Banks are gearing up to process single European payments area (Sepa) transactions for their business customers in readiness for the Eurozone clearing system, which comes into effect in January.
Sepa was created by the European Commission to create a single payment clearing system for the 15 countries that use the euro. It will standardise the cost of transactions from country to country.
Although the UK does not use the euro, businesses with a presence in the Eurozone will need to change their processing systems if they want to make lower cost Sepa transactions.
Banks will have to either upgrade the technology used to process payments or outsource the service. Upgrades include new software and extra network connections to European clearing houses.
According to research from Pierre Audoin Consultants (PAC), the majority of banks will look to outsource the service because the cost of doing it in-house will make it unprofitable to most banks.
HBOS, for example, is outsourcing Sepa processing. It has signed a three-year contract with Belgo-Dutch bank Fortis for the clearing and settlement of euro payments.
"HBOS is a UK-focused bank so this approach makes strategic sense for us," said Graeme Donald, head of industry and product development at HBOS Payment Services.
But outsourcing this process is not exclusively for small or regional banks, said Rajeena Brar, banking and insurance consultant at PAC.
"Some larger banks will prefer to outsource Sepa if this is not an area of priority in terms of investment and if they wish to make better use of their scarce resources to become profitable and grow," said Brar.
However, Brar said banks that want to keep control over their core processes will insource.
Agustin Lago, payments risk head of global payments at Barclays Commercial, said the bank has a system for Sepa cross-border payments. He said this offers more flexibility and control than outsourcing.
"To achieve this the technology investment has been mostly to upgrade our systems to support the Sepa cross-border payment functionality," he said.
Some larger banks with advanced payment processing platforms that have upgraded software are offering outsourcing services to other banks, turning Sepa processing into a revenue generator.
ABN Amro is planning to use its core technologies to provide Sepa processing services to other banks. The bank has connections to every major clearing house in Europe, and as a result has a network in place to route payments to anywhere in Europe automatically.
Mike Hampson, head of financial institutions, transaction banking at ABN Amro, said that by doing this the bank will reduce internal costs through economies of scale and also build revenue.
Hampson said banks will outsource for a number of reasons, but the arrival of Sepa and changes to transaction processing will make many banks rethink their strategies. "Where major investments have to be made in platforms, people question whether they should make these investments themselves," he said.