Now the Single Euro Payments Area (SEPA) is live, banks have got to decide whether to invest or partner.

While most banks have been able to prepare their payments systems to accept SEPA Credit Transfers from January, not as many will be prepared for the additional investment and upgrades needed for the next deadline of November 2009, when they need to be able to process SEPA Direct Debits. Furthermore, sometime between 2010 and 2012, full migration to the SEPA instruments will be expected. This will mean that use of the domestic payment instruments must cease, and the legacy clearing systems must be decommissioned.

This is all against a backdrop of falling revenues from payments due to the removal of currencies, and now borders, in the EU. A recent report from Capgemini estimates that banks will have to halve their payments processing costs in order to maintain current levels of profitability, and with the fallout from the credit crunch still being felt, banks are having to look very closely at the bottom-line.

Colin Digby, Director, Wholesale Solutions, Global Transaction Banking at Deutsche Bank, says as a major euro bank, Deutsche is well positioned both tactically and strategically in terms of having replaced many of its legacy systems. He says: “When the SEPA Credit Transfer volumes shift from legacy clearing systems to the SEPA channels, this is when banks who have only undertaken tactical SEPA changes will become more challenged. Having more of a strategic change program becomes more of a critical nature, as is being seen in the market.”

Colin Digby believes that SEPA is not mature enough for this crunch-time yet; it will come when some of the legacy clearing systems disappear, much of which is not expected until 2010 & beyond.

However, many banks are now starting to look at the next big SEPA challenge – November 2009 – when SEPA Direct Debits will be launched. Deutsche Bank has been working with several banks to provide services in this space and have recently been awarded mandates to provide SEPA Direct Debit solutions for some European banks.

“SEPA Direct Debits may prove to be more of a Big Bang than SEPA Credit Transfers have been thus far. In order to receive SEPA Credit Transfers banks have only had to make minimum change to their main platforms, with SEPA Direct Debit they will have to change a multitude of front- end and back-end applications, creating more of a catalyst for strategic change”,  says Digby.

Presently no one vendor can provide a 100% complete solution for SEPA as it stands today. For the SEPA Credit Transfer and SEPA Direct Debit systems, Deutsche Bank has leveraged vendor systems, but typically these provide only 60-65 per cent of the overall solution. The key challenge is building out the remaining 35-40 per cent that Deutsche Bank has built for its own use as a bank, “much of which can be leveraged for partners we are working with say,” Digby, adding: “The question banks are asking themselves is whether they have the appetite, the resource or the time to deliver that extra 40 per cent.”

It is clear that banks cannot afford to process millions of SEPA transactions manually as this high-touch or high maintenance approach is simply not an option from a risk or servicing point of view.

Deutsche Bank has spent in excess of €200 million building out its payments infrastructure globally, including the SEPA engine. “We’ve re-engineered our complete payments architecture, systems, operations and technology over the last few years, much of which is now available to partner banks in a white labelled capacity,” explains Digby.

Banks are taking a long hard look at the commercial models available to them, as the pressures of resources & time to deliver change are upon them. It will be an interesting time over the next 12-18 months as banks prepare to gear up to the real challenge of high volume SEPA processing.”

Simon Colboc, chief operating officer of Fortis Supply Chain & Cash Management, says that banks are starting to review their SEPA payment operations, but it will be some time yet to take full effect. “There are a number of banks now looking at how they want to run their operations, where they want to base it, and what is part of their core business and not”, says Colboc.

As payments are definitely part of Fortis Bank’s core business, Colboc says that SEPA is a boon to the bank. “Our domestic market the Benelux, historically, is fairly small but in terms of banking efficiency well developed. The structure of Fortis, focused on delivering a local presence to corporate and commercial companies all over Europe, means that the more we can leverage scale across those countries the better for our customers.” In building its SEPA platform, Fortis was able to consolidate the different payment operations it had to maintain.

Colboc explains that the recent deal signed and successfully implemented between Fortis and Halifax Bank of Scotland (HBOS), where Fortis is insourcing all the euro payments for HBOS, best illustrates this. This is one of the earliest outsourcing agreements as a direct result of SEPA. “It makes sense for UK banks, and more so for US and other banks outside the euro payments area, to look for partners to outsource their euro payments instead of using a correspondent bank in each countries, or for each of the 36 clearing systems that are in the SEPA zone. They can get all the services in one place.”

Colboc also believes that banks within the euro-zone will also start to look at outsourcing, and Fortis is in discussions with a number of these. “We are moving from 36 clearing systems to one in Europe. It will not happen overnight, but banks are now seeing this is going to happen. At the moment they can be a medium-sized fish in a very small pond – clearing payments through one of those systems – but when they merge into one, this will change.”

The volume of SEPA payments is gradually building up since the January launch, and Fortis currently represents about one in ten SEPA credit transfers. But Colboc believes the implementation of SEPA will be a gradual shift, rather than an overnight change. “The launch of the SEPA Credit Transfer was just the start of a journey and the launch of SEPA Direct Debit will have a bigger impact. I expect it will show the willingness of our customers to increase volumes through SEPA.”

Another critical factor in the move to SEPA instruments is the local legislation dictating their use, and this has not been fully settled, nor will not be until the Payments Services Directive is fully implemented. “Over time more players will see things coming together and decide to make the move to SEPA,” says Colboc.

There was a quiet sigh of relief in the banking industry when the need to pass, and now implement, legislation held up the launch of the SEPA Direct Debit as it bought them more time to prepare. While many discussions are taking place behind the scenes, outsourcing, or partnering, deals are still slow to come to the table, implying that the vast majority of banks either still view payments processing as core to their business, or they still hope that they can minimise re-engineering costs.

However, the amount of changes to legacy payment systems is unlikely to end with the launch of the SEPA Direct Debit at the end of 2009. The European Commission has made is clear that SEPA will be a modern and innovative foundation to enable Europe to compete on a global scale. The ability to process the ‘SEPA Electronic Invoice’ is most likely just around the next corner.