Assignment - Long Essay- SEPA

Introduction and overview


Now that the euro is firmly established within many European countries, the next major advancement set to take place within the European economy is the implementation of SEPA. SEPA (Single Euro Payments Area) is the area where consumers, companies and other economic players will be able to make and receive payments in euros, whether between or within national boundaries under the same basic conditions, rights and obligations, regardless of their location (ECB, 2006).

When the euro was introduced, Europe’s payment instruments and clearing infrastructures were not upgraded accordingly. More specifically, payments between countries remained extremely costly to make and process. This acted as an ongoing barrier which inhibited the formation of an efficient single market whereby businesses could trade as easily within Europe as they could domestically (Sultan, 2007). This was obviously not classed as a desirable position for the European economy to be in, and thus the SEPA initiative was formed.

According to the European Central Bank (ECB, 2006), the aim of SEPA is to advance European integration through forming a competitive and innovative euro payments market area that will subsequently provide higher service, levels, more efficient products and cheaper methods of making payments.

The new system will standardize the core payment products, services and procedures used within the euro-zone, as well as streamline the payment and collection process which in turn will support and enhance customer/supplier relationships across the region. Basically, it is a necessary initiative which will benefit various parties since electronic payments between countries will be made much easier, more efficient and cheaper. SEPA will not only make Europe an easier place to do business in, but will also make it an easier place to do business with (Sultan, 2007).

In essence, SEPA is the solution to achieving broader commercial harmonization within the euro region, leading to an increase in cross-border purchases of goods and services. Illustrated below is the fact that every citizen, merchant, public administration and corporation with a banking relationship within the euro-area will be impacted by SEPA in some way, as will all parties involved in the payments supply chain.


Stakeholder impacts


Consumers

Apart from the obvious reduction in transaction costs, the main benefit for consumers stemming from the Single Euro Payment Area will be in terms of transaction efficient from the faster settlement speed that new payment system will offer. More specifically, SEPA will allow priority credit transfers to be settled within one banking day, greatly improving efficiency of urgent payments (ECB SEPA Brochure, 2006). Another possibility is that SEPA will allow payments to be made without the Bank Identifier Code (BIC) which should, again, speed up money transfers.

Consumers will also benefit from requiring only one bank account for both domestic and foreign transactions. This will be particularly advantageous for those who have emigrated but still make payments in their home country to elderly parents, for example, or for people who have holiday homes abroad and have to pay utility bills and other fees.

However, the potential services which many anticipate will follow SEPA’s implementation are arguably those which will be of most value to consumers. When SEPA is established there will be the scope to enhance e-payments systems which will further simplify payments for pan-European consumers. One such example is the use of automated e-invoicing whereby companies will invoice their customers by e-mail, reducing office costs and increasing convenience for both parties. This is expected to be the way in which all bills are circulated in the future.

Banks

The implementation of SEPA will have a varied impact on the banking industry. All banks will suffer from lost revenues as they will no longer be able to charge customers additional overseas transaction costs within the euro area. However, for large banking corporations this should be more than offset by the new business opportunities, and subsequent revenues, that the SEPA initiative will facilitate. These value added services include the improvement of current pan-European credit and debit cards, as well as the implementation of a new cross-border direct debit instrument which will expand the market euro-wide. It should be noted though, that banks will be forced to make substantial investment into researching and developing new technologies before this can be achieved. This may not be as simple for smaller banks, many of which will suffer heavily from the introduction of SEPA if they do not have adequate funds available. However, some banks already have the infrastructure in place to deal with the SEPA changeover. For example, Deutsche Bank have already developed a strategic plan to outsource their new systems and technology in an attempt to maximise the potential earnings that SEPA promises (Diana, 2007).

SMEs and SME merchants

A typical merchant will deal more frequently with cross-border transactions than an ordinary SME and, therefore, will receive greater benefit from the additional banking services that will become available subsequent to SEPA’s implementation. Meanwhile, both will be able to make use of standardised payment procedures in the euro area and from the “common settlement timetable for cross-border and domestic receipts and payments” (Imeson, 2006). This will be particularly beneficial to smaller companies who may control order management manually. Moreover, the possibility of electronic mandates inherent in the proposed standardisation of the direct debit system will go some way to achieving the ‘paperless office’, contributing to savings of time and money in the back office functions.

Large companies

Similarly to SME merchants, larger merchants will experience and all-round benefit from the standardisation that SEPA offers. However, they will also benefit from large economies of scale as training across the whole company, for example, will become standardised too, after the introduction of the single SEPA software application (Imeson, 2006).

Large corporations will receive great benefits, too. A single billing/payment system will be able to deal with foreign and domestic transactions, greatly simplifying head office operations. And as well as profiting from smoother running of day-to-day banking as a result of the harmonisation in the single euro payment area, multinationals will also be able to exploit the increase in competition of the euro-banking market. SEPA will massively expand the number of banks available to process the direct debits and payment transfers of large corporations which will drive banking costs down and force level of service up. Subsequently, their customers will also receive a cheaper and more efficient service which is obviously to the advantage of these companies.

Impact on European economy

“Most of Europe will soon take another step toward making it a unified economic power” (Diana, 2007). This view is shared by many financial commentators, who believe that the implementation of SEPA will allow the EU to fully exploit the benefits of the single European currency and be vital to economic prosperity.

SEPA will make cross-border payments as secure and efficient as the market leading state-wide system that currently exists in the USA, and will create a more competitive and integrated payments market. This increase in competition throughout the euro area will allow European economies to continue to flourish and will be instrumental in strengthening the single euro currency.

Subsequently, the single currency will become more attractive to non-members. The fact that the currency itself will become stronger, coupled with the additional enhancements that the SEPA systems will present to euro currency states, will hopefully encourage more non-euro member states to convert to the single currency. By persuading such a financially secure country like the UK to make the changeover this will further contribute to the stability of the euro in the foreign exchange market, and ensure economic progression. Despite the strength of the pound, from a personal viewpoint I believe that this would be a sensible decision for the UK, especially with the arrival of SEPA. With the euro in place, companies, banks and UK citizens will be able to take full advantage of the benefits of SEPA by operating with a seamless yet inexpensive money transfer service without any inherent foreign exchange risk.

It is also important for the progression of the European economy to respond to the growth in electronic payments such as internet banking (often used for one-off payment transfers or standing orders) and direct debits. Due to convenience and security, cash is becoming less frequently used, therefore it is essential to implement SEPA in order to satisfy the changing needs of the European citizens. However, for those who still carry cash, SEPA will address the imbalance of charges that exists between instant cross-border ATM withdrawals and pan-Euro payments, which is SEPA’s main objective (ECB SEPA Brochure 2006).


Timing issues

Banks as well as other businesses and organisations are supposed to be ready to implement the initial payment/debit changes associated with SEPA on January 1st 2008. These changes involve the introduction of new payment instruments (credit transfers, direct debits and cards) which are intended to operate in conjunction with existing processes until full migration is achieved in 2010.

Although, it is evident that many believe this is not a realistically projected timetable of events (Diana, 2007). Initially, it was planned that a so-called “critical mass” (Global Finance, 2007) would be operating using SEPA instruments by 2010. However, it is now believed that a more realistic expectation is 2011/2012 (Diana, 2007). This expected delay is due partly to legal issues, since it will take time for the new directive to be adopted and recorded as legislation by each country within the region (Global Finance, 2007). Countries perhaps should have been given more time to make such changes. In other words, the time taken to reach full migration has been underestimated which highlights a poor planning process.

In general, it is clear that migrating to the new SEPA process has proved not to be as easy as regulators and banks initially thought. A recent survey of European banks has uncovered worrying news that regulators might need to provide further incentives to persuade companies to adopt the new SEPA instruments (Hawser, 2007), which contributes to the consensus that critical mass won’t be reached until 2012. Many companies believe that it should be the responsibility of banks and regulators to fulfil their business requirements with regards to SEPA implementation, instead of them having to do it themselves. In response to this, the European Payments Council (EPC) should offer regulatory as well as business incentives to such companies if the goal migration is to be achieved.

Unfortunately though, it is highly likely that even if such incentives are provided, some countries will continue to use current payment systems and instruments as long as the demand is still present. Also, many of these companies believe that the new SEPA instruments are not a significant improvement on existing national instruments (Hawser, 2007), therefore they do not see the need to change things – a problem which certainly needs to be rectified if the SEPA initiative is to achieve widespread adoption by the target dates.

These points highlight some negative aspects concerning how the SEPA initiative has been introduced and implemented. The European Commission (EC), EPC and ECB should have enforced the SEPA initiative to a much greater extent to avoid the outcome (mentioned above) where some companies refuse to adopt the new initiative. In relation to this, more time should have been spent communicating and negotiating with countries to ensure that all relevant parties were on board and in agreement.

In general, implementation of SEPA seems rather rushed and poorly managed. Potential difficulties have been underestimated by governing bodies, highlighted by some of the problems discussed above. The primary parties involved in the implementation process (ECB, EC, EPC) should have been doing more to ensure that countries and organisations are fully prepared for SEPA, well in advance of migration dates.

Is it a good idea?

From our analysis of stakeholder engagement, it is evident that SEPA will not only benefit European customers but also the large banks and multinational corporations across the whole of Europe. And while a large part of this benefit will be in terms of lower costs and increased revenues, it is a commonly held view that it is the efficiencies of the SEPA initiative and the value added services in electronic banking that it will facilitate which will provide greatest improvements to banking in Europe.

However, in our opinion it is the impact on European economy which is the most attractive aspect of the SEPA initiative. By creating a highly competitive and integrated banking market, European economies will continue to strengthen. The new SEPA integrated payments environment when put in place within the euro-zone will also systemically strengthen the euro currency itself (EPC, 2007), which subsequently supports the argument for a single currency to be used throughout Europe. On a personal note, we ourselves support the belief that a single euro currency should be implemented in the UK and, indeed, throughout the rest of Europe. With the euro in place, UK customers and companies will be able to experience a seamless yet inexpensive money transfer service without the risk of foreign exchange rate fluctuations, confirming our view that the list of potential benefits (ec.europa.eu) of a single currency are to good to ignore.

To conclude, we can see that SEPA is undoubtedly a highly beneficial initiative and therefore unquestionably a good idea. SEPA will generate, through harmonisation, more efficient payment systems which in turn will provide various benefits for the economy and society as a whole.

References

Diana, T., (2007), "Europe Readies For Unified Payments System", Business Credit, July/August, Vol.109, Iss.7, p.64-67.
Available at
http://proquest.umi.com/pqdweb?index=28&did=1336142001&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1196113386&clientId=46002

ECB, (2006), The Single Europe Payments Area (SEPA), European Central Bank.
Available at http://www.ecb.int/pub/pdf/other/sepa_brochure_2006en.pdf

EPC, (2007), “Making SEPA a Reality”, European Payments Council, April.
Available at
http://www.europeanpaymentscouncil.eu/documents/EPC066_06%20SEPA%20Overview%20v1.4.pdf

Global Finance, (2007), "Sepa Answers", July/August, Vol.21, Iss.7, p.S11.
Available at
http://proquest.umi.com/pqdweb?index=30&did=1315952671&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1196113643&clientId=46002

Hawser, A., (2007), "SEPA Rollout Faces More Hurdles", Global Finance, October, Vol.21, Iss.9, p.14.
Available at http://proquest.umi.com/pqdweb?index=9&did=1385836231&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1196109585&clientId=46002

Imeson, M. (2006), “The Banker Guide: SEPA For Corporates - Small Savings, Wide Efficiencies”, The Banker, London, pg. 1
Available at http://proquest.umi.com/pqdweb?did=1145054151&sid=6&Fmt=3&clientId=46002&RQT=309&VName=PQD

Sultan, N., (2007), "SEPA: Reaching Beyond European Borders", Global Finance, October, Vol.21, Iss.9, p.42.
Available at http://proquest.umi.com/pqdwebindex=8&did=1385836391&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1196109585&clientId=46002

Websites

http://ec.europa.eu/economy_finance/euro/benefits/benefits_main_en.htm