SEPA puts the finishing touch to the euro

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					SEPA puts the finishing
touch to the euro
Without an efficient euro payment system, Europe will not enjoy all the benefits of the single
currency. The Single Euro Payment Area (SEPA) is being introduced to improve the efficiency and
reduce the costs of the European payment system. Banks and to a lesser extent corporates will pay
the bill for its introduction. Robert Rühl describes the impact of SEPA at the country level and for
corporates, retail customers, governmental institutions and banks

Efficient cross-border payment services are essential for the smooth func-        harmonization of euro payments, which shows the importance of the
tioning of the single market. Citizens and businesses can only benefit fully      project.
from the fundamental principles of the free movement of goods, services,
capital and people if they are also able to transfer money rapidly, reliably      It is a misconception that SEPA will have a major impact on external pay-
and cheaply from one part of the European Union to another. Despite               ment flows. Non-cash payments account for only 40% of total payments.
the introduction of the euro, however, there is still a clear gap between         Only 3% of non-cash payments are cross-border payments, of which only
domestic and cross-border retail payment systems in terms of quality              two percentage points is intra-European. These figures make it difficult to
and efficiency. These disparities ought now to be reduced and should              argue that SEPA will have an important impact on current cross-border
ultimately disappear. Indeed, the single currency environment argues              payments in general. It may, however, facilitate a growing volume of cross-
strongly in favour of a single payment area. The Single Euro Payment Area         border retail payments.
(SEPA) involves the introduction of uniform payment instruments with the
same costs, conditions and formats. All payments within the euro area in          SEPA will have its biggest impact on costs for domestic payments in so
the common currency will become domestic transactions.                            called high-cost countries like Spain, Italy and Greece but not in the Neth-
                                                                                  erlands and Belgium which have the lowest tariffs for payment services.
Macro-economic benefits
The impact of SEPA is often compared to the introduction of the euro. To          Non-euro countries will profit from the standardization and increased
be able to do so , it is important to define the macro-economic benefits.         efficiency but not from the disappearance of the exchange rate risks. Swit-
One benefit is the reduction in transaction costs. A second is additional         zerland is the only country that is not obliged to use uniform tariffs.
investment and a third the resulting change in incomes and profits. A posi-
tive overall outcome at a macro-economic level does not prevent some              It is the combined effect of euro adoption and SEPA in a high-cost pay-
economic participants experiencing severe reductions in income – banks,           ments country that will generate the ultimate result. Non-euro countries
for example, will suffer a reduction in their revenues from payment               with a floating exchange rate will benefit less, because the positive SEPA
services. It is difficult to compare the introduction of the euro with that of    contribution will be mitigated by the existing forex risks. The size of the ad-
SEPA. The introduction of the euro, eliminated exchange rate risks between        vantages of more standardization and efficiency depends on the perform-
12 (later 13) euro countries. However, one should bear in mind that 11 of         ance of the banking sector and the regulators in the countries involved.
the 12 euro countries already participated in the European exchange rate
mechanism. So, except in crisis situations, forex risks between the partici-      In 2005 the EU Commission impact assessment estimated the gains as
pants were already almost zero. It is difficult to argue that transaction costs   reflected in the reduction of costs as follows:
based on forex risks were substantially reduced for corporates and retail
customers by the introduction of the euro.                                        1. Varying payment accounts prices: a6.7 billion,


To facilitate the introduction of the euro, corporates, banks and gov-            2. Infrastructure consolidation (decrease of unit cost levels to 20% above
ernmental institutions had to invest heavily in administrative and legal          best practice): a10 billion,
systems. Thanks to this expenditure impulse plus the overall positive
mood, GDP growth accelerated by 0.5 percentage points, according to the           3. Increased use of electronic payments: €a5.3 billion, 4.Additional gains
European Commission.                                                              from end-to-end automation (SEPA as catalyst to launch e-invoicing by
                                                                                  providing an IT platform to rationalize internal business processes in the
SEPA will contribute to a reduction in transactions cost for corporates,          payment chain): a100 billion–234 billion
retail customers and governmental institutions by further equalizing the
costs for domestic and foreign payments.,. SEPA was designed for euro             A conservative estimate suggests full implementation of SEPA will contrib-
payments in the EU countries with a priority for the euro-zone countries.         ute a non recrrent 1.3 percentage points to GDP growth in the 31 SEPA
However, 31 countries, including four non-EU members (Iceland, Liechten-          countries. 75% derives from gains through automation and e-invoicing,
stein, Norway and Switzerland), are now in line to sign the SEPA adherence        20% from the first three cost reductions listed above. Additional invest-
agreements. These four countries obviously also want to benefit from the          ment will add only 5% of the additional GDP growth.
The distribution of benefits and costs among economic participants is
much less evenly balanced with SEPA. Banks will bear the burden. When
we take e-invoicing and STP into account, the benefits will increase for
corporates and in the long run for banks. Overall investments for the intro-
duction of the euro are most likely larger than the SEPA investments. The
negative impact on the income of the banking sector in total is probably
more severe in the case of the SEPA introduction.


Winners and losers from SEPA introduction
l Advantages for corporates from the introduction of SEPA are:


1. Reduction of days lost when receiving and paying money.


2. Lower average costs per transaction.                                                Rob Ruhl, Senior Economist, ING


 3. Improved cash management and working capital optimization. In the              income ratio in payments it is important to create economies of scale. This
long run, only a single euro account will be necessary.                            can be achieved by building an efficient processing system and moving
                                                                                   customers from paper to electronic banking and from cash to cards.
4. SEPA will help companies establish shared service centres.
                                                                                   Several studies indicate accumulated investments by banks in the euro
5. Multinational enterprises will profit, although they probably already           area may vary from€a5 billion to €a12 billion. These investments may not
have an optimal payments and cash management structure                             start to pay off before 2012. Banks will reap additional benefits by replac-
                                                                                   ing cash and cheques with non-cash transactions and the introduction
 6. Small and medium sized enterprises will profit from reduced costs for          of new services.For instance by expansion of the business into new
domestic payments, especially in high payment cost countries.                      geographical areas, improved management of the finance supply chain for
                                                                                   corporate customers and additional business from value added services.
 7. Improved electronic processes will bring 75% of the estimated benefits.        Harmonization and standardization of payments across the euro area will
So the major benefits of SEPA’s introduction will come at the end of the           result in economies of scale in payment services. ?? concluded in a study
SEPA implementation plan.                                                          that a doubling of payment volume may raise total costs by only 22%.
                                                                                   Therefore average costs will fall considerably. This will be reflected mainly
l Advantages for governmental organizations are:                                   in lower pricing. But bear in mind that 60% of retail payments are still in
                                                                                   cash.A survey by the European Central Bank of a group of international
1. Reduction of costs for domestic payments, especially in high payment            banks in Europe shows the expected development in costs, revenues and
cost countries,.                                                                   net results for the banking sector under three scenarios, compared with
                                                                                   base line figures for 2005 .
2. Ability to use foreign banks, if allowed by law.
                                                                                   In the ‘SEPA coexistence scenario’: current rules and payment schemes
The costs for corporates and governmental organizations will be in invest-         will prevail, existing in parallel with the new SEPA schemes and products




                                                                                                                                                                   ING• SEPA puts the finishing touch to the euro
ments in administrative systems (ERP, connectivity, IBANS conversion and           will generate 9% less revenues for banks and in the ; ‘ideal SEPA world’:
change of authorizations for SDD).                                                 full advantage is taken of SEPA schemes and products; ‘e-SEPA’: a future
                                                                                   payments world that is fully electronic and paperless, but not cashless,net
l Retail clients will benefit from:                                                results will be 3% less than in 2005


1. Reduction in days lost when receiving and paying money.                         Individual bank results will heavily depend on strategic choices made by
                                                                                   the bank concerned. The most active banks, offering new added value
2. Lower average costs per transaction.                                            services, will be best equipped to profit at the end of the transformation.


 3. The costs for retail clients will be very limited investments in administra-
tive systems.
                                                                                         W H O L ESA L E B A N K I N G



Payment processing companies are heavily involved in mergers in prepa-
ration for SEPA. The best organized companies will survive.                              Meeting your SEPA challenge:

Banks pay the bill                                                                       Bart Ivens
                                                                                         Global Head of DCM Sales
Banks will pay the bill for SEPA. They will generate savings for customers               Tel: +31206523300
after investing heavily in administrative systems and OPS/IT. In the end                 Email: sepa@ing.com
there will be two types of banks: those that outsource the processing and                www.ingsepa.com
the full-service SEPA banks. The latter will have to invest heavily and must



                                                                                                                                                                       
offer their processing services to other banks as well. To improve the cost/

				
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Description: SEPA puts the finishing touch to the euro