Payments technology is moving quickly in all areas. As the single euro payments area (SEPA) initiative standardises and facilitates credit transfers and direct debits within the eurozone, consumer payments are also becoming ever-more direct and accessible. From mobile hand-held phones and tablet computers to electronic invoicing (e-invoicing) for businesses, payments are increasingly online, easy and instant. It is only a matter of time before business adopts the consumer experience of remote payments. And yet, despite these technological leaps forward, payments are still fulfilling the same function they have done for millennia: as goods are traded from A to B, payments still have to move from B to A. It is the speed and methods that are changing.
As well as the increasing use of remote hand-held devices and the accompanying payment applications, we are also seeing innovation in payment data. Information flows are used for logistical purposes; data can interact with the physical supply chain to help managers control their cash flows, inventory levels and manage practicalities in the supply chain such as transport or procurement.
Towards a Single European ACH?
Behind the scenes, SEPA is driving the consolidation of national clearing houses in the eurozone. Each eurozone country already established a single clearing house and these are increasingly working together. The question is whether consolidation will accelerate on a European scale and develop a US-style clearing model, in which there are just two clearing houses, for both low-value and high-value payments. Such a consolidated system in Europe could bring several benefits, not least a standardised clearing and settlements mechanism compatible with all payment applications and new payment instruments across the eurozone (including mobile apps and e-payments).
Ideally, Europe would have rationalised its clearing and settlement mechanism (CSM) industry before the implementation of SEPA. Most CSMs in Europe are bank-owned and some are operated by central banks. Banks are working together with clearing houses to achieve greater efficiency. Establishing a pan-European CSM is an ideal goal, but the road may be long.
Even with the migration to SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs), local payment habits and formats may continue to exist in each eurozone country. This will result in a situation where, although the payment message formats denoted by ISO 20022 are meant to be the same for all SEPA payments, each country could develop its own slightly modified version of the ISO 20022 message format, according to its needs. While eurozone banks want the benefits of a single payment area, they don’t want to lose their local payment instruments.
While working towards a single European CSM would benefit the end users because it would lower clearing and settlements costs, there is still much collaboration to be done in terms of standardisation.
Innovation in the European payments and clearing industry is also driven by customers’ needs. Both consumer and corporate customers need to be able to make payments easily, quickly and in a safe environment.
Safety is perhaps the most essential factor in payments: companies and individuals want protection from credit card fraud and from phishing attacks, so online security is paramount and secure (standardised) processes need to be in place. Banks and providers need to comply with security regulations to ensure payment security for their customers.
Speed is also of the essence in today’s business, so payments need to be accessible around the clock (online and telebanking makes this possible) and clients need payments that are processed with no further complication or need for intervention. Ease-of-use is also a must-have for customers, so payments must have client-control functionality, cost transparency, data updates and integration with the customer’s value chain.
These customers’ needs also drive CSM processes: for example, speed of payment and settlement, as well as security of the settlement process, are important factors behind the customer’s experience. If the CSM isn’t fast, robust and efficient, then the client will experience problems in making payments.
Making payments is a necessity for companies and many view the payment process as a utility. Just as they need electricity or water to run a properly-functioning office, they also need payments to keep their supply chain running smoothly. Payments are certainly not an incentive or point of satisfaction for companies. Rather, they are a necessity for carrying out the company’s main activities.
There are several other factors apart from client needs that are driving payment and clearing innovation. Corporates are undergoing changes in the way they operate in three main areas:
- Centralisation: Risk management is high on the corporate agenda and centralising the control of liquidity and cash management is one way of reducing liquidity risks in the financial supply chain. Companies are increasingly looking at establishing payment and collection factories or shared service centres (SSCs). While the supply chain is ever more ‘stretched’ over geographic distances, there is an increasing focus on payment centres where large numbers of payments need to be processed quickly and with cross-border reach.
- Virtualisation: Companies are increasingly working digitally, with less paper bureaucracy, digital invoicing and contracts or trade/delivery forms signed digitally. There is more automation and straight-through processing (STP), as well as off-shore functions and remote working. Companies are therefore increasingly dependent on the internet, which is driving the need for online security.
- Multi-banking: Interoperability and standardisation are buzz words in the world of banking and payments. In the past, corporates may have felt tied to one bank through that bank’s proprietary online portal. This is changing and there is demand for payment systems that are inter-operable, allowing clients to use multiple banks. Corporates no longer want to be dependent on a ’home bank’. The 2008 banking liquidity crisis has left chief financial officers (CFOs) and treasurers wary of this.
There are driving forces in the payments business beyond client needs and corporate trends. The foremost of these in Europe is SEPA and the Payment Services Directive (PSD). These are putting regulatory pressure on banks to comply with standards. Together with increased competition (banks are able to make payments within the eurozone on the same basis), this is adding pressure to banks’ margins. Where there is pressure, something has to give, and banks are finding value in the payments business by achieving economies of scale, as well as innovating new payment products, services and specialisations.
Banks that don’t have high enough payment volumes to achieve economies of scale are likely to lose their business to market leaders. Thirty banks out of a total of 4,000 banks (i.e. less than 1%) active in payments were processing about 85% of transactions, according to 2007 analysis by Capgemini. SEPA is likely to widen this gap.
The development of standards and payment instruments, such as ISO 20022, mobile payment tools and e-invoicing, have required collaboration and co-operation between banks. The problem for banks is not in agreeing upon and adopting these standards, but in establishing a viable business model. In effect, banks first of all need to co-operate with each other, and only afterwards can they compete. In the case of new instruments such as mobile payments, the standards depend not on banks, but also on telecommunications companies, making the process more complex.
Unlocking Working Capital Through E-invoicing
E-invoicing in particular will be pivotal for the future integration of the physical and financial supply chains. It can be an instigator of other supply chain events and processes, such as shipment, delivery or procurement. E-invoicing can be an enabler within the supply chain. And it’s not only the big companies that can benefit; small and medium-sized enterprises (SMEs) can also use e-invoicing effectively to reduce costs in the financial supply chain. It can also be an enabler of financial products, as in supply chain finance (SCF) programmes, in which an e-invoice can trigger the bank to release funds to the supplier.
However, much work remains to be done on standardisation of e-invoicing before it is widely used by corporates or even individuals. At the moment, there are various e-invoicing standards and many are connected closely to industries. For example, there may be a particular standard for e-invoicing in the automotive industry in a certain country or region.
Banks are also taking a more consultative approach to their e-invoicing business. They are realising that they need to understand their client’s business in order to offer valuable e-invoicing tools. For example, if they understand every step of the client’s procure-to-pay (P2P) process, they are better able to offer advice and services to improve that cycle.
It is predicted that, by 2014, 20% of all retail sales will be made online. This means that merchants want better e-payment services, greater protection from online fraud and, at the same time, they need cross-border payment capabilities. The E-payment Merchant Initiative (EMI), a project led by online merchants, their national representatives and the finance industry, is making progress towards improving the quality, efficiency and security of online retail payments.
Two initiatives that are currently being considered for further development as e-payments standard are the online banking e-payments instruments used in the Netherlands, Germany and Austria, and the pan-European e-banking initiative run by EBA Clearing, called MyBank.
The Future of Europe’s CSM
Europe’s CSM and payments industry is undergoing a phase of consolidation, industrialisation and standardisation. This process, in which bank systems and channels are being streamlined, will also mean that certain parts of the bank’s value chain will be outsourced. Outsourcing will be ultimately unavoidable if banks are to maintain divisions of labour and economies of scale.
There is also a business need for consolidation in the CSM market in Europe. With more than 80 billion transactions per year in Europe and with less than half of those transactions available for CSM exchange, as well as a price for basic clearing evolving to less than 0.1 of a eurocent, further consolidation in the CSM world is likely and some banks will emerge as market leaders for SEPA payments clearing.
It is possible – and desirable – that the European CSM and payment industry will develop along the lines of the US system. In the US there was, over a 30-year period, the substantial consolidation of payments processing and CSM operators. Regarding the payments processing the main US providers now comprise a few dominant non-bank providers. In addition, large banks offer connectivity and white-label services to smaller banks. In the US, small and mid-sized banks outsource all their payments and clearing services, while larger banks may outsource some functions too.
Collaboration and co-operation between the EU’s banks to work towards a single CSM for SEPA is the ideal scenario to establish a state of the art interbank payments infrastructure. A secure real-time backbone to which banks can plug the payment channels offered to their customers. With the big advantage banks can offer: finality of payments. To use a metaphor, first we need to collaborate to make the pie, only when it’s baked can we start competing for a slice.
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