PWC were assigned by the European Commission DG Internal Market & Services to analyse the benefits and opportunities presented by SEPA once ‘fully embraced’. The report released last year in January 2014, provides us with some interesting insights into the opportunities and benefits of SEPA. Some aspects of the report are very technical and theoretical, but the high level themes and concepts are a compelling read for anyone wondering ‘what is the point of SEPA’, and ‘what next’? Read the PwC report for full details, following is my overview:
Benefits of SEPA ‘once fully embraced’
The benefits of SEPA once fully embraced‘ is a recurring phrase throughout the report. It is important because the whole premise of the report is based on this concept. The analysis highlights the benefits and opportunities offered by SEPA ‘once fully embraced’. PWC indicate that SEPA ‘once fully embraced’ refers to:
- The successful completion of the original SEPA objectives, where…
- All of the electronic euro currency payments, within the Eurozone, are SEPA compliant
- All legacy payments, direct debit instructions and niche products have migrated to SEPA
- SEPA transaction clearing has also been rationalised
I know what you’re thinking, but stick with it….
Recurring annual benefits of SEPA ‘once fully embraced’:
PWC define the benefits of SEPA in 2 ways. Below I have indicated the recurring annual benefits (ref: page 6) that outlined by PWC:
- Quantifiable and other benefits
- €21.9 billion quantifiable savings
- €227 billion credit and liquidity unlocked
- Reduction of 9 million bank accounts
- E-invoicing
- ‘SEPA 2.0’ – SEPA will act as catalyst for the implementation of in-house banking and payment factories
- Further use of XML ISO 20022 (CGI)
- Other Direct & indirect benefits
- 973,000 man years can be unlocked from mundane payment processing and refocused on higher value added activities
- Unlocked credit and liquidity represent as much as €23 billion in lost opportunity
- Improved transaction reporting
- Improved STP (Straight Through Processing) for reconciliation
- Redefinition of ‘domestic market’ in mind of consumers
- SEPA will help to breakdown the mental barrier held within the Eurozone that one cannot do business outside of their own country
SEPA stakeholders, and the associated benefits of SEPA:
End user stakeholders: Consumers & Companies:
Consumers:
- Since most consumers have mainly domestic payment processing requirements, SEPA is unlikely to change the way in which consumers interact with their banks
- For niche, non-SEPA transactions and any other domestic payment instruments PWC believe consumers will see prices increases due to reduced competition in this area
Benefits (ref: page 10):
- E-invoicing services – more on this soon…
- Increased security via the EMV (Europay, MasterCard and Visa) cards which make use of chip and PIN technology to authenticate credit and debit card transactions
- Improved consumer protection through the PSD
- Increased cross-border sales opportunities – once consumers experience that a ‘cross border’ SEPA payment is the same as paying for something locally (such as buying a newspaper), SEPA should encourage greater cross-Eurozone purchases and encourage economic integration
Companies – 3 types:
- Local companies & public companies (local presence)
- Small cap companies (regional presence)
- Large multinational companies (global presence)
Benefits (ref: page 9):
- Cost savings (PWC say €13.2 billion) resulting from:
- Reduced banking fees
- Price convergence
- Simplification of bank account structures
- €179.5 billion idle cash unlocked
- Reduction of 9 million bank accounts
- Efficiency as e-invoicing picks up
- Improved transaction processing data
- Lower handling cost per error
- Lower IT cost due to wider use of XML ISO 20022 and potential consolidation and standardisation of applications
- ‘SEPA 2.0’ – catalyst for in-house banking and payment factories (unlikely for SMEs)
- Improved trade credit management due to higher auto-matching of open items
- Up to €115 billion in efficiency gains related to process efficiency and the opportunity-loss
related to cash balances currently trapped in payment processing - Centralising bank account structures which will result in lower bank account fees, this will also enable the implementation of simpler and more efficient cash pooling structures
- Opportunities to increase cross-border sales
- Migration of transaction volumes to more efficient transaction banks
Industry stakeholders: Banks, Clearing Settlement Mechanisms (CSM) and Regulators
Banks – 3 types:
- Local – small domestic banks, serving niche products, links to home country CSM only
- Regional – regional branch presence, but domestic bank in one country, linked to several local CSM’s
- Global – branches in most EU countries, linked to most CSM’s
Benefits (ref: page 11):
- Reduction in operational expenses with a net total of €5.9 billion per annum
- Release of an additional €9.3 billion in credit and liquidity
- E-invoicing
- Other information services
- Reduction in errors and manual processing
- Outsourcing of transaction processing
- Wider standardisation of XML ISO 20022
- The opportunity-loss related to the unlocked credit and liquidity amounts to at least €1.1 billion per annum
- The standardisation of cash management services and the reduction in accounts held with banks may lead to a reduction in the workforce of up to 10,000 FTE across the industry. This amounts to up to €775 million per annum
- Increased cross-border sales opportunities
Clearing Settlement Mechanisms:
- Each country has its own clearing facilities
- National clearing houses clear and settle legacy, niche and non-SEPA payment instruments. Many clearing houses are owned by the local banking community and part of the European Association for Automatic Clearing Houses (EACHA). Association within EACHA enables pan-European reach for SEPA transactions
- EBA Clearing offers pan-European clearing for both high and low value transactions (EURO1, STEP1, STEP2 [SEPA clearing])
Benefits (ref: page 12):
- Loss of €4 million in revenue due to price competition
- Additional data services
- New service models and additional IT services
- Reduction in labor costs of up to 3,500 FTE, or €237 million, resulting from efficiency, automation and consolidation
- Market consolidation
- Redefinition of home markets
Regulators
- Market Regulators within each member state, as stated by the Payment Services directive
- These guys are typically about to ensure the other stakeholders are happy
Conclusion
Keep in mind that the benefits of SEPA will be realised, according to PWC, ‘once fully embraced’. Personally, I wouldn’t look at the figures too much. The values indicated are somewhat difficult to relate to. Each stakeholder will experience different benefits and in some cases some drawbacks too. From a corporates perspective, what I take from the figures is that there are significant savings to be made as a result of SEPA. Broadly, we see opportunities for rationalisation and standardisation which all enable cost savings and process efficiencies. The PWC report is a great summary of what SEPA is, who the stakeholders are, and the benefits they should realise once SEPA has been fully embraced.