After over a decade in the making, Europe’s ambitious Single Euro Payments Area (Sepa) project is finally about to be fully implemented.
Come February 1 2014, all of Europe’s public-sector institutions, financial institutions and companies, whether small, medium or large, should have migrated their payment systems to the new Sepa credit-transfer and direct-debt system.
That is at least the hope. The reality is worryingly different. Many companies are simply not ready, and might not be by February, which is why the European Commission said on January 9 that it was prepared to offer an additional transition period of six months to ensure minimal disruption to Europe's payment system. The main concern is what any disruption would mean for the banks’ customers, another is what Sepa means for banks themselves.
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Sepa is designed to harmonize the fragmented Europe-wide payments system. The goal here, according to the European Central Bank, is to make the process of making Europe-wide payments in euros as “fast, safe, efficient” and as cheap as national payments are. This last point is important because the cost of making payments in euros varies between eurozone countries. The fee charged by a bank for making a euro payment in Germany or Belgium, for example, has historically been lower than in Italy or Spain.
For a consumer, public-sector institution or big company, a single cost for euro payments across Europe will make it simpler and cheaper.
On the flipside however, the savings the banks’ customers will make might lead to billions of euros of revenue loss by the banks, pressure that might be further compounded by a difficult macroeconomic environment, low interest rates in core markets and increasing competitive pressures on bank margins.
So are the banks concerned? They certainly are.
A head of European cash management at one of Europe’s biggest banks says “significant revenue attrition” is expected in the business post-Sepa. The head of cash and payments at another European bank says banks “will have to run faster to keep ahead” of the expected revenue loss over the next couple of years.
Banks have been acutely aware of this for some time and have been adapting their payments businesses accordingly by enhancing and expanding the services they provide their customers to bolster revenues. In addition, savings from increasing efficiency and the expected growth in the volume of payments will help offset declining revenues.
Nevertheless, pure payment processing remains a large and core part of their transaction banking business.
Bank revenues and profits from the payments business are substantial, roughly equating to around a quarter of total banking revenues and 15% of banking profits. In 2012, for example, banks generated $108 billion (approximately €80 billion) of non-cash payments and transaction banking revenues in western Europe, says Boston Consulting Group.
Payments-related businesses continue to serve as a stable source of income for banks, providing a solid platform on which to build customer loyalty and increase share of wallet. Moreover, payments businesses still possess structural advantages such as consistent, predictable volumes and relatively low (non-capital-intensive) risk factors. These businesses have helped banks considerably by providing a low-cost source of funding and liquidity.
At the same time, however, payments-related businesses continue to face challenges on multiple fronts. Sepa is the biggest and most immediate challenge but interchange-fee legislation, along with intensifying competition and disruption by new entrants, are taking a toll.
At the outset of 2014, one of the big questions is just how much of a toll Sepa will take on bank revenues.