Are Europe s Banks Ready for SEPA and Beyond?

Transcription

1 Are Europe s Banks Ready for SEPA and Beyond? Banks in Europe still face many challenges replacing legacy payment formats as full implementation of the Single Euro Payments Area draws near. 1

2 Against a backdrop of technological change, Europe s payments industry is bracing for the impending deadline to implement the Single Euro Payments Area (SEPA). This regulation-based deadline is serious for banks; implementing an industrially solid SEPA engine is both inevitable and urgent. Since the beginning of the movement toward SEPA designed to unify the various national payment schemes in the 27 European Union member states, Iceland, Norway, Liechtenstein, Switzerland, and Monaco European banks have channeled payment standardization efforts through self-regulation by the European Payment Council. For example, the 2009 Payment Services Directive (PSD) opened the market for payment service providers, abolished value dates, and enhanced consumer protection. However, the state of SEPA implementation today is mixed. Finland has already completed the transition, helped by an existing culture of electronic invoicing that allowed most recurring payments to be settled by means of credit transfer. Other countries, such as Germany, have negotiated a deadline extension to give banks some additional time. For all European banks, however, the fundamental thrust remains the same: The time to implement is running out. On 1 February 2014, the use of SEPA payment formats will become mandatory in the eurozone. 1 Although the implementation deadline was debated and announced many years ago, the current timing is unfortunate. Fundamental technological change is altering Europe s payments industry. Earlier A.T. Kearney research showed how smartphones and ubiquitous Internet access are redefining the payment interface, providing points of transaction that are creating richer service opportunities along with added complexity. 2 This digital evolution will only continue as a new generation of tech-savvy consumers becomes more active in the market even as traditional buyers continue to prefer classical payment methods. On the corporate market, companies are using statistical forecasting methods with cash-flow planning and liquidity optimization, actions that require significant data-analysis skills. The aftereffects of the financial crisis and a continued recessionary climate in Europe have forced many banks to squeeze costs to preserve or restore profitability. Payment leaders are scratching for investment money in general, and at a time when the rapid evolution of e-commerce and mobile payments is forcing banks to invest large sums, SEPA merely adds to the already-lengthy list of contenders for scarce resources (see figure 1 on page ). Whatever the implications, SEPA is unavoidable. With this in mind we see five fundamental questions banks must answer as they seek to comply while building for long-term success: Are your customers ready for SEPA? Are your SEPA solutions strong enough? Are you capturing the opportunities in this transition? Are you ready for further regulation-driven change? Are you competitive in payments for the long term? In this paper, we answer these questions as the European payments industry reaches the precipice of major change. 1 For SEPA countries that don t use the euro, the deadline will be 1 October See Finding the New Klondike in the Payments Business at 2

3 Figure 1 Already-limited investment funds are being stretched by the need to devise SEPA solutions How would you spend an extra 25 million euro in your investment budget? Innovation Automation and standardization Mainframe Skills and capacity Centralization Sourcing Total Source: A.T. Kearney survey of executives, Are Your Customers Ready for SEPA? Billers are redefining their roles as they need to manage their customers mandates, especially in direct debit, and existing automated systems evolve. ERP providers such as SAP are developing systems to manage mandates inside their ERP and CRM systems, while SunGard has developed components allowing corporations to manage their billers. Cloud services are also beginning to emerge. Many larger corporations are ready for SEPA, and others are busy preparing. Large insurers are in some cases still investigating implications, but they are being helped by system integrators to be ready to comply. Many smaller businesses are not ready to implement the necessary changes related to SEPA. Many smaller businesses, however, are not ready or are still trying to determine how best to implement the necessary changes. Banks are working hard explaining to these customers what may happen. Most are ensuring that mandate management will be in place for the change, but in some cases they are also shifting relationships from direct debit (authorizing a biller to deduct money from a payer s account) to electronic billing with payment by credit transfer. Specific initiatives such as the Netherlands Finbox, which gives customers to a single point of access for all financial s, look promising.

4 Some areas of the PSD s added payer protection (in the form of guaranteed return of funds) have proved unworkable. For example in the sale of perishable goods such as flowers or fresh food, the current practice is to debit purchasers accounts immediately to limit the credit risk to sellers. Applying an unconditional return to these purchases would be difficult as the goods may have perished yet return of funds could still be claimed. In some countries and segments of the economy such as mail-order clothing, solutions have been found, but they may be less efficient or more expensive for both customers and banks. Insufficient or belated dialogue with customers unaware of the upcoming changes will create nasty surprises. Clear communication is a crucial starting point, followed by introducing a portfolio of possible solutions and workarounds. Carefully walking customers through the process may make for a smoother transition. And the workarounds may actually offer opportunities to deepen the relationship and extend offerings down the line. For example, banks can resell the offerings of existing electronic invoice service providers such as Certipost. 2. Are Your SEPA Solutions Strong Enough? Our previous industry benchmarking study showed us how the payments industry primarily used short-term, standalone SEPA solutions as recently as 2011 (see figure 2). The first solutions were used to demonstrate the ability to receive payments in the new SEPA formats, but these volumes were often small, and the processes were often based on hastily built, standalone applications rather than integrated solutions. Today, most banks are seeking to strengthen their applications, either by using converters or unveiling new applications. National supervisors in various European markets are paying increasing attention and supervising banks readiness to meet the deadline. Figure 2 The industry has primarily used temporary SEPA solutions rather than stronger, integrated solutions 100 Effort (man-days) Lead time (weeks) Example banks A B C D E F G Years using solution Type of solution Stand-alone Stand-alone Integrated Stand-alone Integrated Integrated Integrated Source: A.T. Kearney survey of executives,

5 However, there are signals that many banks have underestimated the challenge of renewing payment applications with the necessary industrial strength to last. While extending the SEPA implementation deadline may be possible, this only buys time not relief from the fundamental challenge of adapting to a new payment chain. A few countries have voluntarily pushed transformation forward, including Finland, Austria, and Belgium, while some larger countries, such as Germany, have asked for deadline exceptions. Today, all are working on developing industrial-strength solutions, but whether every bank will be ready on time remains in question. There are also plenty of complexities to navigate. As billers increasingly collect from a single point inside the European Union, all domestic choices will have at least partial effects, since so many payments cross international borders. For example, Finland, which is advanced in electronic invoice use, decided that direct debit would not be needed for domestic use. Yet Finnish banks still need to be able to process direct debits that come from international billers, so they must still invest in the capability. And in the long term, changing market practices could further influence long-term payment solutions, and foreign-based billers could seek re-implementation of direct debit in Finland. The SEPA deadline is moving closer and adding to the turbulence in banks back office. Our experience suggests thinking through the long-term effects any decision will have on biller and consumer behavior. Network effects are asymmetrical, and the ability to receive and execute can create a lot more costs than the ability to initiate.. Are You Capturing the Opportunities in This Transition? Change is opportunity, and many banking leaders are taking SEPA as an opportunity to rethink their firms payment and collection strategies. For example, SME credit scarcity could be partially relieved with extended payment terms from suppliers or financing support by large corporate customers. Banks can facilitate these changes and offer new services to help. Traditional card payments could be replaced by direct debits, or direct debits could be replaced by the next generation of card transactions. In general, especially in direct debit, the absence of sufficient funds is a unique way to think about the new services provision and the possible opportunities. For collecting banks, absence of funds could lead to a short-term credit provision guarantees if the biller needs it. It could also offer an opportunity to provide new information services around collections management. Banks can also build up paying patterns for the biller s customers and use those to advise those customers in credit decisions. Such a pattern can build longer-lasting relationships between biller and bank. In addition, billers may seek to centralize their relationships as they execute more direct debits across continents. There are also opportunities for payers or consumer banks, as 5

6 the absence of funds may be embarrassing to them. They could temporarily replenish missing funds, send out alerts, or provide long-term balance advice as they build up historical references. Our practice shows that compiling transaction data combined with modern quantitative analysis tools allows for new options. While in principle this would also have been possible with legacy payment formats, the SEPA change offers a unique opportunity to tap into these new sources of value and influence the new paradigm. 4. Are You Ready for Further Regulation- Driven Change? SEPA s full implementation has been a long and tiring process, yet it is by no means the end of payment regulation in Europe. European authorities are already planning additional regulations on cards and e-commerce, with early drafts circulating and hearings ongoing. Banking leaders must reflect on what they have learned from SEPA and how they can prepare for future changes. The years of change and waves of regulation have weighed heavily on incumbent banks investment programs. In this respect, future regulatory changes could give the advantage to newcomers that can start fresh and get their business models compliant and correct from the start. SEPA is by no means the end of payment regulation in Europe. Authorities are already planning additional regulations. Since regulators can only make so many changes at one time, it is hardly surprising that traditional payments, card payments, and new developments are tackled piecemeal. However, these types of small changes can have a severe impact on the industry, as regulatory uncertainty forces industry players to adapt systems multiple times, communicate with customers repeatedly about these changes, and create a prolonged period of distraction from the core movements of the market. Let us be clear: This is not a plea for less or no regulation. Rather, forward-looking regulatory changes that prepare the industry for a competitive future are far preferable to those that merely play catch-up with long-established market realities. Banks can assist as well; after all, they took a long time to agree on SEPA, and then many begged for regulation to intervene with deadlines. Recent scandals such as the Libor rigging have further undermined the industry s credibility. We believe that neither total self-regulation nor strict public regulation is a solution. Rather, the industry must find a way to marry its interests with the public interest of a sound finance function. 5. Are You Competitive in Payments for the Long Term? The issue remains whether many banks will be able to survive a system overhaul combined with a more competitive market. In addition, falling technology costs have made it more economical to displace cash with electronic payments, changing the paradigm further. Many industry 6

7 participants will need a new long-term strategic approach, especially as the battleground shifts from the back office to the front office in terms of growing and nurturing the payment franchise (see figure ). This mainly affects the B2C market, where the bulk of volumes are recorded. Figure At least three battlegrounds are emerging, mainly in B2C in payments Transaction value Low (less than 20) Cash displacement Alternative payment solutions Medium Cards and automated clearinghouses High (more than 1,000) Face-to-face Mail or telephone Remote Channel Source: A.T. Kearney analysis With SEPA-related investments being implemented and further regulation to be expected, the business case for change is often related to a need for compliance yet many changes are financially unattractive. The industry s outsourcing side has already developed well, and opening the market further would foster this growth even more. Make-or-buy decisions and their timing are important issues for many banks today. Forward-looking regulatory changes are preferable to those that play catch-up with long-established realities. More than a decade ago, Y2K was the ultimate test for information technology (IT) in many sectors (including banks), and after meeting the challenge the IT industry did not stand still. Outsourcing models have matured, and technology has allowed for more refined and specific task allocations. Cloud computing is the essence of this change, as it reduced the need to own and operate computers; services are scalable now at a far lower cost with no investment needed. 7

8 Yet, we still see in our benchmarking study major cost differences, often explained by a complex set of causes: scale, software infrastructure costs, the quality of process organization, and other elements. The cost leaders get all of them right (see figure 4). Figure 4 SEPA leaders are widening their cost advantage Indexed cost per transaction (laggards = 100) Electronic billing Paper billing Laggards Domestic payment leader Cross-border payment leader SEPA payment leader Note: Leaders have the lowest indexed costs for each type of payment. Source: A.T. Kearney analysis Cost is only one part of the equation for long-term success. As new payment formats emerge and concepts such as online wallets offer new services, innovation is becoming a strategic necessity to be a payments leader. And this is where piecemeal regulation may hamper incumbents further, since addressing these changes makes an annual dent in investment budgets and creates business-model uncertainty. Innovative newcomers may or may not succeed but incumbents have significant strategic challenges surviving in this field. Cross-industry alliances therefore will quite naturally arise; numerous examples exist. However, the customer overlap between partners is often limited, hampering rapid implementation. For banks, SEPA-related changes are forcing a reconsideration of where future business comes from, how to get access to innovation, and which parties can help bring success. Reconsidering the Business One thing is certain: SEPA, future regulations to come, and the further evolution of technology will continue to bring fundamental change to the once-stable world of payments. Most banks cannot solve the associated issues alone. A smart plan for navigation is needed, one that creates an immediate impact through short-term compliance, and builds a long-term advantage by safeguarding a successful future. 8

9 Authors Johan Kestens, partner, Brussels Jan-Wouter Bloos, principal, Amsterdam The authors wish to thank to their colleagues Ettore Pastore and Andreas Pratz for their valuable contributions to this paper. 9

10 A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world s leading organizations across all major industries and sectors. A.T. Kearney s offices are located in major business centers in 9 countries. Americas Atlanta Calgary Chicago Dallas Detroit Houston Mexico City New York San Francisco São Paulo Toronto Washington, D.C. Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Middle East and Africa Abu Dhabi Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please insight@atkearney.com. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. 2012, A.T. Kearney, Inc. All rights reserved. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do.