It has not been an easy journey for the SEPA initiative. In truth, SEPA has been dogged by an array of disagreements, issues and confusion. And despite heavy investment from a number of large banks in many European countries, the true benefits of the payment scheme are yet to be seen. So, will the regulatory proposal for end-date implementation mean that the initiative truly gets out of the starting blocks? Also, is SEPA under threat from the Eurozone crisis?
Reachability, efficiency, significant cost reductions and increased competition. These buzzwords were the basis of the payment model that convinced European leaders to embrace SEPA back in 2002. The European Payments Council (EPC) was established, a roadmap to create new pan-European Schemes – the SEPA Credit Transfer (SCT) and the SEPA Direct Debit (SDD) – was agreed, and SEPA was swinging into action.
Fast forward almost a decade and implementation has been worryingly slow. And even as the market awaits an end-date regulation (time of writing is early November), there are a number of substantial challenges that still lie ahead.
A difficult upbringing
SEPA has predominantly been run as a ‘self-regulatory’ project – set up and managed by the EPC, with the strong support of the European Central Bank (ECB) and the European Commission (EC), who saw the value in establishing a standardised system for low value, cross-border and domestic euro payments.
Ruth Wandhöfer, Head of Regulatory & Market Strategy, EMEA, Director at Citi Global Transaction Services says that, from the outset, the EPC’s vision was that this system was not only a cross-border initiative to create a cheaper way of making low value payments but, “It was also an initiative to transform the domestic payment landscape in the Eurozone countries.”
But for many market participants, the promise of SEPA turned out to be more ‘work’ than ‘perk’. To that end, adoption has been one of the main concerns that SEPA has faced since the EPC officially launched the SCT in 2008. To make matters worse, the implementation of the Payment Services Directive (PSD) in November 2009, designed to establish a common, comprehensive set of rules for all electronic payment services in the EU, did little to incentivise the landscape towards SEPA acceptance.
Only a few smaller countries, like Luxembourg, that did not have an alternative national clearing system moved to SEPA immediately, using the pan-European clearing house EBA. However, for the other European countries, despite the legality of the PSD, there was a perception that there was no real need to move if their existing framework was sound.
“The domestic schemes work well today for those customers providing services in their own markets. Proving the value driver for change to these customers is challenging,” agrees Mark Santall, Head of International Payments at Lloyds. The cost of migration and the lack of definite ‘value-add’ for certain payment types has also been reflected by the slow uptake.
A (very) slow burner
As of October 2011, there are over 4,491 SCT scheme participants with only 20% of all euro credit transfers migrated to SCT. Even more dismal figures are reflected in the SDD uptake with 3,912 SDD core and 3,384 SDD B2B scheme participants – yet only about 1% of euro direct debits have thus far migrated to SDD. At this rate of uptake, it would take 30 years to implement SEPA completely.
“Without an end-date, there is no SEPA”
So says Gerard Hartsink, EPC Chair. Discussion around mandatory end-dates has been on-going and after much haranguing, the EC came forward with a proposal for fixing suitable migration deadlines, amending Regulation (EC) No. 924/2009. The proposal was adopted on 16th December 2010 but is currently being negotiated in the European Parliament and Council.
Initially, two separate end-dates were recommended but the market has recently pushed for a single end-date. A final decision is expected to be made by the Plenary of the European Parliament in Strasbourg, early in 2012.
“Initially, two separate end-dates were recommended but the market has recently pushed for a single end-date. A final decision is expected to be made by the Plenary of the European Parliament in Strasbourg, early in 2012.”
The probability is that this decision will establish one mandated implementation date in 2014 (although some banks still believe that there will be two end-dates). Whether or not this occurs in February of that year, or towards the end of 2014 depends on when the decision is actually made. Mark Buitenhek, Global Head of Payments & Cash Management at ING agrees that the creation of this end-date will drive the rate of adoption for SEPA. “What is clear from speaking to a number of our corporates is that they just want certainty. I think the proposed end-date will at least give that certainty and will give the clarity as to whether it is time to invest in system changes or not,” he insists.
Certain financial institutions are also starting to take SEPA implementation more seriously: even though the migration deadline is not officially signed off, the knowledge that there will be an end-date is at least comforting.
“Certain financial institutions are also starting to take SEPA implementation more seriously : even though the migration deadline is not officially signed off, the knowledge that there will be an end-date is at least comforting.”
That said, “Whilst the EU may push for a 2014 deadline, migration is an extremely complex initiative. During this period of global uncertainty, therefore, it’s imperative that the EU works closely with all participant countries to ensure that everyone arrives together”, advises Santall. However, Buitenhek counters that, “We need faster decision-making, particularly in times of crisis. We need to move on.”
The euro debate
As if SEPA didn’t already have enough challenges to contend with, some industry commentators are questioning the achievability of SEPA against a backdrop of sovereign debt and increased country risk within the Eurozone.
Like many issues that have threatened the SEPA concept, the basis of the problems of the euro have the European participants divided in opinion. The ‘nationalists’ feel the crisis was due in part to SEPA not being implemented thus this encourages the drive towards it and the centralists feel that SEPA would get a united currency back on track.
Regardless, the fact remains that the current loan book of the ECB – whose role in the on-going Eurozone crisis is quite significant – is collateralised by bonds that have a lower market value than the loan. The ECB has become highly exposed to struggling euro economies, and with countries such as Greece likely to default again, the risk of substantial losses are high – putting the central bank’s credibility under much strain.
So should the initiative be viewed as ‘a political whim gone out of fashion’ and the last ten years a waste of a decade? For some, a feeling of fear prevails that leaders who initially moulded the foundation of this new payment structure may now ‘jump ship’ at the last moment. For others, the efficiencies that SEPA is designed to bring still carry enough weight, with or without the euro.
Harmonisation… but our way
Differences aside, what is wholly apparent for the future of the payments model, is that everyone must opt for SEPA for the full benefits of the initiative to be realised. But already, countries are putting their own spin on SEPA behind the scenes.
Messaging standardisation using ISO 20022 XML, for example, was a main component of the SEPA vision to create a unified, harmonised European payments environment. As individual countries or infrastructures begin to implement SEPA, variances in the interpretation and usage of these standards are being incorporated.
Finland, for example has wholeheartedly embraced SEPA but the country has augmented the XML payment message – adding a field for ‘payment date’ and extending the length of the remittance field – to make it more workable for its domestic market. Whilst the Finnish changes comply with the EPC’s guidelines on so-called additional optional services (AOS), it means that another financial institution cannot be fully competitive with a Finnish bank for domestic business unless they have implemented the Finnish SEPA solution.
Wandhöfer explains part of the motivation behind these local, so-called ‘mini-SEPAs’: “The varying specifications of the ISO 20022 message standards that have emerged often seem to aim at perpetuating local habits, rather than embracing harmonisation.
“At first sight, some of these variations might look like a positive thing to do in terms of meeting user needs, but what is at risk is severely limiting the benefits of enhanced efficiency, cross-border competition and more choice for customers.”
“At first sight, some of these variations might look like a positive thing to do in terms of meeting user needs, but what is at risk is severely limiting the benefits of enhanced efficiency, cross-border competition and more choice for customers. The only feasible way forward is to work towards the ‘highest common denominator’ in SEPA, and not the lowest, where the latter is a key trigger for increased national add-ons and variations,” she says.
Germany: reluctant to lose its identity
The fact that some countries have raced ahead in the implementation of SEPA comes down to culture for the most part. The countries in the Benelux region, for example, are all within commutable distance, so companies there are used to using cross-border payments: for them, the transaction is the same as a domestic payment. The culture in these countries – how they and their consumers operate – is quite different to that in other European countries such as France, Italy, or Germany for example.
In comparison to Benelux, there is a lower awareness within Germany for all matters to do with SEPA. This seeming reluctance to embrace SEPA may well be influenced by the type of business that Germany undertakes – primarily domestic trade. German politicians felt that when the announcement of mandatory implementation of the IBAN was made (‘IBAN the Terrible’ according to one German headline), there was pressure from certain parts of the domestic industry to try to delay it. This resulted in politicians referring to SEPA on a negative level to appeal to the general public in order to get re-elected. This lack of commitment from a domestic government could only further hinder the SEPA process in Germany.
Like other European countries with an existing domestic direct debit scheme that has been invested in and used for many years, there is very little incentive within Germany to move across to the new payment scheme, pending the mandated end-date. A much divided banking landscape may explain why SEPA implementation has not taken place in Germany to the same degree as other areas in Europe – there are around 35-40% commercial banks and the rest are savings and co-operative banks, which are smaller and would need to find an appropriate and cost-effective way to implement SEPA. “It is difficult for a divided country to look at a pan-European approach: they possibly need to consolidate first for Europe to move on,” says Buitenhek.
It is not all bad news though, many of the German commercial banks have in fact implemented SEPA. Elsewhere, the government unit for processing pensions in Germany already makes use of SEPA: it has implemented a compliant bilateral SEPA clearing process with its local banks (Germany prefers bilateral exchanges as opposed to clearing houses). This pension department is effectively using SEPA transfers at quite high volumes – but these are figures that you can’t see in the statistics, because the ECB only looks at the clearing systems. The banks that are working with this government entity have had to support XML standards.
However, Germany has also added variances to the XML format to adapt to its national market. Changes have been made to the message header to the extent that it is not in line with ISO 20022 standards. This means that the payment message cannot be opened elsewhere – which defeats the purpose of a standardised format. That is not the only problematic additional optional service (AOS) that the Germans have proposed. Richard Martin, Head of Product, Payments and Cash Management at Barclays outlines their latest proposal for SEPA direct debits: “An accelerated Core Scheme clearing cycle D-1, which could result in a two speed DD – how easy is that going to be for the underlying multinational corporate originator to handle with their reconciliation processes?” he wonders.
While Germany may eventually bow down and join its neighbours in this unifying payment scheme, the country looks determined to implement SEPA in its own way for now.
One of the stipulations of the SEPA regulation will be to finally insist banks implement XML, something which many banks have managed to put off doing so far. While listed as a participating SEPA bank, instead of implementing a SEPA solution, they have essentially converted the old MT SWIFT format to accommodate the standard format, instead of internally investing in their own IT XML functionality.
Additionally, there is the separate question of whether corporates will also adopt the ISO 20022 XML standard when initiating SEPA payments via their banks. Wandhöfer believes that everyone needs to find the appropriate solution. For the larger corporates it is much easier as they have existing ERP systems such as SAP versus the SMEs that have proprietary formats. A mapping solution for ten customers using SAP can be fairly straightforward, compared to mapping ten different individual ERP formats of proprietary systems into XML.
“I don’t think corporates should be forced to adopt XML – this should be a business decision.”
“I don’t think corporates should be forced to adopt XML – this should be a business decision,” she states. “However, it would make sense for all banks to be required to be able to handle XML messages from their corporate clients who are ready to do so,” she adds.
But what of these ‘national’ amendments to the XML messages that some countries have taken upon themselves to embed? Surely this ‘tweaking’ of the standardised payment format destroys the initial SEPA harmonisation ideal? Martin Schlageter, Head of Treasury Operations at Roche maintains that the practice does not always reflect the model. “XML is a valid alternative to current standards but the experience in practice is that banks still do require different format layouts and specifications,” he says.
An additional practical challenge around XML is finding the appropriate body that can effectively ‘police’ XML as a standard and maintain consistency. Some argue that the European Commission could emerge as de-facto scheme manager as a consequence of the powers that the forthcoming regulation may give, but is this really fitting from a competition and future innovation perspective?
Aside from XML, another potential consistency pitfall is the discrepancy between the SEPA Rulebook and the current version of the regulation, not least regarding the direct debit mandate flow feature. Direct debit checking could affect straight through processing (STP) issues and the question of corporates being exempt from this feature is still undetermined. Buitenhek feels that a re-evaluation needs to be agreed upon and executed to clarify these inconsistencies. “Having the key processes right is the key to implementing consumer confidence in this product,” he says.
The anticipated publication of the new SEPA Scheme Rulebook in November 2011, reflecting market needs and taking effect in November 2012 may help to instil this confidence by revealing common standards in the development and maturity of the SCT and SDD schemes.
Why make the mistake of stopping here?
Santall is of the opinion that it may be prudent for the European bodies to take an early checkpoint on SEPA implementation, post-regulatory agreement, so that all participants are aligned. “I can see a scenario that this may prove more challenging for some than others,” he predicts.
However, the fact remains that, despite the many delays, the consensus at this year’s SIBOS conference was that SEPA, when finally implemented, would spread globally – payments being a global business. Indeed, in support of this theory, there are banks in geographies outside the euro environment, several African banks for example, that are keenly observing SEPA and its progress towards the implementation of true standards.
“SEPA is important, standardisation is important, but what is even more important is that we are now working towards actually delivering something to the new world.”
Nevertheless, what is also critical in SEPA’s success is to acknowledge how SEPA is still relevant to the world we are living in today. “SEPA is important, standardisation is important, but what is even more important is that we are now working towards actually delivering something to the new world,” believes Buitenhek. So perhaps what is actually required now is re-establishing a commitment to SEPA so that another decade (of indecision and political hesitation) doesn’t pass us by.
At the time of writing, further meetings are taking place between the European Commission, Council and Parliament with a view to agreeing a final version of the SEPA end-date regulation.