Single Euro Payments Area (SEPA) Compliance Costing More, Taking Longer

SEPA, along with related initiatives, is a regulatory effort to simplify and standardize the vast and fragmented payments market in Europe and reduce cross-border hindrances to payments processing. SEPA is affecting all aspects of electronic payments, including card payments, credit transfers and direct debits, thus impacting banks, processors, and their consumer and corporate customers.

More than half of payments industry executives surveyed (62 percent) said SEPA and other regulatory issues are the largest driver of change in the European payments market, compared with 28 percent citing market dynamics.

However, respondents' ranking of eight proposed viewpoints on the regulation revealed that they see SEPA as more of an opportunity than a compliance requirement. Three-quarters (74 percent) of respondents agreed that SEPA is a "catalyst for change which will accelerate your payments infrastructure transformation plans." More than half of executives (57 percent) agreed that it is a "project that delivers long overdue harmonisation, standards and improved efficiency." Only 16 percent of respondents agreed with the notion that SEPA represents "unnecessary change with no business case," although 27 percent said SEPA is a "high-risk project with unrealistic timeframes."

Researchers questioned 47 senior payments experts from major banks, commercial/interbank processors and local industry in France, Germany, Spain, Italy, Netherlands, Belgium, Norway, Sweden, Finland, Denmark, United Kingdom, Latvia and Ireland. The survey sample represents a significant portion of the European payments market, including 12 of the 26 interbank processors, 26 of the largest 100 banks and five of the largest commercial processors. The study was conducted between April and June.

Forty percent of bank respondents said they expect to invest between EUR 11 million and EUR 50 million for ACH-type capabilities over the next five years, and 34 percent said they expect to spend in the same range for card-processing systems.

Extrapolating these results indicates a total spend on payments capabilities over the next five years by Europe's 90 largest banks of more than EUR 3 billion, according to Noel Gordon, managing director of Accenture's Banking practice in Europe, Africa and Latin America - making it possible that the previous highest estimate (from TowerGroup) of EUR 8 billion ($10 billion) across all of Europe will be exceeded.

"The European Payments market is in revolution," said Gordon. "After years with little change and relatively low regulatory mandated investments, initiatives designed to clear the way for seamless cross-border payments in Europe are heavy and expensive lifting for everyone in the industry."

More than a third of respondents (39 percent) said they intend to replace legacy payments processing platforms as a result of SEPA, while more than half (55 percent) said they plan to update their existing platforms. Only 6 percent said they are undecided or planning other future steps.

Even with all this investment, only 37 percent of respondents said they intend to be fully SEPA compliant by the 2008 interim deadline. Between 2008 and 2010, countries' existing national payment systems will co-exist with SEPA payments, before full migration to SEPA payments in 2010. Banks which have not upgraded their systems by 2008 will need interim solutions to convert SEPA payments for processing by existing systems until 2010. A quarter (27 percent) of respondents said they intend handle their interim solutions internally and 19 percent said they intend to use third parties. Another 16 percent said they will consider developing stand-alone SEPA-compliant products.

"I foresee a lot of premature grey hair among IT executives before this is over," Gordon said. "While banks are not required to be fully SEPA compliant by 2008, the fact that nearly two-thirds of respondents say they will seek temporary interim solutions is worrying. They're incurring extra expense, buying themselves just two years to get to their final SEPA solution. For those using this approach, the ideal answer is to select an interim solution that can be expanded upon to support full compliance later on."

One of the reasons that two-thirds of respondents will not be SEPA compliant by 2008 is that the initiative is stretching many banks' business and technology resources to the limit. When asked to choose among organizational capabilities that would be strained by SEPA compliance, 74 percent of respondents selected "technical project management" capabilities, 71 percent selected "business project management," 69 percent selected "strategy development and planning," 67 percent selected "systems delivery" and 62 percent selected "change management across the organization."

"This data indicates that regulatory compliance threatens to overload the industry by soaking up so many resources," Gordon said. "Several executives indicated in interviews that they were worried that SEPA might actually stifle product innovation - just the opposite of what's intended."

Other highlights of the survey include:

-- Euro-zone banks are expecting to spend more than non-euro-zone counterparts over the next five years on changes to their payments infrastructures. The largest spending geographies include UK and Scandinavia (outside the Euro-zone) with their largest banks anticipated to spend approximately EUR 300 million and EUR 250 million, respectively, and France and Italy (inside the Euro-zone) approximately EUR 500 million each. On average, the banks in the survey predict spending EUR 23 million each on changes to processing of ACH-type payments and EUR 22 million each on their card payments.

-- Respondents projected that the most challenging business-product change will be implementation of SEPA Direct Debit. More than two-thirds of respondents (71 percent) rated this as the biggest development challenge to compliance for ACH payments, in part because the new scheme is different than existing national processes in several countries. Many banks are also concerned that SEPA Direct Debits will also require major changes by their corporate customers.

-- Banks were rated as best-positioned to benefit from SEPA in their local market by 79 percent of respondents, followed by 61 percent for international card schemes (such as Visa and MasterCard).

Survey respondents also projected that consolidation of payment processing is an inevitable consequence of SEPA as national payments infrastructures give way to European ones. Respondents predicted:

-- On average only seven of the 15 ACHs, and only seven of the 11 domestic interbank card processors, in Europe will survive beyond 2010.

-- On average only four national debit schemes out of the current 11 will exist independently by 2010.

-- Their domestic debit card schemes were unlikely to exist as independent entities by 2010.

-- Consolidation may make market entry difficult for new industry players.

"Many of the executives we surveyed saw Visa and MasterCard as big winners, particularly their debit card schemes," Gordon said. "Their card processing operations were seen as likely to grow across Europe. But they'd need to expand their offerings - from their present limited roles of authorization, clearing and settlement -- to compete with existing U.S. and European card-processing companies."