Treasury Today Country Profiles in association with Citi
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September 2006

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The problem with SEPA

We wrote an editorial about SEPA – the Single Euro Payment Area – in May. It seems appropriate to return to the subject at this time as there are so many articles and conference presentations on the subject and every supplier is talking about being SEPA compliant.

In this edition of Treasury Today we feature a very interesting discussion between leading banking industry experts on SEPA and what it means for corporates. One of the most noteworthy conclusions of this discussion is that SEPA can be seen as a solution looking for a problem.

There is a problem, no one doubts that. Cross-border payments in Europe are expensive and are handled inefficiently by the banking industry. However, these cross-border payments are also a very small percentage, perhaps 2-3%, of the overall payment volumes in Europe. Domestic payments account for the rest of the payment traffic and these are handled in each country on domestic payment systems.

SEPA is a solution forced on the European banking industry by the European Commission. It seeks to establish efficient crossborder payment systems on to which all payments will be migrated, regardless of whether they are cross-border or not. At first glance, this seems a simple and logical idea since this would provide volume to the new systems with all the economies of scale.

But there is a problem with this solution. The new systems in their basic form have been built to the lowest common denominator and are not as feature rich as the existing systems; except in a few countries where the domestic systems are creaking. So, there will be little incentive for remitters of payments to move away from the domestic systems – something the Commission wants to see.

SEPA may solve a small problem – cross-border payments – but it is also in danger of creating a bigger problem. The Commission is talking about wanting a significant migration of payment volumes to the new systems and forcing this by legislation, if necessary.

Forcing a solution – a supply led solution – when there is no real demand is rarely a successful business strategy. This may be different. Perhaps the Commission is just the catalyst for what must happen if we are to have an economically united Europe. But the SEPA solutions are going to have to get a lot better before most corporate customers will want to move much volume to the new systems.