Migration to the the Single European Payments Area is proving a convoluted process, with many parties lagging behind in the transition. John P Berry, CEO of STET, Europe’s largest automated clearing house, explains how efficient clearing and settlement mechanisms can help the move, allowing banks to benefit from economies of scale.
As the Single Euro Payments Area (SEPA) end date nears, all parties involved in the process are approaching the migration in radically different ways. Because the initiative is so all-encompassing – affecting payment systems, banks, corporations and customers alike – there are drastic variations in their levels of awareness and preparedness; the movement is not as streamlined as regulatory bodies might have hoped.
At one end of the spectrum, the majority of payment systems have been ready for a while. Few clearing and settlement mechanisms (CSMs) should have problems in meeting the February 2014 migration deadline. Banks are also generally well prepared, having been kept aware of the regulatory changes from the outset. For banks’ customers, however, there is far less cognisance of SEPA.
“That’s something neither the CSMs nor their banks can very well control,” says John P Berry, CEO of automated clearing house (ACH) STET. “Although the level of migration to SEPA Credit Transfers is encouraging, the SEPA Direct Debit is at a level of advancement that is still very preliminary. The problem is that neither the CSMs nor the banks can do anything to force a corporation to move to SEPA. I couldn’t say whether the end date will be met.”
The European payment industry is therefore facing structural challenges on an unprecedented scale. Rather than simply launching into SEPA, payments networks must prepare themselves for a transitional few years, in which SEPA instruments and domestic payments continue to exist in tandem.
“A lot of people have been trying to push towards SEPA for the last ten years,” says Berry. “It’s taking a tremendous amount of effort, with a result that it’s moving slowly.”
The idea of a fully unified market seems far removed from reality. Approximately 99% of payments are still made domestically, with countries retaining a fierce attachment to their own banking communities. Concerned about the technology integration required – not to mention the need to replace their existing payments infrastructure – many banks are approaching SEPA with trepidation. This mentality is proving difficult to overturn.
Such worries may seem surprising, especially given the much-vaunted advantages of the single payments area. Through streamlining a highly fragmented payments architecture, SEPA is poised to bring macroeconomic benefits across the eurozone. It will support the single currency, strengthen the foundation of the monetary union and increase GDP. This boost is largely due to economies of scale; for example, banks can make significant cost-savings in their dealings with CSMs.
“Because we’re an industry of fixed costs, however many payments we process a year, the cost of the platform is essentially the same,” explains Berry. “This means the more volume we have, the lower the proportional costs.”
Banks also stand to see a reduction in interbanking expenses, according to Berry.
“If I acquire an order from a customer to process a SEPA credit transfer, this SCT needs to go first through the bank’s infrastructure, then through a system that links one bank to another, and then it’s processed by the second bank,” he says. “The interbanking costs are around 5-7% of the total. For a bank to be credible internationally, it needs to connect to half a dozen systems, independent of the number of transactions. So, simplifying the number of different platforms will lower these costs.”
STET’s flexible ability
With this transition ongoing, the onus is on corporates to keep pace. Here, it’s a question of remaining organised – for many business owners, a change of format need not become a major issue. For banks, meanwhile, it is critical to stay abreast of changes and harness cost efficiencies where they can. In particular, they stand to gain through working with ACHs renowned for their flexible approach.
“Our personal approach is to say you can have multiple CSMs on a single platform,” says Berry. “You can keep the specificities of each system or banking community, while still receiving 90% of the cost benefits of a common platform.”
As the leading ACH in Europe, STET was built to cope with diverse formats and prodigious volumes. Capable of processing up to 300 million transactions a day, the company can support all instruments from a domestic market, SEPA and non-SEPA alike. In a crowded marketplace, it enjoys a highly specific niche.
“We’re small and large at the same time,” says Berry. “We’re a small company on the market compared with some of our competitors abroad, but we do only one business: CSMs. In terms of the CSM business, we’re by far the largest there is. We’re very focused.”
Founded in 2004, through the union of six French banks, STET was designed to embrace the SEPA project throughout its evolution. In 2006, it created the CORE project, a SEPA-native platform shareable by several banking communities, and two years later migrated the French market to this platform. Once STET began processing the French SEPA credit transfers, it attained a market share of 48% of all CSM-processed euro payments. This figure is poised to rise to 52% following the implementation of the new Belgian CSM.
STET is now pursuing a European strategy, with the promise that French transactional volumes will reduce costs for other communities. Combining tailored services with excellent value, the company now boasts extensive experience in processing interbank payments efficiently. The governance of each scheme is left to the CSM in question.
“We were chosen for the Belgian community because they were looking for a cheaper alternative that would allow them not to have to invest heavily in the modifications of CSM for SEPA,” says Berry. “In no way did we restrict or constrain what the Belgians wanted to do with the CSM, so they keep total control. Because the French and the Belgian CSMs are running on the same technical platform, we’ve technically lowered costs, but they can still retain their own chosen products.”
These advantages are not confined exclusively to payments. Because a CSM is, technically speaking, a processor of structured messages, it can be used to deal with e-mandates or e-invoices, as well as financial transactions. Consequently, once the basic infrastructure is in place, there is scope for all kinds of value-added services.
Cooperation meets competition
STET offers a wide array of services – full connectivity, online information services, liquidity management tools, payments warehousing, and audit trail and reconciliation reports. All of these are available on a 24/7 basis. Through heightening the scope for communication between banks, the company feeds into an increasing trend for what Berry calls ‘coopetition’.
“It’s a mixture of cooperation and competition, an area where competing banks decide to cooperate,” he says. “There is a very clear possibility for a banking community to extend the area of cooperation and to add more services that can be done between banks instead of each bank doing it for itself. This is intrinsic in the payment infrastructure.”
In the years ahead, the march towards SEPA is due to gather pace. For banks across Europe, finding efficient clearing and settlement services will prove imperative, particularly so as their payment instruments evolve. With STET, they get a one-system approach that is geared to meet their changing requirements, no matter how diverse.
This company profile appears in the Winter 2012 edition of Future Banking