Euro de change

A Roundtable with Capgemini, LogicaCMG, and Clear2Pay

Aiming to achieve a highly standardised and integrated payments environment that will enable customers to reap the full benefits of the single currency and facilitate pan-European business and consumer activities.

The Single European Payments Area (SEPA) represents big challenges and, for some, big benefits. As a cross-industry movement, SEPA’s stakeholders include everyone associated with the sending and receiving of payments – from the European Commission, the Central Bank, the European Payments Council as well as the private sector, operators and government authorities. Everyone understands they cannot avoid the issue, but with the 2008 deadline – by which time banks must be able to offer customers the ability to make SEPA compliant payments – fast approaching, there is still much to be done.

Business Management invited three industry experts with key insight into the requirements and implications of SEPA compliance to discuss the issue in more detail.

The Experts:
Bertrand Lavayssière, Global Financial Service Leader, Capgemini
Simon Bailey, Director of Payments, Global Financial Services, LogicaCMG
Michel Akkermans, Chairman and CEO, Clear2Pay

BM. What are the likely opportunities and practical implications of SEPA for European financial institutions?
BL. The opportunities are linked to the risks. Financial institutions should, for example, rethink their payment offering and their value chain, streamline costs, and look to potentially offer new services to third parties, such as insourcing. Looking beyond the 2008 compliance deadline, there will be also practical implications for financial institutions as a result of changes in their business models by 2010. This impact analysis and strategic plan should address the change in the revenue and costs models. More detailed analyses of the possible impact and an overview of alternative solutions can be found in the World Payment Reports 2005 and 2006, respectively.

SB. When it comes to migration from national to European instruments across the eurozone, challenges facing banking groups include the affordability of being in payments processing services, and whether scale economies of payments processing can be met from consolidation within the banks itself. If not, could scale be achieved from external market share that is won/acquired, and is there a graceful exit strategy that protects the core client relationships and banks own regulatory position?

The opportunities in a single market for payments across Europe are extremely wide, and there is an urgent need for a longer-term strategy beyond the 2008 deadline. There is real potential for banks to create and sell wider services, such as e-invoicing and related AR/AP automation services, to clients, especially in the corporate and business sector, for whom there is huge potential value. However, it’s less apparent if any one bank could provide the interoperability and reach necessary to ensure value to corporate clients.

Practical challenges remain in coordinating and managing the end-to-end payments processing business across banking groups to create and develop a core infrastructure service that meets the needs of internal and external stakeholders. This internally-focused ‘shared service centre’ approach is a precursor to effective selection of sourcing models for the group that reflect the business value generated by these core banking services.

The relationship between card services, potential for card account-based market entry strategies and the effect on treasury operations of consolidation of high value payments infrastructures with the completion of Target2 migration, all present choices and challenges to banks.

MA. The practical implications will drive down revenue from payment services as banks know them today. Banks will therefore need to find ways to drive down the cost by increasing straight through processing (STP) at a fast rate.

Banks will also need to find alternative income, for example by offering value-added services to their (corporate) clients. Repairing payments from those that are not STP to STP is one example.

The cost of realizing the benefits of SEPA are likely to be high. As a result, the big players in the industry will have a natural advantage, while smaller players will have to choose their partners with care, perhaps even outsourcing payments processing altogether to a larger bank.

Is the new legal framework really necessary to create and efficient EU payments market?
BL. Yes, certainly, because of the legacy legal systems and the embedded local specificities on payment instruments definitions, transfer of ownership, reporting authorities, and the discrepancies in the commercial laws logic and practices. In general, payment is for concluding a trade of any kind.

SB. The Payments Services Directive is intended to encourage the banking industry to adopt efficient and common payments instruments, both in terms of the core European payments capability and to meet the wider needs of users of payments services. But legislation brings complex risks – the legal constraints and the acceptance or encouragement of alternative forms of commercial structure to meet them is both a threat and an opportunity for the industry.

The threat lies in creating entities under the PSD with structural benefits in terms of operating costs and regulatory overhead, while the opportunity is to become or out-compete these new entities, whilst protecting core bank franchise and extending the market offerings into wider elements of the payments value chain.

In markets with so-called natural monopolies, regulation can provide the overall framework to enable the market function efficiently, but detailed regulatory controls on the functioning of the market may be burdensome.

MA. The legal framework creates an environment in which new entrants can find easier entry into the market, which is likely to force many existing players to take action. This might mean protecting their market with a better service offering in terns of either price or service levels or starting up alliances and activities in new markets. Therefore, by removing the various obstacles, there will be a natural move towards innovation for all players involved.

Regulatory measures, however unwelcome they may be at the time, can often turn out to be a blessing in disguise for banks. There is a real possibility and opportunity to turn SEPA compliancy into a benefit for banks. It will often drive action at a much faster pace, as it creates the necessary ‘burning platform’ for change (consider, for example, Bolkestein regulation on domestic versus international Euro payments).

Do corporate customers want anything more than standardized interfaces with their financial service providers? If their banks are doing a good job, should they care about market infrastructure?
MA. Ultimately, corporate customers want traceability, visibility and choice. To a corporate, straight through processing means more than just the processing of the payment inside the banking channel; it includes the matching up of those with account receivables.

Market infrastructures are therefore important to corporate customers, as the choice of market infrastructure drives the time between debit and credit. So corporate customers should, and do, care about market infrastructures.

BL. They certainly do want more than this. Corporates want the ability to easily consolidate their financial and cash position, both in AR, AP and on the bank side. They want money to flow easily without the constraint of always having a bank account in each and every country, and they want to manage their cash position fast and efficiently. They also dream of a unique set of commercial conditions (in the broad sense) that would allow them to streamline their management and, ultimately, reduce costs.

In response to the second question, if corporates can avoid paying a fee to a bank, and the market infrastructure (such as MACUG) allows that, of course they’ll do so. It’s always wise to avoid an intermediary if the added value cannot be measured. However, the question can also be answered the other way around – if automated clearing houses (ACH) operate on an independent commercial way, they will develop services on behalf of the corporates. A direct commercial relationship between a corporate and the ACH is therefore an option. Services that can be offered include direct debits and invoicing services. Denmark is a very good example of this.

The importance of this question is in a changing competitive environment, in particular between banks and ACHs. Banks will offer more active insourcing services on a larger scale and, as such, will become competitors for internal clearing for ACHs. The latter will also offer insourcing for banks’ back-office processes (as in the German Postbank, for example). However, the ACHs will also develop direct commercial relationships with corporates, so I’d advise corporates to anticipate these developments.

SB. Good question, and the simple answer is, no, they don’t care about payments provided they are fast, safe, efficient and cost-effective. Therefore, they certainly don’t care about the infrastructure, especially where payments are submitted and received from banks rather than the infrastructure itself.

Standardisation clearly helps corporates to switch banks and, therefore, to ensure competitive pricing, but decisions about payments processing are not based only on the cost of the specific offering; availability of credit, length of relationship and other factors are equally significant.

Corporates should not – and in the vast majority of cases do not – care about market infrastructure. However, they do care that it enables predictable services levels, the option of real-time payments at reasonable cost, transparency of costs and prices, competition between payments services vendors and, ideally, the ability to understand what a payment is for, when it will arrive (or has been sent), that it has been processed (or stopped) and to integrate this seamlessly into their existing AR/AP operations and their cash management/treasury systems.

In card payments acquisition, there is perhaps less evidence of a broader agenda in payments processing relationships. Merchants may not care who handles their payments transactions and are used to the concept of international brands and schemes enabling effective payments. A substantial market for merchant acquiring could emerge from the SEPA Card Framework changes.

Do you see consolidation among clearing infrastructures as a condition or a consequence of an efficient SEPA?
SB. Personally, I find such internally-focused debate sterile and a diversion. How the industry delivers a common infrastructure across Europe is of considerably less value and interest than the fact that it does, what that means and who will make it happen. I believe that as long as it works efficiently and safely nobody really cares.

Massive overcapacity and needless duplication of function within the infrastructure is likely to increase costs to the banks that own these infrastructures and thus indirectly to those using payments services. It may also be difficult to offer predictable and consistent pricing and services in the event that there remain a large number of providers with similar, but slightly differing, offerings, whose hours of operation are not consistent and whose pricing models vary.

Institutions with heavy investment across many of these payments clearing operations are likely to be wondering how to extract value and limit costs in the next steps of consolidation. Some may also be questioning the need for clearing, given the consolidation in payments instruments and the preponderance of large players, both in national contexts and increasingly across national borders in the future. This might direct large groups to alternative approaches to clearing, based on direct relationships with high volume counterparties.

BL. Consolidation is a consequence because of the volume game. Furthermore, bank consolidation could result in the ‘on us’ activities being widely spread, meaning less business for current ACHs. Currently, the game is far from over and all options are open.

There will be substantial consolidation among ACHs; a decrease to between three and five is often mentioned in the marketplace, although I believe five to 10 is more likely. The volume effects allows for this number of ACHs, because volumes higher than 10-15 billion transactions p.a. do not contribute substantially to lower cost per transaction.

Secondly, the competition will not only be over price (determined by volume), but will also be determined by value-added services. In that respect, there are a variety of services that can be provided more cost-efficiently if provided by the ACH rather than by a bank itself. Examples of this include the development and maintenance of websites (channels on average take 50 percent of the cost per transaction), a repository of transactions (a legal requirement for all banks is to store this information of payments transactions during many years), and anti-money laundering (many banks have implemented systems which try to identify suspicious transactions based on pattern recognition. This can be done much more efficient on the ACH level).

MA. The need for processing volume to support the cost of implementation will drive consolidation. However, consolidations will not necessary group current clearing centers. Large financial institutions with large volumes of transactions might consolidate the payment processing on a bilateral level in order to reduce their processing costs and dependency on other organisations. Ultimately, clearing centres, like banks, are commercial operations that will follow and execute their own strategy, the market being just one influencer.

Is enough effort by all concerned parties going into ensuring interoperability among existing clearing systems?
BL. Yes and no, depending on the definition of ‘interoperability’ and the expectations on the volume that can be exchanged. The answer would be yes for low volume – for example, the EBA can offer that and bilateral agreements (with National Central banks agreements) can do it. The answer, however, is no for large volume transactions (above €10 billion), as the legal framework doesn’t yet exist.

This question can only really be answered in relation to what you might expect as ‘enough effort’. Due to the intensity of the discussions surrounding the rulebooks and the new legal framework, which in itself was a good thing, there is already a substantial delay in the final publication of all the terms and conditions of SEPA. These terms and conditions are very lenient, which is the reason behind much of the discussion about how to further drive development of real useable SEPA products. This leads to a situation where compliance is the maximum that one can expect on the 2008 deadline. So, yes, the effort of approaches towards SEPA is at this maximum expected and defined by the banks and the EC.

SB. I don’t believe enough effort is going into interoperability, full stop. Whether there is one infrastructure or 400, the issue of end-to-end, account-to-account transparency of payments operations has simply not yet been systemically addressed. The creation of schemes and rules is a precursor to these assurances and the risk currently is that these may be open to interpretation – i.e. implementation by specific banks, groups of banks or countries could vary.

The question is how would this be mitigated in the current approach? Who owns this issue in the industry, who is managing the risk, and with what resources? And, if it isn’t done, what is the potential impact on the industry, its leaders and the response from regulators and legislators?

Added complexity comes from the ability to create additional optional services – where core SEPA services are extended to provide added value for specific groups of banks. So, not only is the core not subject to an end-to-end test program against pre-agreed and provable requisite, but each participant is also able to add to this core (with others) to meet wider needs in their clients or amongst their counterparties. Now pick the working bits out of that across 310 million people, with 365 million payments accounts processing 171 million payments per day through 6400 banks. Even more significantly, work out what went wrong after the initial implementation, who needs to change, how and when they will do so and how to work around the initial state.

The key challenge is delivery, on time, of an infrastructure that works end-to-end across all banks, countries and euro denominated accounts. The opportunities in this timeframe are therefore limited given the changes needed.

One of the only potential benefits for banks is creating and marketing propositions to those market segments for whom the first step of migration has value, such as those with substantial euro payments volume. With the variation in payments pricing across the euro zone, a further potential opportunity exists for relatively low cost providers of payments to target those countries with expensive payments services.

Merely to meet the deadlines, banks need to act very quickly. An essential first step for banks with European scale and reach will be management of group-wide programs, with clear ownership and governance. They then need to develop a longer-term strategy for their position in the European payments landscape, to enable short-term decisions on implementation planning. Thirdly, banks must decide whether to adapt existing processes and systems to meet changing needs or seek external partners to assist them.

Banks need to consider what forms of partnership and supply best mitigate the risk of delivery, maximise potential for value creation and position them for their future development. We believe this requires a combination of practical solutions, strategic context, depth of experience across the payments business and proven delivery capability.

Serving over 700 clients worldwide, including some of the world’s leading financial institutions, Lavayssière has shown a commitment to building long-term relationships through account management and the development of leading-edge offerings. Having established five centres of excellence in financial services for developing and driving solutions in retail banking, insurance, wealth management, payments and compliance and risk, Capgemini’s solutions have been recognised in several leading industry awards.

Previously, Lavayssière was part of Capgemini’s management team in charge of the financial services sector for France, and tthe global leader for the Financial Services Global Market Team at Gemini Consulting. His extensive experience in this industry is due to his nearly 20 years of work in Consulting and IT spanning three continents.

Michel Akkermans is Chairman and CEO of Clear2Pay, an innovative e-finance company focused on delivering globally applicable solutions for secure, timely electronic payments. A proven pioneer in the world of e-finance, in 1989 Akkermans founded FICS, a leading software provider in the field of online banking and regulatory financial reporting. Under his leadership as Chairman and CEO, FICS grew to employ over 700 employees worldwide and achieved revenues in excess of US$70 million. Prior to his foundation of FICS, Akkermans held management positions in a series of international banks, including Morgan Guaranty Trust and Continental Bank, and subsequently for international consulting companies. A visionary in the new financial dynamics, he is a frequent keynote speaker at industry-led events.
In addition to his chief executive role at Clear2Pay, Akkermans is advisor at the venture capital fund Gimv, and holds a non-executive board position at Capco, a leading globally-operating provider to the financial services industry and the listed ‘privak’ Quest for Growth, a Belgium private equity investment fund.

Simon Bailey has over 19 years of experience with retail and wholesale banking, payments and electronic delivery systems internationally. As Director of Payments, Global Financial Services, he is responsible for marketing within LogicaCMG’s global financial services business.

Bailey’s experience spans sales and marketing, and consultancy and business management, both within innovative e-commerce start-ups and large technology service providers. He has solution experience of a wide range of traditional and internet-based payments systems and has most recently been involved in the growing compliance and operational risk issues arisingfrom regulatory change.