking sector SEPA will be one of the biggest challenges of recent decades. But its impact is by no means limited to banks and other financial institutions. Major businesses in all sectors – manufacturing, retailing, telecommunications, for example – also need to be aware of these developments, and of the opportunities they offer for saving very significant sums of money. The same applies to the public sector. Any government department or national, regional or local authority with a significant payments regime will be impacted – even if payments are largely or wholly domestic.
SEPA also aimsto benefit private consumers who need to move funds around Europe for whatever reason – planning a holiday, buying a house, taking out insurance, opening a savings account – and who are looking for a good choice of low-cost ways to handle the transactions involved.
So how ready is the European financial services industry in general, and UK banks in particular, for the challenge? Given that Phase 1 of SEPA is about to pass into UK law via the Payment Services Directive (PSD) in November, the question is both urgent and topical. Some important answers can be found in the publication, launched in September 2009 of the latest World Payments Report, an annual report based on interviews with major banks and their leading corporate clients, produced by Capgemini in collaboration with the European Financial Management & Marketing Association (EFMA) and RBS. (The full report is available free of charge at www.wpr09.com)
The report shows that despite the worldwide credit crunch, the political drive for a unified payments system across Europe has remained strong in 2009, and the EC’s timetable to achieve that aim has remained aggressive. However responding to such profound change within the anticipated timescale is clearly a major challenge for UK banks. And competition is making that challenge more acute. Competitors and potential competitors are hungrily eyeing the profit potential of the European payments processing market – estimated to be worth up to €100 billion per annum in throughput terms – making it even more important for established players to respond urgently.
Indeed some competitors have already gone far beyond mere contemplation of the market potential of SEPA. A few European banks are known to have already made major investments in new IT systems designed to exploit the potential of an open European market in payments processing. On top of that, competition from new entrants is also a far-from-remote possibility, with famous-name retailers and telecommunications companies known to be studying ways of getting in on the act – in some cases by focussing 100 per cent on payments processing, with front and back office operations geared solely to that market. A third threat comes from Asia, where huge innovation in financial processing could provide quick and easy entry into some of the more complacent corners of European markets
What will be the net result of all these impending changes? Many expert commentators are making the somewhat paradoxical (but in my view correct) prediction that increased competition will lead not to more players, but to increased concentration of the market in the hands of a small number of highly efficient ones. One prediction is that in five to seven years’ time, we will see just 30 organisations winning 80 per cent of the European payments processing market – a dramatic reduction from the 6,000 banks currently active in this market.
Clearly there is a massive window of opportunity that is still open for banks to make their choice. Do they want to be major players in European payments processing? Or are they content to see that profitable business snatched by their bolder and more innovative competitors? The CIO is central to this decision, since the new SEPA world requires a very significant investment in IT – probably of the order of tens of millions of pounds. The new infrastructure not only needs to be SEPA-compliant, it also needs to handle major increases in transaction volumes and the smooth onboarding of accounts and transactions from those institutions who have been less energetic about investing in SEPA and its opportunities.
However, for those reluctant to undertake massive upfront investments, various forms of partnering or outsourcing (of IT, business processes, or both – and with other financial institutions or specialist service companies) are also viable possibilities. A number of conversations are known to be taking place between major players involving a variety of different partnering or outsourcing arrangements.
Many CIOs, not only in the UK financial sector, but in all UK organisations involved in large-scale payments processing, will need to keep a close watch on the SEPA initiative as it develops and is translated into domestic law. There are huge opportunities and huge threats. And inevitably, for an activity with systems efficiency and flexibility at its heart, CIOs will play a crucial role in the success or otherwise of their own organisation in this brave new European world.
Read Liz Benison’s analysis of the impact on CIOs of the European Solvency II regulations.