PP007 – How Will SEPA & the PSD Impact Corporates?
Participants: Dhiru Tanna, SVP Business Integration (Product Innovations Group) at Bank of America, Peter Scott 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. Today we’ll be talking about how the Single European Payments Area and the Payments Services Directive will impact corporates. How well do corporates understand the likely impact of this changing legislation? How will their needs change as PSD and SEPA are introduced and how will those needs be satisfied? Joining us to discuss these issues today are Dhiru Tanna, Senior Vice President of Business Innovation and part of the Product Group at Bank of America, and Peter Scott, Global Head of the Banking Sector at Sun Microsystems. Gentlemen, good afternoon.
Peter Scott: Good afternoon, Mike.
Dhiru Tanna: Hi.
PS: Right, Dhiru, I thought the first thing that we could usefully do here was to have you introduce yourself and explain to the listeners your role and your function within Bank of America.
DT: Okay, thank you Peter. My role is to work within the Innovations Group at Bank of America. We look at new ideas coming in that may need developing or look at existing services which may need enhancing, so we take a look at them, identify what needs to happen, put in the business cases and then roll them out for development. That’s what my Group does. We sit within the overall GTS product area, so that covers all aspects of cash management products.
This is Global Transaction Services?
Correct, Yes.
So really you’ve got the finger on the pulse of the way the market is evolving and the way that user requirements are changing?
Sure.
Let me start by asking a question about Bank of America, and the way that Bank of America is positioned in the marketplace. The bank has, over the last few years, gone through a significant process and period of acquisition and consolidation, could you just tell us a little bit about how the bank sees itself going forward and the way that it would like to be perceived as a global brand, particularly to its corporate clients?
Just speaking from a GTS point of view, GTS is a very important part of Bank of America’s business in the US and actually even more so internationally, we are a growing part of the business for Bank of America. Within Europe, Bank of America operates in 21 countries. Some of those countries we are direct participants in those clearing systems; we have Branch Operations, but in others we operate through partner banking capabilities, through correspondence, but it’s a different model. We hook into other banks pretty much as a core partner, so we provide core services, which our clients are looking for, seamlessly.
So things like cash management services are also included.
Exactly. So if a client is looking for services for five or six of these countries, they come into us, we facilitate them whether they’re through our own branches or through our partner banks as a seamless transactions. Our plan, our ambition if you like, is to be a key player in a post SEPA environment, and that clearly means we’re going to need grow scale and look at other opportunities in how we develop the cash management business. A lot of our growth, over the last three or four years, has come through organic growth. I mean, organic growth continues to be the driver for this business.
Right. I thought that we could talk a little bit about the corporate needs, in terms of first of all, how well do the corporates really understand the requirements of SEPA and the implications of the PSD? I know most bankers that we talk to tell us that there’s been a lot of communication with the corporate world, but to a certain extent, there is some feeling that many corporates are not really as aware as they should be of what they should be doing to plan steps for SEPA. Could you just tell us a little bit about your perception of that issue and what you think corporates ought to be doing at this stage?
Sure. I think you’re right, it’s very clear talking to clients, or actually attending conferences and seminars, and SEPA seems to have generated a whole industry of conferences. There’s a conference on SEPA every other week, almost, or it feels like it. When you go to those events, you meet two types of customers. You’ve got one group who actually knows a lot about SEPA; is very informed and is actively working towards doing something about it. And then you’ve got the other group who’ve maybe come along just to find out what’s going on, then they retreat back to their offices and almost forget about it.
I always find that those conferences are very sparsely attended by corporates anyway.
It’s mainly bank sponsored, corporates who are coming along, and I think the challenge is going to be how do we try and address that? The way we, at Bank of America, have addressed it, is actually to have client specific seminars. So, we do client specific road shows. I’ll go and see four or five clients and do a specifically targeted presentation on what SEPA is, what the impact of SEPA would be for those particular clients, and then what they should be working on, and that seems to work better, for a number of reasons. It’s at a client’s offices, typically, so the client is able to bring in four or five of their people, rather than just having one person going in.
It’s a bit more intimate.
It is a lot more intimate, and also you get a chance to talk about their specific requirements. You can talk to that individual account structure and how potentially it could change and what the implications are. So we’ve found that that has worked very well. In addition we do general sessions with clients where we’d invite, ten, 15, 20 clients to an office in London or in Frankfurt and then have a similar discussion. Those sessions are working well, but the question you’re asking is “Are corporates prepared for it, and what should they be doing?” I feel they’re aware of the issues; they know what they need to do, but they’ve not quite grappled with how they’re going to resolve the problems. So for example, a number of people have said to me, “I can see the SEPA deadlines coming, and the two important deadlines, 2008, end of 2010”, at least for the creditor transfer fees. They can see all of that. Their issue is “How do I know there’s going to be enough volume going through your systems so that I need to migrate from my existing product set into the new SEPA product set by 2010?” It’s a genuine concern they have. What they don’t want to do is to start migrating themselves, only to find that they’ve moved to the new product set but the others are still in the old products.
You mean the different banks are moving at different speeds?
Not just the banks, they’re more afraid of their suppliers, their vendors, are they all moving at the same pace? Because if, here’s an example, as a client, you’ve migrated over to SEPA Credit Transfer, Jan 1 2008, but if the receiver can’t receive those payments, then why have you gone through all that pain? You know, it’s that classic situation we had when the first fax machine was invented, you need two people in order for the fax machine to be useful. And to some extent, that’s almost what we’re saying here, “If I’m going to start issuing SEPA Credit Transfer, I want to make sure that the person who’s going to receive it is going to benefit from the better remittance information or the valued conventions”, and some of the corporates are concerned that if the take up is going to be very slow, should they not just wait? And I think that’s a difficult situation to be in, because it means everyone’s got to wait for everyone else.
But I’m also wondering, the ISO 20022, the 140 characters, do you see that before any European wide standard is formally agreed, that that will be used in bilaterally agreed formats between buyer and seller communities?
I think that’s definitely a possibility. A number of clients have said they are starting to look at ISO 20022, even though, for me, the reality is banks and clearing settlement mechanisms have to start using ISO 20022 from Jan 1 2008. There is no obligation between the customer and the bank to use it initially, yes. At some point, as you rightly say, clients will start using that, more and more, but I don’t see any clients who are moving towards that equation at the moment.
Right. To what extent do you think some of the larger corporates needs and requirements are going to be certainly moulded, to a certain extent, in their capability to execute by the readiness of the major accounting applications that are present in the market, the SAPs and the Oracles that are out there?
I think it’s going to drive it to a large extent. If we look at something like SAP, we know that there is a patch coming out September or October time this year, which will allow SEPA transactions to flow through, have the BIC and the IBANs a core part of the payment. The question is, if they release in September, October time, how long is it going to take for a corporate to test that, and then roll it out? How long is it going to take a corporate to first of all take the decision to upgrade from the current version? These are not simple decisions; these are things which will take some time, and I have yet to meet a corporate who’s gone out and bought a patch and implemented it within a two or three month timescale. So I think your question’s a valid one; I can’t see how corporates will start using those services until at least Quarter 1, Quarter 2 of next year. And I think that takes us to the underlying problem, will there be any volume coming through in the first half of next year? I think there will be some transactions coming through, but I think the volumes will be pretty small, at least initially.
I think it also raises quite an interesting point in terms of the opportunity for the banks in the sense that if the corporates are struggling with “How shall we use these additional data fields?” there could be opportunities in the financial supply chain space with solutions from financial institutions about how payment propositions could be enriched by bank services. Could you give us your views on that?
Sure. You’re referring to what SEPA calls the “Optional Services”, right? “Additional Optional Services”, yes? The AOSs. Yes, enhancing the supply chain is clearly one function where a lot of banks are putting a lot of effort into “How can we try and enhance a customer proposition? How can we add more value?” And you’re talking about both from the pre and the post shipment point of view as the invoice is raised, is there some element where the bank can step in or the banks, as a consortium maybe, can step in and offer some financing capability, or after the payment is due, is there something which can be done there? A number of banks are working on propositions of different sorts and I see that this is an exciting field. If you think about it at the moment, you do have trade finance capabilities; all the banks offer it, but it’s typically offered as a separate part of the business, it’s separate from the cash management business. What you’re now seeing is the ability to join the two together so that you work seamless from end to end. I think end to end is going to become a good theme going forward, because you’re talking about a straight through processing STP. STP has always been very important to banks, but typically STP has worked from the time the transaction enters the bank’s system, to the time it leaves the bank’s system, and you’re very happy if it’s 90%, 95% within that. As a bank I can say, “I’ve got good STP.” But really, reality is, you should be more concerned about the STP from the time the transaction enters the client’s ERP system, as it goes all the way through the ERP system, into your bank system, out from your system into the clearing system, then into the beneficiary bank, and into their ERP system, so that full end to end supply, and I think if you get 80, 90% end to end supply, sorry, straight through processing there, I think you’re in a phenomenal position.
I think that’s true. I think the banks are certainly looking more at the Procure to Pay and the Order to Cash cycle within their clients and thinking well, how we can we enhance the STP and the better use of utilisation and optimisation of cash within that business.
Correct. The other one which everyone talks about is e-invoicing. Those of us old enough to remember the .com era knows that we all had fantastic plans for this side of the business. Most banks have now got rid of those particular platforms, but it looks like it’s coming back in fashion, so there’s a lot of emphasis these days on what can we do? Can e-invoicing be brought back up again? And everyone keeps talking about the Scandinavian models and can we try and replicate the Scandinavian models into the rest of Europe? It’s early days, but that’s another one where people are starting to focus a lot more attention on.
It’s certainly an opportunity area for the banks and I think to a certain extent I think it’s recognised that by the EU that this is important on a Europe wide scale. I mean, they’ve just recently instituted a taskforce to look at the challenges of invoicing, and I think probably, quite accurately, are looking most specifically at the tax implications of invoices across the European Union, rather than just looking at the syntactical requirements. Okay, so, looking at what corporates want, and we’ve talked about some of the factionality that they need, but one of the major drivers I think that corporates are going to be looking for in a post SEPA world is going to be price. I think one of the key attributes that corporates have spelt out to me is that they perceive that SEPA is a big opportunity to reduce their costs by consolidating their banking relationships and driving their transactions through a particular account with a particular institution, rather than having them spread across Europe. How do you think the banks are going to respond to this and what do you think the implications might be for some of the back office systems of the banks?
I think you’re right. It’s interesting how many corporates you meet, the first thing is does this mean my price is going to come down, or when will my price go down? Can it go down now, Jan 1 2008? And then you say “Well, when are you going to move to SEPA Credit Transfer?” as an example, then I can start talking about moving the prices. But it is – price is very, very central to their decision making. I think what you’re going to find is corporates at the moment have a huge number of accounts across Europe and clearly, going forward, they do not necessarily need all of those accounts, so SEPA gives them a good opportunity to go through the banking relationships and decide how many banks they want to have a relationship with, and then start centralising some of those decisions and rethinking the account structures. Now, don’t get me wrong, you’re never going to get down to one bank, one account, because there are other relationships which have to be taken into account. In some countries, you will need local bank accounts for some local instruments, which may never get into a SEPA like environment, for example. You may have some credit requirements you mentioned trade earlier on. There are some core trade financing needs which will necessitate you having a local bank account with a particular bank, so that you will continue to have local relationships, but I think what you will see a lot more of is, certainly the large multinational clients, will start consolidating their banking relationships to fewer and fewer. What are the implications for the banks? Well, in order for the banks to be competitive, they’re going to have to be able to grow in size. I think it’s all about volume and it’s all about scale. And this is one where the banks are going to have to work carefully to build up their value proposition so that when clients are looking for which bank to go with, they’ll go with the one which offers them not only a good service for a good price, but also provides value adds. These are the elusive value-adds which effectively provide the client things which go beyond a pure product in the good old days we used to call it Relationship Management. Maybe that’s all it is, but this is over and above buying a Credit Transfer or a Direct Debit, it’s the ancillary services that go around it.
Wrap around it?
That wrap around it, correct.
I think there’s also some implications in terms of how the operations of payments is actually managed. I mean, historically there were different silos for high value payments, low value payments, and different payment modules to address different areas of the business, whereas I think, going forward, many banks are actually consolidating these into a one holistic payments app that basically has different service level criteria for different types and values of payment. You know, when you look at – you talked about STP, STP in the old world was important, but STP in the new world is even more important because the margin on the business is going to just go down so dramatically, over time, that automated exception handling is going to become key and critical.
It’s interesting, isn’t it? We all know the pressures that SEPA’s going to bring us. The bank’s investment’s going to go up, but we all know this is an investment which banks have to make. In order to move forward, we have to make the investments and we have to grow in not just our core target businesses, we’re going to have to look at growing into other areas as well.
Right, which brings us onto the topic of banks seeking to stay in the payments business are all going to look to grab more volume; it’s going to become more of a volume player than it is today. Perhaps you could tell us a little bit about what you think banks who are looking to outsource parts of their payments business to other banks are going to be looking for by way of service levels?
Okay. One of the interesting things is you look at some of the smaller banks and they are – a lot of them, in Europe. In order to be SEPA compliant means a huge amount of investment, so clearly they are either not able to make the investment or they don’t want to make the investment, so that the decision they’re having to make is do we outsource, insource, business to another bank? The sort of things they’re looking for is can the bank they want to outsource to take the pain away? So will they interface, will they reach into my system, pick up my data in the format that I currently have it and then deal with it accordingly? So, if I’m going into Bank A systems, can I go into Bank A systems, pick up the information and seamlessly translate that into the new instruments, whatever they are, and put them into clearing? They don’t want the pain of having to do anything, because if they’re going to have to do something, they’d rather do the whole work. So I think that’s the first important point. The second one is how the service model works. If Bank A is outsourcing to another bank, they want to make sure that if there’s a client issue, either with the credit or with a query on a particular debit, they know who to call; they know what the service model is. They want an element of self service so that they can go into the other bank’s system and find out what has happened to that particular transaction.
And I guess also the other issue that they want to be concerned about, if they’re stopping investing in future payments technology, that whoever they go and outsource with has got something of a future proofed value proposition going forward.
Very much so, and that’s one of the things we talk to, when we’re talking to some of the FIs, is that they have to make sure that their criteria for selecting that partner are spot on, because ultimately it’s a long term relationship. You have to make sure that the partner you select, the partner you tie up with is one where you can have the confidence that the future products will come through, but also you have a right mindset. Both have the same way of looking at things. If you’re concerned that the bank you’re outsourcing to is going to steal your customer, don’t.
It’s not going to work, is it?
It’s not going to work. If you have any doubt, you shouldn’t be going against – with that particular partner. So it’s very important that financial institutions sit down and think through the key criteria which, if you like, drives their particular organisation and have that as a core function when they’re looking for an outsource partner.
Right. I always wonder when we talk about outsourcing and we talk about it a lot, because we believe that it’s going to be the consequence of what’s going on with SEPA, but when we actually start talking to banks, some of whom you would expect to be actually looking at outsourcing, they say “No, no, no, we looked at that, but we’ve decided we’re going to hold onto our payments business; that it’s key and integral to the value pot that we offer our customers. It sits at the tail end of a lot of processes, and to lose it, we would lose too much control.” To what extent do you think there is a delay where people are almost in denial at the moment about what they can do, and what will be profitable by way of a payments business, and that we’re going to see another later wave, perhaps in a year, or 18 months’ time, when people start waking up to the practicality of investment?
I think we are going to have to wait for a second wave. A year ago, if we’d had this conversation, we would have said, “2007, there will be a number of these movements.” But I think everyone’s holding back because everyone’s waiting for someone else to make the move first. Someone else to go in and, if you like, break the ground before the rest of them follow and since we haven’t had that, everyone’s holding back. I mean, I’ve talked to a number of banks and it’s clearly they would like to be able to make the decision, but because no-one else has, they’ve held back themselves. So will this be in 2008, or will this be in 2009? I suspect it may wait ‘til 2009 before some of these movements start taking place.
Yes. I tend to agree with you. I think that what the banks have done, in most cases, is band-aid quick fixes on their existing applications, which do just enough to get them over that first hurdle. But then, as they run those systems, I think they’re going to find that the competitive pressures are going to be too great and that a year or so after that is the time that they’re going to start seriously looking at outsourcing.
Absolutely. Why don’t you get SEPA compliant first? Make sure you’re there so that if anyone wants to know, you’re compliant. You can process the transactions. Because guess what, the volumes are low anyway in the first phase so the point is, if I can buy some time, I can then look around and see what the rest of the competition’s doing. If everyone’s in the same position, maybe we’ll just stay on and then you’re right, come some time towards the end of next year, volumes start ramping up, then they’re going to have to make a decision.
Well, then the domestic volumes come through as well, of course.
Exactly, exactly. Yes. And don’t forget the whole premise of SEPA is if you find a cheaper provider elsewhere, you should be able to go to it, right?
Right.
So from a Bank’s point of view, if I’m currently operating in one country and I’m using my partnership in that one country to go through just that one clearing centre, now, potentially, I could suddenly switch to go from CSM1 to CSM2 seamlessly. And if you do that, all of a sudden the volume dynamics change.
So we’re talking about the VOCAs, the EQUENS’s of this world?
Correct, yes.
And I think, I mean, we both perceive that these are potential ultimate winners, in the sense that they will be the large volume aggregators of payment transactions.
Absolutely. If you look at VOCA, they have the ambitions to become the dominant player.
I think they have the systems as well. I mean, to be fair to them, they’ve got the capacity, they’ve got the volume, they’re sitting there ready.
And they’re the only group who I’ve come across so far who have an eloquent vision. They know what the vision is; they know where they want to go to. Some of the other groups I’ve talked to, I’ve met, they know what they would like to do, but the roadmap isn’t clear. With VOCA, I get a sense that the path has already been laid out. Okay. And then you’ve got possibly two or three others, one could be Visa, one could be First Data. There’s nothing to say you can’t switch from being just a card processor to being payment processing. And I think the day they start moving into that field, the market will open up dramatically.
I think one of the interviews we’ve had here on the Payments Podcasts leads us to believe that Visa is waking up to this. They’re beginning to say “A payment is a payment is a payment,” and the ability for them to simply add to their dataset is relatively easy, and they can carry low value as well as high value. Could you tell us a little bit about the single card process concept that we discussed earlier offline?
Sure.
And let the listeners know something about the Bank of America Card Operations.
In talking to clients, one of the things clients are specifically looking for in the card area is if they look at the travel and entertainment card business, the T&E cards, if they operate in four or five countries, they currently have four or five different programmes. What they’re looking for is a single programme which goes across all of those Euro countries, which really is what SEPA cards framework is all about. We’re the number one issuer of cards in the UK; we have a formidable business in Ireland, and we have a good business in Spain and Portugal. So we will all be looking at how the card proposition develops for us further from both the retail side and a corporate side.
Just before we get off the topic of cards, I know that there’s a view of the Commission that there should be a third provider in Europe, aside from Visa and Mastercard, which are perceived to be US franchises effectively. Do you have a view on that, I mean in terms of the realism backing that concept?
My view is only that I know a number of times people have talked about having a third player in the market. It’s never really taken off. Partly because I think, Mastercard and Visa do a good job, certainly as far as the cards framework is concerned, both have announced a reduction or transparent pricing…
And a separation between the scheme rules and the operations which…
Absolutely, which is one thing which…
…makes it more visible.
…the Commission was concerned about. So having a third force, or the need for a third force, I think it’s interesting. I’m not sure what it will do in terms of adding more competition to the market, but it will be interesting to watch it.
It could be quite an expensive experiment to try and develop a pervading brand from scratch to – well, one to watch, perhaps. Before we wrap up this interesting conversation Dhiru, perhaps we could just talk a little bit, finally, about the timing, some of the timing implications. We know there’s been a delay in the PSD, which has led to a delay in the implementation of the Direct Debit attributes of SEPA. Could you just maybe talk through your views on that and what impact you think that’s going to have on the way that banks roll out services, and perhaps a little bit also about what the implications of that rollout is going to have in terms of the relationships between banks and corporate?
Sure. The Payment Services Directive, as you rightly say, was delayed in its sign off. It finally got signed off by the Finance Ministers and then the EU Parliament in April of this year. The next stage is for all of the Member State Parliaments to sign off before it becomes ratified. So the question is how many years is it going to take for all of that to happen?
Well, November 09 I think is obviously the target date for the sign off?
Is the target date, so between now and November 09 all the different Member States will go through, approve it, and then, in theory, we can start rolling out separate Direct Debits. So if you look at 2010 as the introduction of SEPA Direct Debits, you’ve then got potentially two years, if you look at the original timescales, over which period we should move away from the legacy products and into SEPA Direct Debits. I’m not entirely sure if that timescale will be attainable. And the reason for that is whereas for separate Credit Transfers a two year timescale is possible because Credit Transfers are much simpler.
They’re already there.
They’re already there, a much simpler instrument as well. For SEPA Direct Debits you’ve got a whole host of issues to worry about before you can start thinking about it. So besides the banks and the corporates starting the process of coding and rolling out the product sets…
As well as renegotiating contracts of course.
…that is where the big trouble’s going to be, because if you think about a large Fund Manager, you’ve got hundreds of thousands of Direct Debit mandates across different countries, if they’re now going to have to go back to every single one of them and get another contract signed, a) it’s going to take time, but also look at it from the other point of view. If you’ve had a Direct Debit mandate signed 20 years ago for a fund you’ve been drip feeding over the last 20 years, if you now get a notification which says “You’ve got to change the mandate,” you might take an opportunity to cancel that. So I think there are all those issues there as well, which is going to suddenly start focusing minds for the corporates to say “Do I really want to do this?” If so, “How do I want to plan for it?” Now those corporates who are looking to use SEPA Direct Debits or looking for Direct Debits for the first time, I think this will be a good opportunity, but the existing large players I see that they will take a little bit more time and thought before they migrate on. So what am I saying? I’m saying SEPA Direct Debits will start from 2010. I think the migration period will take a lot longer. It certainly will be more than three or four years before clients start migrating in large numbers.
Right, yes, I tend to agree with you on that. Great, well, Dhiru, it’s been a really interesting chat and it’s been an interesting conversation. We’ve covered a lot of ground here in terms of where we think that the client needs are going, how we feel the banks are responding, some of the competitive issues which are likely to occur as a consequence of these changes, and it just remains for me to thank you very much indeed for coming along.
Absolutely, yes, thanks very much Dhiru for coming along. Now a quick word to our listeners before we go, if you would like to subscribe to the Payments Podcast, then you can go along to www.paymentspodcast.com where you will find full details of how to subscribe, either using RSS or via iTunes or via email. Stay tuned and we’ll have another episode for you next time.
We will be taking a break for the summer, but will be back in September. The Payments Podcast was brought to you today by Voices in Business, helping our sponsors participate in thought leadership in their business sector. For more details, visit www.voicesinbusiness.com. Goodbye.
» Posted in
Uncategorized |
