The January 2008 deadline creeps ever closer and many banks are at full throttle in their efforts to gear up for the advent of the single euro payments area (SEPA). SEPA is intended to create a more uniform payments environment throughout the E.U. that will require banks to treat ACH payments as domestic-based payments, even if they occur between different countries. Although this makes things simpler, there is the fear that banks will lose some fee revenue on what were previously considered cross-border payments.
However, there are financial institutions that see SEPA as an opportunity to differentiate themselves in what is often considered an increasingly commoditized market. Harold Young, managing director, global head of payments products with Deutsche Bank (Frankfurt; $1.3 trillion in assets), says the financial institution is fully committed to making SEPA a reality. From the start, Deutsche Bank has been involved in the shaping of the directive with the European banking authorities. "SEPA harmonizes ACH payments across Europe," Young says. "It also introduces true direct debit functionality throughout Europe for the first time. This is a major step forward and marks a leveling of the playing field for Europe with other markets in the Americas and Asia."
Deutsche Bank finds itself in a favorable position since it's one of a few financial institutions also able to offer SEPA processing to banks on a correspondent basis. Experts in the industry agree that there will be a purging of European banks as some realize they don't have the resources required to upgrade their systems to be SEPA-compliant. Either they will fold or will farm out their SEPA processing to larger FIs such as Deutsche Bank.
"Deutsche Bank's position is full commitment to SEPA and the earliest possible retirement of individual legacy national ACH schemes," says Young. "We intend to use the pan-European EBA infrastructure, or bi-lateral clearing for payments settlement, not the local infrastructures."
According to Young, Deutsche Bank had a bit of a head start on SEPA since it had already consolidated its ACH processing in three of the countries in which it operates in Europe. "We just extended that base to our remaining European regions," he says. "We anticipated SEPA and replaced what we had with a platform we knew could be SEPA- compliant. We did all our learning, the coding and integration two or three years ago. Now it's just a matter of learning on the new formats, replicating the processing, then performing user-acceptance and stress testing."
Deutsche Bank also is looking to SEPA for the value-added services it can help the bank provide. These involve reporting, transparency and visibility around transactions, and the ability to make routing decisions more easily. The bank is building routing intelligence into its individual and file-based message flows, Young explains. The routing software used by Deutsche Bank is proprietary while the processing piece involved modifying a vendor-based solution, he adds.
Yet SEPA is not just about making money. Long-term, Young predicts that SEPA will set a precedent for the rest of the world around standards and formats in banking since it uses an XML-based ISO 20022 standard. ISO 20022 is the format agreed upon by several standards groups working on the end-to-end payments chain.