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Basic SEPA strategy 101

By davebirch posted Dec 28 2006 at 9:15 AM

[Dave Birch] By common consensus, banks are going to lose a lot of payments income because of SEPA. The figures being bandied around are of the order of tens of billions of euros, or as much as two-thirds of total payments-related revenues. Research from CapGemini, ABN Amro and The European Financial Management & Marketing Association (EFMA) -- covering banks in Austria, France, Germany, Italy, Spain and the Netherlands -- forecasts that this reduction in banks' direct payment revenues often between 18 billion and 29 billion euros will happen by 2010. Banks face the challenge of reducing costs, revising prices and creating incentives - especially for consumers - to move away from unprofitable payments to e-payments in order to preserve profitability. And they need to get on with it. As Ann Cairns (CEO, Transaction Banking, ABN Amro) is quoted as saying: "Banks must urgently analyse the short term impact to comply with the January 2008 agenda both from a regulatory, marketing and operational point of view. They also need to assess whether staying in the payments processing business will continue to be profitable over the longer term."

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The research mentioned above found that while the use of 'SEPA-type' (some form of direct debit, credit transfer, or card payment) instruments differed widely across the countries studied, overall, 85% of all non-cash payments are already made using these instruments. But of those payments, 42% currently fall "significantly short" of SEPA standards, while just 13% are already compliant. There's a lot of work to be done here.

It looks, actually, as if there's more to be done than is possible in the timescale. Experience from the market place is that getting SEPA compliance is costing more than it should and taking longer than it should. Accenture reckons (hopes?) that the total spend on payments capabilities over the next five years by Europe's 90 largest banks will be more than 3 billion euros making it possible that the previous high estimates from Tower (8 billion euros for the whole of Europe) are an underestimate.

As many people have observed, the banks' fundamental strategy in the face of these figures should be to grow the SEPA-compliant payments pie at the expense of non-SEPA, less profitable instruments (ie, cash and cheques). At the simplest level, this means replacing cash transactions with debit card transactions. To some extent this is already happening as a natural process as debit cards are accepted for lower-value transactions (look at the Dutch market, where one in ten debit payments are below 5 euros and one in four are between 5 and 10 euros) but one that will accelerate as the deployment of contactless makes small payments quicker and easier with cards than with cash.

Surely, though, the way for the Commission to ensure that SEPA instruments replace non-SEPA instruments is to encourage cost-based pricing for all payment instruments and starting treating payments as more of a utility. How long would cash and cheques survive on that basis?


With SEPA costing so much - someone will have to pay. i.e. the consumer / retailer somewhere along the chain. Does this mean that we will start to see national euro e-purse type schemes to deliver a low cost national payments infrastructure? I am sure one of you guys knows but I would over 80%. This must be an opportunity.

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