Major European banks can profit from Europe's new cross border payments system if they overhaul their core legacy payments systems.
But uncertainty about the level of demand for the Single European Payments Area (Sepa) payments among European businesses will limit the number of banks prepared to upgrade their IT systems.
Sepa makes cross border payments in Europe as straightforward as making a payment within a country. It was introduced in January last year and will become a legal requirement for payment processors in November. From 2 November this year, all companies that process payments will have to have embarked on SEPA compliance.
A combination of harmonising the payments market through SEPA and using SEPA as a platform for e-invoicing could lead to savings to European businesess of £268bn over the first six years, according to a European Commission study published last year.
Banks, which will have to offer customers Sepa services, are taking one of two tracks. They are either overhauling their payments systems to process Sepa payments for themselves or are planning to use white label services provided by other banks.
But comprehensive research carried out across Europe by financial services think-tank, the Financial Services Club, has revealed uncertainties about Sepa and the potential demand for SEPA services.
According to the study, only 13% of over 350 global payment professionals believe Sepa is being implemented correctly. It also revealed inconsistencies about how the system, which aims to make cross border payments seamless, is being implemented by individual European states. And at least one large European bank said its major customers do not make cross border payments services.
Chris Skinner, chairman at the Financial Services Club, says Sepa compliance will be as challenging as the arrival of the Faster Payments system in May 2008.
"Most banks do not have the budget to overhaul payments systems. The majority will just have the systems in place to receive SEPA payments but will use other banks to process them."
He says it will be a fee earner for some banks.
Banks investing in Sepa payments processing systems include RBS, ING, Deutsche Bank and Citibank.
IT services firm Logica has provided consultancy services for Deutsche Bank on its Sepa project. Simon Bailey, director payments and transaction banking at Logica says the German bank re-engineered its entire payments infrastructure to offer Sepa transactions as a service. The bank has re-used many systems but made them Sepa-compliant, he said. And it is linking other banks to its Sepa processing systems to support its outsourcing of Sepa transactions.
Bailey says uncertainties over the payment volumes are making it difficult for IT planners to create Sepa strategies. Volumes have been lower than expected and when they will increase is unclear. "There is a lot of uncertainty about the volumes of Sepa payments that will be demanded. Banks will not be cost competitive if they cannot get large volumes."
He predicts most of Europe's banks will outsource payment processing, unless payment volumes grow.
Claude Roeltgen, CIO at BayernLB - a small bank based in Luxemburg - says the bank will use the Sepa services offered by other banks. He says smaller banks have to specialise in adding value through advice rather than high-volume payment processing. "Sepa will have a big impact on banks that do a lot of processing but we are not doing anything ourselves."
Michael Mueller, managing director of wholesale solutions, global transaction banking at Deutsche Bank, says meeting Sepa compliance places further strain on legacy technology for many banks.
European legislation is complicated at the best of times. Changing legacy systems at large banks is likewise challenging. Combine the two in this case and you need a payments business IT strategy that pans five years.