The following is an article by Paresh Madani – Head, Payments Center of Excellence, PrimeSourcing, i-flex solutions.
SEPA – A Catalyst for Payments Consolidation by Way of Systems Integration
(A paper presented at the SEPA Conference (International Payments) November 8-9, 2006)
This paper talks about how the Single European Payments Area (SEPA) initiative presents an opportunity for various banks across Europe to consolidate and optimize their payments processing. Corporates and banks, in particular, will be evaluating a number of routes toward SEPA compliance but, eventually, a phased approach will take precedence over the others. Let us look at how SEPA will affect – and influence – key players, and delve into how technology and, most importantly, systems integration will be critical in achieving SEPA compliance. While there have been a number of discussions and debates on how SEPA will affect banks, corporates and their customers, not enough is being discussed about how Information Technology can play a pivotal role. SEPA presents a unique setting for banks to consolidate their fragmented payment processing to a few platforms of scale. These platforms will centralize payment and messaging flows, to the ultimate benefit of the end-user.
Impact
There has been enough written about the impact of SEPA; the loss of revenues due to increased cross-border competition being uppermost on everyone’s minds. Studies conducted in the market indicate that despite SEPA bringing in increased efficiencies on account of greater Straight-Through Processing (STP) and better liquidity management, revenue losses and investment costs for SEPA adoption will outweigh the cost savings.
Opportunities
Then again, just as loss of revenue can be considered a negative, it can also be treated as an impetus to streamline the fragmented payments processing infrastructure, increase efficiencies, and help evolve new payments business models. The effect of SEPA on the banking sector as a whole would depend on banks’ ability to reduce infrastructure costs, reduce manual handling in some parts of the payment processing chain, and also evolve profitable pricing models. Developing new products, re-engineering pricing models to develop new lines of revenue, and steering customers towards the most profitable payments instruments are some strategic decisions that can help banks invest in future growth. For instance, banks could look at creating payments business models to include in-sourcing of payments business for other financial institutions.
Strategizing – The Way Forward
It is critical for financial institutions to adopt a proactive approach and address any concerns related to fragmented product-based silos in the process, thereby, avoiding inefficient processing; for instance, in the duplication of payment processing across different product processor-based systems. In the face of rising competition and falling revenues, banks may be called on to replace or adapt their existing product processing systems for cross-border payment transactions. Such systems would need to develop the capacity to accommodate new interfaces. Banks will need to look at integrated STP systems that help them add value and reduce costs.
Impact on Key Players
As stated earlier, while SEPA is expected to bring in increased efficiency in payments processing, there is also the apprehension of investment costs outweighing any saving in costs. Hence, it will become extremely critical to effectively manage the ramifications of multiple entities in the face of SEPA. Banks are expected to face maximum challenges; especially, in terms of overcoming increased competition, high investments, new pricing models, needs for re-evaluating and re-engineering payments infrastructure and, most importantly, the evaluation (/evolution) of new payment business and outsourcing models as part of the larger objective of creating Payments Business Utility Services.
As commercial and economic borders open up with SEPA, corporates will again have to look at new business models in order to cater to the business opportunities that would emerge post implementation of SEPA. Offering consistent pricing to customers both within and across national borders, and consolidating and centralizing treasury functions, and evaluating accounting structures would enforce changes on their existing back-office ERP applications. The end customer community may reap the maximum benefits, though they will have to carefully consider the availability and levels of new business services post SEPA implementation. These benefits will include low costs, speed in transfer, ease and reliability, and transparency in (as in domestic) cross-border accounting. A slew of business and technology considerations will have to be assessed before embarking on any change in payment processing and related IT Infrastructure. For instance, from a business perspective, the factors are:
• New rulebooks and frameworks for complying with SEPA Business Rules
• Bulk payment processing capabilities for low-value processing used for paying through ACHs such as STEP2
• Debit Transfer Processing
• TARGET2 Liquidity Management
• Pricing and billing capabilities
• Achieving operational efficiencies
On the Technology Side…
• Implementation of new payment instruments resulting in changes/ replacements of systems for new instruments such as SEPA Credit Transfer
• Adoption of open standards (ISO 20022) for SEPA Credit Transfer, Direct Debit, TARGET2 Liquidity Management
• Implementation of new SWIFTNet business solutions
• Integration with new clearing/ market infrastructures
• Inter-operability between multiple systems
• Ability to process volumes Needless to say, SEPA does not offer banks a common or single solution. It is recommended that banks view the multitude of factors specific to their business and future goals before setting forth on any implementation.
Consolidating Payments Processing
If one were to pick the top few areas that banks would be evaluating to achieve payments processing efficiencies, it would most certainly have to include:
• Increasing the rates of STP (areas such as analyzing payment patterns for auto-enrichment and repair; automatic matching of payments between Directs and Covers)
• Centralized liquidity management
• Understanding a variety of transactional attributes that would be used in the derivation of pricing
• Efficient payment flow tracking and tracking of payments (dashboard functionality, automatic handling of exceptions)
To analyze transactional patterns and attributes for pricing and payment flows, Payment Analytics would come into play. If one considers the different processing steps involved in an all-encompassing payment processing model, we recommend the following steps for optimization:
• Receipt, safe-store and authentication
• Message enrichment and transformation – (including auto
repair)
• OFAC/Compliance checking
• Debit account validation (including IBAN check)
• Debit authority check-mandate verification (for DD MT204 &
PEDD)
• Funds/Credit check (VOSTRO disposition) and earmarking
• Payment routing (Chain build)
– Book clearing, NOSTRO (Serial, Direct-cover)
• Credit account validation/qualification (including account v/s name matching)
• FX processing (standard rates, special rates, among others)
• Pre-advise (MT210)/notification generation and dispatch
• Pre-advise (MT210) matching (for incoming)
• Direct v/s Cover matching – MT103 v/s MT202 / MT910 (for incoming)
• Fees and charges calculation (including correspondent fees)
• Cut-off times check (clearing/ treasury) and value dating
• Liquidity desk–scheduling, warehouse, timed payment holds, among others
• Liquidity desk – Funds checks (including TARGET2 cash messaging)
Liquidity desk – Payments prioritization, alternate routing
(if needed)
• Message formatting and bulking (if required)
• Message final validation (OFAC, cut-off, etc.) and release (InterAct, FileAct)
• Acknowledgment (ACK/NACK)/confirmation match and handling
• Book-keeping and MIS
• Advising (SWIFT, e-mail, fax, paper)
If one considers the overall enterprise payments IT infrastructure, there could be multiple options for the consolidation of payment processes and components such as:
• Payment initiation systems
• Payment types (wholesale and retail)
• Payment processing factory components (currently siloed across different product processors and
payment processing systems)
• SWIFTNet solutions for business (Funds, etc.) and market infrastructures (STEP2, TARGET2,
Faster Payments), thereby consolidating the SWIFTNet ISO20022 processing
• Liquidity management
• Payment interfaces and gateways- consolidate via a centralized messaging hub
• Complementary systems (e.g. Accounting, Billing)
• Payment networks
Many SEPA migrations will witness the gradual consolidation towards an enterprise payments infrastructure. It would be advisable for banks to move to component-based, service-oriented payments architecture with a central messaging hub to interface with the myriad of systems, including direct business processing. Common payment processing components such as compliance checks, credit management and pricing can be developed as Web Services, which can then be reused across applications.
Possible Approaches for SEPA Migration
From a generic implementation adopted by the smaller banks (e.g. indirect participants) by connecting to an external SEPA compliant SWIFTNet infrastructure, to banks
wanting to create a consolidated payments, liquidity and SWIFTNet infrastructure as discussed earlier, the approaches towards SEPA migration can vary. Significant among these routes will be that of a SEPA SWIFTNet messaging hub that can act as a single window to external networks and systems and connecting to market infrastructures such as TARGET2 and STEP2, as well as for other SWIFTNet Business Solutions in the areas of funds, cash reporting, exceptions and investigations and trade services.
Systems Integration – The Way Forward
In a nutshell, there are going to be multiple businesses and IT infrastructure changes that will drive compliance towards SEPA and, ultimately, towards the larger goal of enterprise payments infrastructure consolidation. Most organizations have set up a SEPA Implementation Committee/ Group cutting across business and IT divisions. While such groups will have SEPA compliance in immediate focus, they cannot afford to ignore the larger objectives, and not define roadmaps accordingly. All these paths will lead to changes across multiple applications and payment processes, and the creation of new applications and processes. This would imply that most SEPA initiatives would involve systems integration, thereby, introducing the need for selecting an IT solutions partner. A cost-effective solution backed by a vendor’s expertise in global payment processes is what will win in the end.
Author
Paresh Madani
Head,
Payments Center of Excellence,
PrimeSourcingTM, i-flex solutions
