SEPA end-date regulation – a strong driver for payment innovation

When the European Parliament passed the “single Euro payments area” legislation on Tuesday, it was an important milestone in creating a unified, European, payment market. The, somewhat, voluntary implementation of SEPA Credit Transfers, SCT, and SEPA Direct Debits, SDD, by the European banks was a corner stone, but the slow adaptation of the new products (only about 9% of all bank transfers in the euro zone were done using the SEPA frame work as of August 2010) haunted the legislators. This had risen to 21% as of September 2011 but at this pace, the full benefits of a single euro payments area would be many years away.

The SEPA legislation will speed up this process by setting a deadline for the two major payment methods – credit transfers and direct debits – to move to the SEPA scheme no later than 1 February 2014 for countries in the euro area (and 31 August 2016 for non-euro countries). The legislation also bans the hidden fees between banks for direct debits that are currently charged in several countries.

The original proposal was drafted already in December 2010, but the turbulence in the euro zone last year postponed the legislation. With many European banks suffering in the wake of the crisis in Italy and Greece, many questioned if this was the right time to pass a law that would force the banks to make major investments in adapting processes and IT systems to the new scheme, at the same time as they would loose income from cross-border payments. On top of that, the Basel III requirements had already put financial strain on the banks. In the end, however, the prospect of economic growth seems to have tipped the scales. With SEPA, the resulting innovation, alongside the cheaper cost of moving money across the EU, could stimulate economic growth worth €300bn in the first 6 years, according to the Commission.

The banks in the euro area now have two years to adapt to the new payment scheme. This might sound like a long time, but those banks that haven’t done an impact assessment yet are going to find it hard to meet the deadline. The regulation will affect many different areas e.g. customer contracts, product offerings and IT systems, and as many of the European banks are also operating in several countries (both inside and outside of the euro area) it will be a complex task to make sure that you are compliant by 1 February 2014.

The standardization of the SEPA products will also force the banks to innovate in the payments area. European wide competition will make the transaction fees converge downward and successful banks will have to focus on the outer edges of the business to create value. It is the bank that don’t just see the SEPA legislation as a mandatory compliance project, but as an opportunity to innovate, that is going to be the winner in the SEPA world.

With less than 24 months to go, it is time for the banks to roll up their sleeves, innovate and execute.

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