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SEPA and PSD business case - there is still hope!

Highly praising the effort, achievement and activities of the EPC and banking community, I have an opinion that the decision on the part of the EC, ECB and national central banks / regulators to manage SEPA implementation and migration in the 'self-regulated' mode was a costly mistake. The criticism of the EPC and the banking community, although somewhat justifiable, is however one sided - it is not in the nature of a financial institution to errode its own revenue and profit base, so naturally in their majority the banks have acted defensively. Payment services users need to become active; more importantly keep their side of investment into technology and processes.  

The model should turn towards the regulated process and centralised (ECB and EC) ownership of the outcomes, i.e. benefits case, investment case and adherence towards standardisation and timelines. The observing role of central regulators and passive position of the European government sector should turn into proactive management of SEPA implementation and migration.

There is still time to reverse and enforce the migration process. We should not dwell on mistakes and need to analyse and re-assess the business cases moving forward with right implementation activities for SEPA and PSD. 

Here is an introductory section from my analysis paper on the future of the SEPA and PSD business case and the implementation process:


In the financial industry we witness the establishment of a highly regulated, risk adverse business model which prioritises protection of consumer and public holding (result of recent nationalisation of the financial industry), strict governance/monitoring from the Board of Directors down to the operational floor, shrinking profitability margins and change in risk-taking behaviour. Tighter governance and monitoring of mega-projects such as SEPA / PSD should be high on the priorities list of the regulators and the Boards.

In 2007 Capgemini commissioned by the European Commission delivered a report setting benefit “targets” for SEPA (and PSD as an enabling regulation) - of €123bn over 6 years[1]. Most discussed were the following findings and conclusions:

·         Perceived losses of circa €91bn in transaction fees by banks.

·         Astronomically high Return on Investment (ROI) for users of banking services - €177bn of benefits with €17bn of investment, in the case of the most optimistic scenario.

·         Negative overall business case for banks under all presented scenarios. However, it does not mean that all individual banks will end up with the negative business case for their SEPA services and solutions.

In summary, based on the analysis in this paper, the effects of the economic crisis and the regulated market on SEPA implementation are:

·         There is a direct negative effect of macro- and micro-economic conditions on the cost and time-to-market of the SEPA and PSD implementation / migration. Although the negative trend has emerged, the effect of it can be diminished and compensated by an introduction and enforcement of a timely, decisive regulatory strategy and roadmap. The aim of this strategy has to ensure the planned investment is committed by all stakeholder groups and milestones are adhered to. It is not enough to set the end-2010 SEPA migration target for public entities, enforceable milestones and centralised structured programme management approach are required for this stakeholder group to succeed.

·         Establishment of regulated financial market resulting in shift of control on the part of commercial banks on certain decision-making aspects of the business

·         That investment funds must be available for systemically important programmes and change, such as SEPA and PSD (C3).

·         The establishment (public) virtually has control over decision-making process on both sides: the financial sector and public entities (C4).

·         Partial nationalisation of major banks may lead to change in budgeting, spending and investment priorities of the major European players. Depending on the scenario the nationalisation of banks can work both ways for the implementation of SEPA:

o        (a) A positive effect - regulators assume more responsibility and engage hands-on in the implementation process.

o        (b) A negative or neutral effect– regulators stand back relying on the self-regulatory potential of the financial industry, which so far has not fully attended to the interests of other SEPA stakeholder groups.

Such mega project as implementation of SEPA and PSD will be affected by the current crisis and economic slowdown – the business case needs to be reviewed. So far there’s been no attempt to summarise various estimates (Capgemini, Tower Group, European Commission) on the benefits and costs of SEPA implementation and migration.

Below are the major conclusions based on the analysis of market data / information; for the full range of predicted outcomes and chain of logic please refer to the appropriate sections of this paper:

·         There is a necessity for strong central structure for managing and governing the SEPA and PSD migration (C20). Either European Commission (EC) or European Central Bank (ECB) should organise a pan-European SEPA Programme Management Office (SPMO) and run it at least until the end of 2011 to be able to report on the results and outcome of PSD implementation and SEPA migration. The SPMO should be led, but proactive and dedicated Programme Managers with teams of analysts and programme management officers, not by the observers. This SPMO must be independent of any specific stakeholder group, represent the interests of all SEPA stakeholders and carry out impartial reporting and analysis function across the Community. Each Member country or groups of countries should have an equivalent PMO with similar mandate and responsibilities.

·         The SEPA and PSD business cases have evolutionised under the changing economic conditions. In the negative scenarios loss due to SEPA implementation is not imminent (mainly loss of opportunity); to achieve the positive outcome the perceived gain needs to be unlocked, i.e. it is not guaranteed. Neither gain nor loss will occur automatically; if the development of SEPA is left to the market forces (perfect Nash equilibrium – no interventions and protectionism) - any outcome is possible with high probability of negative scenarios to prevail due to the influence of the economic crisis.

Following the postulates of the game theory (Nash equilibrium – prisoner’s dilemma) a combination of choices and implementation strategies on the supply side (PSPs) and the implementation / investment choices on the demand side (PSUs) would create a series of economic outcomes for SEPA. The constituent parts of any of these outcomes are the following factors:

o        Adherence to the provisions of PSD, meeting estimated benefits.

o        Implementation within the EC’s timeframe.

o        Staying on the level of original planned investment.

o        Reaching the required levels of penetration within all stakeholder groups.

·         Creation of favourable economic outcomes (C21). In the regulated market these choices and moves can be managed to achieve the most favourable economic outcomes. It is time for national central banks, led by the EC and ECB, to take more active role in managing the legislative migration and secure practical participation of the demand side, especially on the part of public entities, in the form of necessary investment and implementation effort.

·         There is a necessity for the review of the investment and cost aspects of SEPA and PSD migration due to changed economic conditions. The investment and operational cost sides of the SEPA business case must be reviewed. Most banks are making losses and operate under tight liquidity regime. Losses, liquidity shortages and cost of capital force banks to put stop on spending; Tower Group has already predicted serious reductions in IT spend. This factor negatively affects the following aspects of SEPA solutions and systems:

o        Number of SEPA dedicated products offered on a given IT platform

o        Number of SEPA dedicated / ready channels offered to customers

o        Complexity of SEPA system/solutions – strategic vs. tactical. There is a risk of emerging ‘sticky-tape solutions’, the ones implemented as temporary solutions and notorious to stay within the payments infrastructure permanently.

o        Use of the most efficient technology may create impediments towards the standardisation

o        Ability and willingness to pass the SEPA benefits to the end-customer in the form of lower fee and / or lower-priced service/

o        Increase in operational risk due to quick-fit solutions and cutting corners during the implementation and testing

·        Time for regulatory intervention as ways of reinforcement of the ‘self-regulation’ model for the migration to SEPA and PSD.

Changed in macroeconomic market conditions, significant changes and shifts of power in the capital markets and vulnerability of all participants including the vendor community (a specific type of the PSU’s corporate segment) require more regulatory supervision and control. The EC, ECB and national regulators’ strategies need to be changed to secure the benefits and manage risks. Economic incentives have to be created for the collaborative and standardisation solutions. The question facing the industry now is: would regulators be able to pick up the reigns of power and maintain the rate and quality of migration to SEPA and PSD?

UNQUOTE ____________________

[1] 'SEPA: potential benefits at stake', report for the European Commission, Capgemini Consulting, 2007

[2] Analysts warn EU banks still need cash injections, Peter Thal Larsen, November 7 2008, FT


This opinion is open to discussion, however time is of importance as per famous line from the 'Fifth Element'.


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