ShareSEPA - Say Positive Change
If you are a bank or a Financial Institution (FI) anywhere in Europe, you might as well be feeling the heat now! The European Union (EU), as you are aware, has embarked on an ambitious project. Aspiring to be the formidable, dynamic knowledge-based economy of the world by the year 2010, the Union of European countries has adopted several measures to radically transform its financial services industry for the better.
SEPA (Single European Payments Area) regulation envisages a single payments format and system for all countries of the European Union by 2010. Industry estimates are that banks will spend billions in order to comply with the regulation. The scope of the SEPA impact will provide a once-in-a-lifetime opportunity for banks to redefine their competitive differentiation based on payment processing.
Much has been written on the impact of SEPA, what it means, the timescales, the issues raised by the ACT, especially with regard to SEPA Direct Debit (SDD), the likely reduction in the number of processors supporting a common scheme as defined in the rule books, and so on. Now the Payments Services Directive (PSD) is raising further questions in the areas of real-time reporting of payments fees, and the introduction of licenses for ‘non-credit institution payment service providers'. Without repeating much of what has already been written, the overriding theme is well illustrated by a recent European Parliamentary Services paper. The paper describes the PSD objectives as ‘striving to achieve more efficient payment systems with advanced payment technology serving as the basis to deliver benefits to EU citizens, especially in the areas of price divergences’.
Pricing is therefore very much at the heart of SEPA and the PSD, and attention to pricing as a fundamental revenue based strategy, is a core issue and far more than a routine back-office activity.
The implication is that, what was once a cross-border international payment that attracted a premium fee, will now be charged an intra-country fee, thus reducing fee income for banks. Similarly, the move to real-time and D+1 settlement will reduce any income made on float. With pan-European payment processors coming on board and the predicted decline in national ACHs and roll-out of Target2, the need for corporates to hold accounts with different banks in each country, where they have subsidiaries, will be less. The implication is that there could be a rationalisation of banking relationships, with the majority of business being passed on to a primary relationship bank with a large number of dormant accounts held open for the credit line resting with the previous bankers. Add to this the PSD’s mission to introduce new, perhaps more agile payment service providers, and the competitive landscape looks rather bleak. On top of this there is the need for regulatory compliance and banks will have to demonstrate this. In short, fees and revenues will reduce, competition will increase, and there will be more regulations to contend with (following on from Y2K, EUR, SOX, Patriot Act, etc). Furthermore, the costs of processing will remain the same.
Clearly this is good news for the bank’s customers, but not so rosy for the banks and FIs, but it should be seen as a catalyst for positive change, where the early adopters can gain market share through higher volume.
First of all, if fees are reducing, there needs to be a focus on ensuring that all current fees that should be billed are in fact billed, consistently and accurately. Current charging is often embedded in legacy system silos and in some cases, fees cannot be billed for systemic reasons. The avoidance of such ‘revenue leakage’ is a fundamental requirement and SunTec has demonstrated this at a number of banks. In undertaking the implementation of a common pricing and billing system, inconsistencies can be highlighted and corrected, and all fees due, billed and collected to provide a net positive contribution to revenues.
Another focus area is assessing the value each customer brings to the bank and developing strategies for fees, such as tiering and overall value contribution. The need is to start looking at the bank’s business as a set of customer relationships, which attract fees that are based on loyalty, and value of business, rather than a set of various accounts that have bank charges.
For banks operating in multiple countries, the pricing and billing function can assess overall customer value across the borders and then set consistent discounts or incentive plans against the local country pricing, taking into account any local tax or regulatory reporting requirements. This is very much in the spirit of the SEPA programme.
From a regulatory perspective, having pricing and billing performed in one place will in effect, provide a transaction data warehouse, which stores all fee-based transactions and the amount and basis of calculation of the fee (a standard feature in SunTec’s TBMS-F database). This will not only provide a means to provide audit for compliance, but also make for new value-added itemised bills for customers. There are also significant benefits to be gained in operations and liquidity management to reduce costs.
The transparency aspects are addressed in part by having a single repository, but under the PSD, there is also a requirement for customer notification of fees prior to payment execution. SunTec’s TBMS-F offers full real-time capability for very high volumes of traffic and can sit as an adjunct processor to the EB system or the payment system to provide on-demand pricing that reflects the customer relationship. For EUR-EUR payments, the same domestic charges will need to be applied but exceptions can be identified and billed. The net situation is full transparency that meets the PSD, and the spirit of SEPA, and yet retains fee income. This type of approach is only possible by modelling the components of a fee, a capability which TBMS-F provides.
There is also an equivalent set of issues pertaining to correspondent bank relationships. In the same way that corporates may choose to concentrate their payments through a single EUR banking relationship, the FI business can also be impacted. In this sense, USA or Asia-Pacific banks, who have multiple FI correspondent banking relationships in each country in the Eurozone, may choose to concentrate their payment flows into a primary relationship. This may well need to be considered in the context of reciprocal relationships, but the threat is nevertheless, one not to be ignored.
All in all, the payment landscape is changing and various banks will adopt different models. The common factor, when considering harmonisation of pricing, is the ability to be in control, especially as margins are less and a small change can turn a profit into loss.
SunTec's TBMS-F already has major banks adopting its technology to put pricing and billing at the heart of their businesses for retail, corporate and securities. Apart from addressing a number of issues arising from SEPA and PSD, TBMS-F provides a broad platform for relationship-based banking using pricing and billing as the key strategy for growth, and also, the incentives to positively shape customer behaviour to reduce costs.