PP002 - SEPA & UK Faster Payments
Participants: Jim Ford, Senior Director of Global Product Sales within Global Banking Services at the Royal Bank of Scotland, Peter Soctt of Sun Microsystems and Mike O’Hara of Voices in Business
Mike O’Hara: Hello and welcome to the Payments Podcast brought to you by Voices in Business and sponsored by Sun Microsystems. SEPA, the Single Euro Payments Area is the new European Banking initiative aimed to improve the efficiency of International Payments through the creation of a zone of 31 states in which all electronic payments are considered domestic, and where there will be no difference between national and international payments. This initiative will present the Banking Community with a number of challenges, particularly in the UK, where by the end of 2007 banks will have to have implemented faster payments, real time or same day transfer of funds as opposed to the three working days it currently takes. So what are the challenges that the banks will face? How much will it cost them? What impact will faster payments have on businesses in the UK and how will banks add value to their services in the post-SEPA world. I’m your host, Mike O’Hara, joining me to pose these questions are Peter Scott, Global Head of Banking Sector at Sun Microsystems and to answer them, Jim Ford, Senior Director of Global Product Sales within Global Banking Services at the Royal Bank of Scotland. Gentlemen, good afternoon.
Peter Scott: Good afternoon.
Jim Ford: Good afternoon.
PS: Great, well, Jim, let’s get started. What do you think have been the major challenges in designing RBS’ response to Faster Payments and SEPA.
JF: Okay, turning to UK Faster Payments first of all, there are two challenges. Number one is the fact that payments on a same day basis now are now being made in 15 seconds as opposed to minutes or even hours. This might be the case today. So when that payment goes out the door, that has implications in terms of credit management, it has implications in terms of risk management, implications in terms of anti-money laundering and compliance.
The second issue is the new infrastructure actually provides status updates, so when payments are made out the door, immediately status updates have to go back to the customer, and those have been two challenges that we haven’t had to face before, even in the world of CHAPS today, which, of course, as you know, is RTJS. And there’s also been the challenging of providing customers with a myriad of different channels, for example, today most customers who remit, or most banking customer who remit CHAPS payments through us actually do it via SWIFT. In the new world, they could make those payments via SWIFTNet FIN, SWIFTNet FileAct, we also have various internet based channels and host to host connections that we can offer, so we’ve had to think very, very seriously about the range and flexibility of channels that we can actually offer the customers. So Faster Payments really has been quite a challenge for the whole UK Banking Community. I think in terms of SEPA, the biggest challenge there has been the Pan-European direct debit, you know, this has never been done before, the fact of an example, a customer who is buying some goods in Germany can open an account in Germany, but then perhaps when they buy other goods in France, they can use the same account, i.e. the bank in Germany is a key challenge, and we, you know, we’ve had to think very carefully how we design our direct debit platform to achieve the maximum flexibility.
It’s also been increased by the fact that we, of course, have not only in the Royal Bank of Scotland/Natwest here in the UK, but Ulster Bank, Ulster Bank is an in bank in an in country, whereas RBS Natwest at the moment sits in an out country. So there have been some very interesting challenges.
I’m just wondering, Jim, whether those challenges, the degree to which those challenges have rolled back into your business applications. Traditionally, those applications would presumably have been batch operated and run to a batch timetable, whereas the demands of the UK Faster Payments is that they provide a far more interactive response. To what degree have you had to go back and look at those applications and reconsider either their redevelopment or their upgrade in order to meet the requirements of Faster Payments.
Well, I guess a key example of that was our current real time cash management tool, BankLine was traditionally based on a dial up connection and we’d process payments on a batch basis. BankLine has now been upgraded for Faster Payments so that it will accept the single payments immediately in real time, also it will accept files of payments as well. We have also developed another new product, which will enable us to take payments in in any format and translate those payments into various outgoing formats, so for example, a customer could send us a batch of payments for Faster Payments, in a SWIFT format, and we could actually translate those into the ISO 8583 format for Faster Payments. Likewise a customer could send us a batch of Euro Payments in say SWIFT format again, and we can translate those into the ISO 2022 format, so it’s presented, you know, quite a few challenges in that area, but it’s challenges that I’m very glad to say that we’ve actually been able to rise to as a bank.
And it sounds as if the service proposition that you’re putting to your customers has been significantly enhanced as a consequence, then?
Yes, yes, very much so.
Was the time limit of UK Faster Payments something that you always foresaw, the real time nature always a part of the specifications, or did that creep in as the project went forward?
Yes, I mean, in the beginning, when the Office of Fair Trading made their first announcement, which was May 2005, the system would either be for same day or next day payments, so when we originally looked at that, we designed the system in that light. But then in December of the same year, it was announced that in fact they’d moved to a near real time basis, so we had to upgrade our systems. That involved quite a number of changes, that involved additional investment, but thankfully once again, we managed to, you know, to rise to that challenge.
Right, do you think that you’re typical of the UK Banking Community? Are you ahead of the game? Have some other banks, perhaps more difficult to meet the challenge?
I think we’ve all found it quite difficult. I couldn’t comment on different banks individually; I can only comment on what customers remark to us, and one of the earliest things that we did with Faster Payments was we ran educational forums, because we’ve always recognised the great value when it comes to intellectual capital, so quite simply, we’d invite customers into the Bank, we’d organise presentations for them, you know, we’d listen to them, we’d answer their questions, and we organised about four or five different forums during the course of 2006, for example, in different parts of the country. Just getting the customers in to listen and to ask all the awkward questions. Now, I’ve no idea whether my competitors did the same, I’m sure they might have done, but the feedback that we got from our customers was “We really appreciate the intellectual input.” One or two of our clients did comment, that was a key value add.
I guess, I mean just staying with the cost issues for a moment here, that looking at a comparison between SEPA and UK Faster Payments, SEPA is something which affects a considerable volume of transactions for all of the institutions concerned. And whether you’re operating a payment hub infrastructure, within the back office of a bank, or you’re a Payment Aggregator in terms of a Service Provider, there are volumes of scale that will allow you to set off some of the investments that you’re making and meeting the compliance. Do you believe to that extent that some of the UK banks may be disadvantaged going forward because of the additional investment that they’ve got to make in UK Faster Payments?
I wouldn’t like to comment on the individual banks, I think what the Banking Industry in general face in the UK regarding Faster Payments is that it’s very likely revenues will actually come down, so the banks have all had to invest in the technology, but I think it’s generally recognised that Faster Payments will be cheaper, say for example, than CHAPS. So to that extent, you may well actually see a situation where you have increased technology costs, but nevertheless revenue is coming down, now how that will impact on all the banks in the UK, well, how that will impact the banks on an individual basis is difficult to tell. I think it would be fair to say in general terms that revenue streams will be challenged.
Yes, reading the press discussions that if the revenues from payments goes down, then the likelihood is that other items may start being charged for and this type of thing. But I guess that the other, the flipside to this is that the 24/7 nature of UK Faster Payments mean that more transactions may be made, at times when there weren’t any transactions historically, so over weekends.
Yes.
So this may be of benefit to the consumers. What other benefits do you see coming from UK Faster Payments for the Corporate and Consumer markets?
I think first of all for the Corporate market, it would actually be potentially better control or should I say better working capital management. I mean the Corporates will have much more certainty about when they actually receive payments and when they make payments, so, if for example, they can go to suppliers and actually tell suppliers “I not only want a payment on the same day, but I want it by a certain time.” Through such tools as internet, you know, tools, real time cash management tools, they can monitor their balances, they can actually see their transactions coming in by a certain time and therefore they in turn can then process transactions much faster. So the whole working capital cycle, which is a great challenge for Corporates today, I think Faster Payments will actually ease and make it more efficient and more simpler, potentially.
Do you think we are going to see intraday overdrafts emerging?
Well, [laughs], that’s been talked about for such a long time. I mean, it was talked about when CLS arrived. It’s been talked about in terms of time payments, and I think, on a general point, time payments are increasing in the
UK across different scenarios and across different disciplines. I couldn’t comment categorically, but there’s certainly a possibility that at some point intraday liquidity may well be charged for. I mean, intraday liquidity is charged for, for example, in Switzerland, through CLS, it’s charged for in the States, you know, by the FED, so, you know, there could be at some stage a growth in an intraday market in the UK, but I have not seen any categorical signs of that at the moment.
Right.
And that is just a personal opinion.
Do you think having a 24/7 settlement system will lead to just a general uptick in economic activity?
Potentially yes, perhaps not so much in the hours between of one and six in the morning, although [laughs] you never know, but I think perhaps more at weekends. I mean people do work more at weekends, people are doing a lot more 24 by seven business, and I think once corporations realise that, you know, the weekends, that payments can be processed, payments can be received, there may be a move, even in Treasury dealing rooms to, you know, to work over a weekend. I personally hope not, but, you know, but it may happen. And I think as well, with the standing order transactions, I mean, they don’t go through at weekends right now, but I mean they are being processed between one and six o’clock in the morning for the most, or the vast majority of them are, that will make the lives of the utility companies and credit card companies much easier.
Right, I mean, it’s certainly a potential future where you can start transferring funds between parties using perhaps mobile phone devices to do that, and seeing an instantaneous [snaps fingers] response to those payment instructions that you initiate. It’s really another world altogether isn’t it?
It is. Well, I often make a joke at conferences, but it’s half true, that on a Saturday morning, my daughter, who’s going to university, may call me up at nine in the morning and say she’s spent £200 in the bar for the drinks bill last night, “Please send me funds urgently, Daddy”, and I could sit on my laptop and make that payment in a matter of seconds on a Saturday morning. But I haven’t told my daughter about Faster Payments yet.
[Laughs]. I’m sure she’ll find out. Yes, I think the other thing that’s interesting that we could perhaps just discuss is the comparison between UK Faster Payments and the amount of profile that it gets, relative to SEPA and the type of service levels that are envisaged with SEPA, where I think the maximum settlement period is three days, it can be less but three days is the marker, would you like to comment on that?
I think first of all, to be fair to SEPA, I mean Faster Payments is a purely domestic system and so it’s much easier to process payments through a domestic system as, for example, you can do in Germany today with the garaging clearing of all the systems. But it’s interesting that the Faster Payments is 24 by seven, as far as I know, there is no other system in the world that does that today. It’s interesting too that in terms of information, the system remits update messages immediately, so people who are remitting funds know in a matter of seconds as well whether the funds have reached that destination.
I think also the timing of the single same day payments of 15 seconds, the nearest I know of in Europe is EBA Pan-Euro Scheme, which is proposed to be four hours. I think if Faster Payments ever gets rolled out to Euro, and there has been some talk about that, that will be a very, very strong competitive system, you know, throughout the SEPA area.
What’s interesting, I think, with SEPA, I mean you are talking about 27 different countries, but given that we live in a world of internet technology, given that we live in a world of mobile technology where companies like PayPal are transmitting funds between accounts instantaneously, three days does seem an extremely long time. Of course, I do have to add that the ultimate goal of SEPA is to move to one day execution time. So they are moving towards that.
It’s a little bit of a, something that’s been designed by Committee as well, and I guess the three days is also a – it’s a maximum period with the understanding that, you know, obviously some countries can actually settle under that.
There was a public comment made by a Central Banker from, shall I just say the Baltic Region, who remarked that in his country, they can make a low value payment in 90 minutes, so why was he moving to a system of three days?
Yes, well, a difficult question to answer. We’ve talked about the costs involved, we’ve talked about the way that the service is likely to lead to enhancements. I’m just wondering about the competitive landscape for payment providers, post the UK Faster Payments introduction and post-SEPA, what do you think that’s going to look like? Who do you think are going to be the winners? Who do you think are going to be the losers?
I think first of all, it’s no secret that it’s very much seen as the banks with deep pockets who will actually be the winners. Banks who have, who are prepared to invest an awful lot of money in processing; banks who have the staff levels; banks who are able to invest in innovation, product development etc, will certainly be the key winners. I think for, you may have niche providers for example, who will be able to survive in their own niche, in their particular countries.
The worry, I guess, is what will happen to the middle tier of banks if you like, the middle levels; banks who today make payments for their customers, but really don’t have the capacity to invest heavily in technology and who are also being faced by all this raft of Regulation.
So I think for, example, white labelling may well become quite an attractive offering. Many of these middle tier banks, they have very good relationships with customers; they want to keep those customers; they still want to process their payments, but they do have to maintain their own infrastructure, or can they go to one of the larger players and actually use their infrastructure to process their payments? The reason why I say white labelling is more popular than pure in sourcing, they can still brand the payments as their own, they can still brand the service as their own to the customers and the customer, quite frankly, doesn’t need to know about the infrastructure that’s lying behind. So I would think that for the middle tier banks, it doesn’t necessarily mean the end of the road, but it means a new way of thinking, a new way of approaching this whole issue of cost and investment and Regulation.
Yes, I wonder whether there’s a timing issue in there as well. I do agree with you that to a certain extent, one could argue that Regulation is stifling innovation because everybody is spending their money on becoming compliant and it’s only really the larger guys who are going to be able to leverage that and develop more innovative products. I guess the interest that I have is whether or not the Tier 2 players are actually going to take – they’re going to go through a phased approach in this. They’re going to initially, rather like the Airlines, back in the, sort of, late 80s, 90s, every country had to have it’s own National Airline. I think to a certain extent within banks there’s still a feeling that every bank must own it’s core payment process and capability and that banks will go through a phase of investment initially in the hope and the expectation that they can pull in additional volumes from some of the parties that they transact with. But some will find it difficult to do, over time, and then have to move to a white labelling approach later.
Yes, I don’t think that on the 2nd of January 08 we’re all going to wake up and the landscape will change. I mean, I think that SEPA will take some time to bed in in terms of reality. It’s been something that’s been talked about now for the last four or five years and there’s a danger that people are getting quite lethargic, but I think once the reality of SEPA hits, which I guess during the course of 2008 will begin to bite, that is when banks may begin to consider, are we going, you know, the right way about it? I mean, the revenues from SEPA payments are likely to go down, so as revenues go down, that’s when – when banks, for example, look at their budgets towards the end of 2008 and, you know, they look at their profit and loss, that might be the time that they start to ask the question, “How long can I stay in this game?”
One thing that we haven’t talked about was about direct debits. The positioning of direct debits, which are new services effectively for banks, on a cross-border basis. How do you see the demand for those services actually developing over time?
I think perhaps the initial first demand would come from the Public Authorities, for example, authorities who are responsible for pension payments and social security payments, you know, they will be making those payments across Europe potentially, because obviously people are very mobile nowadays and they’re living in different countries, so they might be – the first demand may well come from them, in terms of the payments.
I can also see demand from companies like, for example, large insurance companies who have to pay out premiums on a regular basis, again there could be facilities there. It might also be interesting to – with some of the multinational banks who have large bases in Europe, they may have staff who are working in Europe, it may be easier to do direct debits to pay the wages to them in Europe rather than having to do it from overseas in the Head Office. So those are three, kind of, organisations or types of organisations that immediately spring to mind, you know, from where there might be a demand for this service.
Yes, and I guess with the demographic, ageing of the population as well with people moving and having second homes in other countries, overseas direct debits to settle overseas bills might be something that they may want to consider, just as an idea. We’ve talked about outsourcing and we’ve talked about white labelling for some of these Tier 2 and smaller institutions, what do you see as being the challenges and potentially some of the dangers for those institutions in adopting a third party’s service offering, and to what extent do you think that the actual payment processing itself is a component of the value of other services, you know, every transaction ends in a payment and as banks look to add value, they’re going to want to add that value in and around the payment, as a part of their service offering, so how do you think smaller Tier 2 banks safeguard against that threat?
Well, I think a very basic thing but very necessary are they have to choose carefully. You know, when these banks begin to actually to offer these type of services, I’m sure there’ll be the usual glossy brochures and the usual sales, but I mean, the banks will have to think very, very carefully about who they choose. They will have to potentially perhaps, issue RFPs, very, very detailed Request for Proposal documents; they should be very careful when they come to negotiate their Service Level Agreement. They have to think about the impact of the Service Levels on their own customers, you know, the customer starts to process payments and then the next day the service begins to collapse because the bank they’ve outsourced to isn’t doing the service properly. They need to think very carefully and they need to go into those banks and do very specific strong due diligence visits, and they need to see the processes, they need to see the products, they need to see the staff. All of these things must be covered and a very, very great level. And they’ve also got to think about, potentially, the impact of operational risk and Basel 2. If they’re outsourcing, you know, their payment processes to other banks, how’s that going to impact? What, kind of, impact will that have from, you know, from an operational perspective? And also negotiating in terms of fault clauses, negotiating in terms of compensation fees, and what countries are their chosen provider actually catered? What’s the level of expertise? There are a lot of very detailed questions they have to ask before they actually outsource that business, because once it’s outsourced, it’s very hard to get it back.
Yes, I think that it also ties back to that question of innovation as well, when people are outsourcing their services, they’re not doing it just to meet the compliance requirements of today. They also, to a certain extent, want those services future proofed in terms of the way that they innovate and they develop over time.
Exactly. In the custody world this happened a lot where Fund Managers were actually outsourcing the back offices to major custodians, and there was a comment in a magazine a number of years ago now, where an anonymous person remarked about a custodian, that it was good that they were doing all this outsourcing and product innovation, but what a shame they couldn’t get their existing level of service right in the first place.
[Laughs]. Yes. So Jim looking at those Tier 2 banks and looking at the decisions that they’re having to make, could you give us some idea of the insourcing services and propositions that you would offer them at the present time from RBS?
Well, certainly first of all, we could offer them a straightforward Euro-clearing type services, so we could process their payments. We have an automated repair functionality that allows us to fix a certain level of payments. We can offer them, you know, for example, customer support, so we can handle investigations.
We’re currently investing quite heavily in our investigations capability and we’re looking next year to allow our customers online investigation so they can interrogate their own cases. We provide, you know, we can provide them with real time cash management, so they can view their balances and their transactions in real time. We can provide them with a file mapping functionality that I talked about earlier, so they can take a file of payments in in their format and translate them to the appropriate outgoing format. Yes, those are the main things I could say that we can currently offer. And, of course, we’re looking to invest in our technology all the time, you know, we have a large budget to invest and processing to invest in technology, and that is something that we’re looking at ongoing.
So for example, we’ve started having discussions on how could we white label, how could we insource, and those are discussions that will be ongoing throughout the year. How could we offer clients more sophisticated cash pooling. Multicurrency processing, that’s another key initiative, if a Tier 2 bank gives us Euro, well, why can’t they give us other currencies as well? They could actually consolidate their currency clearing business with us, which in itself has got tremendous benefits from a customer support point of view and also from a financial point of view. So you start to move beyond the immediate Euro picture into a wider global one.
Right. When thinking about the type of services that you’re offering into the Corporate world, do you see RBS moving more into financial supply chain type products for Corporates where you’re moving really from the bank itself through to the customer and the customers of your customers to provide more extended services and deeper value propositions?
Yes, definitely. I mean I myself don’t work with the Corporates, I work more with the banks, but I know from talking to my colleagues, both in payments and in Trade Finance, that they want to see the physical supply chain and the financial supply chain more closely integrated. It comes back to provision of information and also the provision of intellectual capital. If you listen to Corporates at conferences for example, they will often say “I don’t want five or six Product Managers walking through the door offering different products. I want a solution across the board” and RBS, with Corporate customers, is moving towards that.
Terrific, well it sounds really exciting and I look forward, Mike, to perhaps having another representative from RBS on the show here to discuss some of those products and services in more detail.
Absolutely. Well, thank you very much for chatting with us today, Jim. I think it’s been a fascinating discussion.
Yes, it’s been really interesting.
It’s a pleasure.
We’ve covered some interesting ground.
Thank you very much for the invitation.
Just a quick word to our listeners, if you would like to subscribe to this podcast, then go along to www.paymentspodcast.com and there are full details there of how to subscribe, either via iTunes or via RSS or just through email.
Once again gentlemen, thank you, and we’ll speak to you next time.
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