The European financial community will be watching France closely over the next few months. The country is at the forefront – at least among the bigger member nations – of implementing the single euro payments area (SEPA), one of the most significant eurozone projects since the establishment of the euro itself. The rollout in France will be seen as a quantum leap for end-to-end, straight-through processing (STP) within Europe.
Having come through the financial crisis in a relatively better state than many other countries of similar size, France’s treasuries are progressing on the journey to SEPA. The first wave will happen from April 2010 onwards when public administration make the great migration, switching over to the seamless, cross-border payments platform. When they’ve migrated to SEPA, those departments making high volumes of payments such as welfare transfers will account for about 40% of payment exchange in the French market. As such, the switch by government will provide a useful dress rehearsal for Europe, as well as kick-starting the domestic programme. “This will be a very significant accelerator,” predicts Annie-Claude Jacquet, head of product for HSBC France, who is closely involved in the programme. “The French government wants to be a leader in SEPA.”
The next big step comes when the state-owned enterprises, making up about a third of the French economy, progressively join the SEPA programme. In practical terms, that means they will abandon the domestic Echange Telematique Banque-Clients (Etebac) platform and convert to SwiftNet for multinationals, Electronic Banking Internet Communication Standard (Ebics) for domestic organisations, or a web-banking solution. The first stage of the programme covers credit transfers (SCTs) and the second covers direct debits (SDDs). The switch by state-owned enterprises will give SEPA an even bigger boost, according to Jacquet.
In SEPA terms, this is known as the ‘point of irreversibility’, or the tipping point, that will prompt the remaining components of the economy, such as merchants and small and medium enterprises (SMEs), to join the migration. From that point on, SEPA will have made the transition from a pilot scheme to a full-fledged, seamless system of electronic transfers.
SEPA first went live in January 2008, when some 4,000 banks – around 500 in France – started exchanging SCTs. However, the launch was conducted on a small scale, by necessity, and as of March 2010 only about 1.5% of transfers in France were SEPA-based, roughly par for the course for most member nations. However there’s been a lot going on behind the scenes.
“In France, there’s a strong will to implement SEPA,” reports Christophe Roy, head of payments and cash management for HSBC France.
President Nicolas Sarkozy was very much wedded to SEPA, having encouraged the project while he was finance minister and during his term as EU president in 2008. “France has had a very active role in the migration to SEPA and is well placed for the transition,” points out Jacquet. “The Finance Ministry ran a strong SEPA policy and Sarkozy was very active during his time as EU president in a very practical and pragmatic way.” Thus France was the second EU country to pass the essential enabling legislation – in July 2009 – and to launch into the massive complexities of the changeover from a purely domestic system of transfers.
“Building a European-wide system of transfers seems simple in principle,” explains Jacquet, “but it is like putting together a mosaic because every country has different systems and rules. France is different from Germany, Germany from Italy and so on. It is difficult to find a common scheme. And there are also many technical and legal elements to consider.” Unsurprisingly, smaller nations such as Belgium and Switzerland have been quicker off the mark. These countries undertake a volume of cross-border transactions that is disproportionately large compared to their size and they were highly motivated to speed up their migration to SEPA.
Bumps in the Road
As elsewhere in Europe, the financial crisis did not help France’s preparations for SEPA. As the Banque de France explains in its latest survey of progress, they took place against the worst possible background of unprecedented pressures on existing transfer systems, although everything held up in the circumstances. According to the report: “The exchange systems functioned well in spite of a hectic environment characterised by a one-off increase in volumes traded, strong bank liquidity constraints and the failure of a number of non-resident institutions, which had taken part in many systems in different countries.”
Banque de France used the opportunity presented by the crisis to conduct a thorough overhaul of the payments landscape, the backbone of financial stability. This is particularly so in fast-growing online banking. As the bank points out, “it appears necessary to use [in online banking] the most fail-proof techniques of one-time authentication solutions for identifying customers making payments.” As it happens, French people are significant users of cashless transfers, making the move to SEPA an even bigger job. According to figures from Banque de France, large-value payments average around €400bn every day. That’s equivalent to over 20% of annual gross domestic product (GDP).
The shift to SEPA is thus happening in a financial sector wounded by the crisis, though not seriously. An International Monetary Fund (IMF) survey of French banking published late in 2009 concluded that “losses and write-downs of banks have been significant, but comparatively less than the hardest-hit countries.” In hard numbers, total losses and write-downs amounted to around 3% of the global total. That compares more than favourably with 55% for the US, 12% in UK, 9% in Germany and 7% in Switzerland. “Most of the regional banks are very strong, perhaps not very profitable but strong,” says Roy.
Also, barring the dreaded double-dip phenomenon, the economy is seen to be turning the corner, with growth variously estimated at between 0.5-1.5% for this year, depending on how deeply the eurozone is hit by the ongoing crisis in Greece’s public finances and loss of buying power in hard-hit trading partners such as Spain. According to INSEE, France’s official bureau of statistics, the recovery will be “a struggle” but would have been worse without the president’s “re-launch plan” of last year which has proved beneficial, according to economists who say France is doing better than most other member nations.
Economists add that an impending law protecting small businesspeople – including ‘artisans’ – from the seizure of private goods in the event of failure will serve to boost confidence.However, the implementation of SEPA could be a bigger task for France’s financial sector than elsewhere because most of the capital cost will be borne by domestic banks. As the IMF report notes: “Foreign banks have made few inroads into French mainstream banking, except for HSBC.” For the same reasons, the non-bank sector will also have to foot a hefty bill – France hosts the second-largest mutual fund industry in the world.
The Changing Face of France
The shift to seamless transfers is expected to have profound long-term implications for the financial sector as a whole. For instance, the level of card payments, which already account for 40% of all transfers in France, is expected to rise, while the use of cheques, although still the second-most popular form of transaction, will decline. Indeed paper-based transactions are already falling by around 5% a year.
There may also be important considerations for French banks with important revenue from transfer fees, such as Banque Postale and many regional institutions. Overnight, they will lose these fees as the mandates shift to corporates. As Roy predicts, the result could be consolidation and merger of smaller banks: “It will happen, but in the longer term. The truth is that some banks will survive the transition and some will merge.”
As the great migration moves into its decisive year, France’s SEPA committee, a joint operation between the French Bankers Federation and Banque de France, is keeping a vigilant eye on progress. It publishes a quarterly score card and an annual ‘Migration Report’ that will appear until such time as there are no Etebac-based transfers at all, probably by the end of next year. Another inevitable consequence of the rollout of SEPA will be intense competition among banks and corporates for the biggest cross-border customers. And substantial efficiencies are likely for major companies, such as utilities, merchants and retailers among others, as they choose among a range of solutions from competing suppliers.
The long-term benefits of SEPA appear inarguable. As Jacquet summarises: “I’m absolutely sure SEPA will promote cross-border transactions and international business. It will facilitate exporting and importing, especially for small companies because the price of transactions will be the same for them as for big companies.”
Already pricing is a major consideration. Although the eurozone has had uniform pricing for transfers below €50,000 since 2003, that’s not the case for movements above that figure. Until now, cross-border transfers for such sums have cost more than domestic transfers. Banks and others will be free to fix their own fees, but it’s likely to be in a buyer’s market. As Jacquet says: “For new clients, banks will fix price in terms of volume, amount and other factors, but it will be very competitive.” Ultimately, there’s no doubt that, as Jacquet points out, “SEPA will change the equilibrium between corporates and banking.”
To learn more about HSBC Global Transaction Banking, please visit the company’sgtnews microsite.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.