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Insight – Don’t Bank On It

In the run-up to the adoption of the ‘virtual euro’ in January 1999, the
banks were gung-ho with promises of more efficient payment systems for
businesses. The benefit would be lower transaction costs, less time spent on
administration and better, more economical cash management.

In practice, there are still no pan-European banks with the capability to
operate as full-service local banks in every eurozone country. Likewise, there
is not yet a eurozone-wide payments system. So six years on, Brussels is
threatening to force banks, local central banks and national clearing systems to
get a move on.

“If necessary, the Commission will make some agreed industry standards
mandatory and include the roadmap for the single payments area in our draft
legal text,” was how EU Internal market commissioner Charlie McCreevy put it at
a conference in Luxembourg in March.

He also noted the Commission’s displeasure that one of the key building
blocks in the formation of an efficient Single Market in financial services
would not, at the present pace, be in place by the 2010 target.

The EU is currently comprised of 25 countries and 450 million people, and 56
billion non-cash payments are made in the EU annually.

Stitching together a unified payment system means replacing all the 25 local
electronic payment clearing houses, such as VOCA in the UK, with a single
system, employing a single IT architecture, which would be adopted by as many as
7,000 banks and savings institutions in the EU. According to research by Tower
Group, the banks will need to spend €6bn (£4.1bn) on their payment
infrastructures during 2005 alone.

Tower’s researchers continue: “The disruptive impact of SEPA is likely to be
greater than the concerns European banks face with Basel II or MiFID [the
Markets in Financial Instruments Directive]. The reasons are twofold: increasing
investment and decreasing margin. SEPA means that the European payments markets
are completely dismantled from current national boundaries and converted into a
single, pan- European, integrated system. To enable this, spending on payments
infrastructures by European institutions will need to rise to around $10.5bn
(£5.8bn) in 2007.”

One might debate whether financial directors really care about what it costs
the banks, as long as it does not put up the costs they have to pay for banking
services. However, in a White Paper entitled SEPA: The Forgotten
, CMGLogica’s Jerry Norton discusses the benefits of SEPA to
businesses, but points out they may have to stump up for being part of the new
system and are not being included in discussions on how the system will work.

“The prevailing rationale is that payments will be cheaper, faster and more
‘straight through’ – this must be a good thing for business. Not only does that
disguise other benefits, but it ignores the fact that all end customers will
have to face some upheaval. Businesses, for instance, will have to ‘spend to
save’ in a way analogous to the banks having to ‘spend to make margin’ in the
new world.” The report continues: “The corporate world feels that it is not
involved in much of the decisionmaking process regarding payments and that the
banks do not listen.” Amid a welter of acronyms, fine sounding strategic plans,
declarations of Brussels’ political will and lobbyists plying the agendas of
banking and local payments communities, the chances of a real result to benefit
business customers does not look like being realised any time soon.

Tower Group’s Ralph Silva and Chris Skinner summarise the state of play:
“Obtaining agreement is like herding cats because none of the constituents
involved has any motivation to agree to a common path, and the cat herders,
namely the European Commission and the European Central Bank, have yet to crack
the whip to make SEPA happen.” Maybe the pace of progress towards a pan-Eurozone
payments system will now accelerate, following Commissioner McCreevy’s remarks.

In any case, although UK plc is one of the major users of the euro as a
trading currency, as Britain has not adopted it, it is effectively sidelined
from playing a significant role in the establishment of the single payments
system. Nevertheless, it is an important debate to follow, because when such a
system is eventually ready for use, CFOs and treasurers with large volumes of
European cross-border euro payments to transact should be enabled to save time
and money and to optimise their cash management operations.

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