The Changing Face of European Banking: SEPA and its' Benefits
When the SEPA initiative, or the Single Euro Payments Area, was first rolled out, many people didn’t see the benefits of this system, believing the changes would be inconsequential. They were quickly proven wrong. SEPA has made cross-border payments simpler, which has led to massive savings for corporates and banks alike, while also offering a wider range of opportunities.
A Quick Overview of SEPA
SEPA is an EU initiative designed to simplify bank transfers in euro, thereby improving the efficiency of payments between member countries, namely 28 EU member states, Iceland, Liechtenstein, Norway, Switzerland, Monaco and San Marino as of July 2015. Thus, the different national markets for euro payments that were subject to different rules and processes were integrated into a single market, allowing for more efficient payment processing.
The goal of SEPA was to do away with the complexities of each country regulating payments in euros, which made it complicated for customers to make cross-border payments. In fact, many companies had to establish bank accounts in various countries to be able to make payments locally more cost-effectively and more easily.
Once SEPA was instituted, customers were able to make cashless euro payments – the system applies to a wide range of payment instruments, including debit and credit cards – from a single account using the same set of payment instruments. This helped to significantly reduce the cost of moving money around the European economy, which, at the time, was estimated to be somewhere in the vicinity of two to three percent of the overall GDP.
The Benefits of SEPA for Corporates
The biggest advantage for corporates is that SEPA significantly improves the efficiency of their payment process. As a result, international companies that operate collections across the EU can now work with a single set of payment instruments and a single bank account instead of being force to used different direct debit programs in every country. This not only reduces costs directly but also improves their bottom line due to the greater efficiency allowed by standardized processes and infrastructure, meaning more streamlined back-office administration.
Furthermore, firms are able to centralize all their payments and collections, meaning they can work with a single bank. Thus, not only is their relationship with the bank more efficient, but they also have a greater level of control and a stronger negotiating position with the bank, thereby allowing them to further reduce costs. This higher level of efficiency also applies to the supply chain.
Another very important benefit of SEPA is that it gives corporates better control over their cash and a greater level of transparency. One issue large companies have is the inability to quickly determine their cash position at a given time, especially when said liquidity is spread out over multiple banks in multiple countries. SEPA allows for the centralization of these funds, making it easier for companies to determine their cash position and therefore more effectively plan ahead.
The Benefits of SEPA for Banks
At first glance, one would think that SEPA wasn’t the best thing for banks as they’d be losing a significant level of their income generated by fees and other costs as numerous bank accounts would be shut down, since the need for them is no longer there. However, this is not the case. SEPA offers banks a host of opportunities that can significantly boost their income, while reducing costs.
In the first place, SEPA will significantly reduce the fees banks incur for cross-border payments, which means substantial savings. In fact, a PwC report for the European Commission found that SEPA could lead to €21.9 billion in savings per annum, of which approximately €5.8 billion would be attributed to the banking sector.
SEPA also enables banks to expand their business because they will be able to offer their services more easily to customers throughout the entire euro area, affording them access to completely new markets. This will also increase the level of competition but the larger potential customer base far outweighs this slight drawback. The higher level of competition will also work in the banks’ favor because they will be able to negotiate better terms with their own service providers, thereby increasing their savings substantially.
There is also the opportunity for an entire range of new and innovative products, which will further assist banks in drawing in new customers.
According to the European Commission and the European Central Bank, SEPA has created an “integrated market for payment services which is subject to effective competition and where there is no distinction between cross-border and national payments within the euro area.” It is a system that has benefited anyone and everyone who needs to make cross-border payments, from the consumer to the large corporation, and it is definitely a system that has afforded banks many more opportunities.