Once SEPA has become the standard it is aimed to be, life for automated clearing houses (ACH) will change. Or so some argue. The ownership structure of clearing houses after the SEPA end-date is an issue that is discussed more and more. Duygu Tavan reports
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There is no doubt about it – SEPA is a heavy investment. Changing ones existing clearing structure is costly for a benefit that, as industry insiders admit, is not very big. Frankly, the ROI is very weak. Customers are not yelling for one common format, stakeholders say.
About 90% of payments are still domestic and the financial incentive is not very strong among the industry to move to SEPA. But despite the as-of-yet undecided end-date for SEPA, there is also no doubt that it will happen. And when Europe has achieved that uniformity, life for banks and clearing houses may look different.
Currently, there is what one industry insider calls a natural instinct among banks to want to own a part of ACHs, or want your central bank to own it. But this instinct may become rudimentary when the SEPA standards are implemented across Europe and the clearing services offered will be all the same.
The discussions within the industry are showing signs of both common and varied opinions.
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By GlobalDataOne common opinion among the parties Electronic Payments International has spoken to is that offering a SEPA-compliant clearing service will be plain vanilla and that this would restrict business opportunities and growth. And all parties agree that the status of ACHs after the SEPA end-date will depend on the shareholders, as well as pricing and value-added services.
Simon Newstead, head of FI market & business strategy at Royal Bank of Scotland, says that therefore, the SEPA end-date will drive competition among processors.
The national ACHs could see SEPA as an opportunity to increase their market share, he says. But what may appear as a big opportunity is at the same time a threat in this increased competitive payments landscape, there will be winners and losers, he says.
The service providers are broadening their offers to the market.
Pricing and offering more than just plain vanilla clearing are the key drivers.
Gerard Hartsink, chair of the European Payments Council, says that more and more ACHs are broadening their offer to the market. So they offer more than just clearing services. It is an M&A game. The world of payments clearing looks like the securities clearing business but it is different. From a logical perspective, it would make sense (for clearing houses) to consolidate. But this will be up to the shareholders to decide, he says.
The competition after the SEPA end-date will certainly be higher. Banks will have the option to switch, because everyone will use the same clearing standards. If one house offers a cheaper service, banks may consider switching, especially if the processor offers more than payments clearing.
If the service is only SEPA compliant, then it is a plain vanilla offering. But if the clearing house offers other services, such as back office processing, then their service will be different to that of some others, Hartsink says.
There will be consolidation
According to Michael Steinbach, chairman of the Equens, the European ACH structure will continue to develop past SEPA. In a fully-integrated payments market such as strived for with SEPA, it will be all about the volume of mass payments, he argues.
This means there is going to be and there already is a big price competition. Consolidation will start with price competition. Some weak providers will diminish; the strong ones will become stronger. Then the competition will revolve around services offered. Steinbach predicts a shrinking of the number of ACHs in Europe, a trend that will be driven by accelerating price competition.
In the end, there will be fewer ACHs. But competition keeps you sharp, keeps you awake, he says.
Clearing is by definition a commodity and in the commodities business, the lower the price, the more clients you have. But if you move out of this clearing trap, there is a number of value-added services. In this case, functionality and quality will make the difference, argues Massimo Arrighetti, CEO of SIA.
I dont think the SEPA end-date will change something that will not happen anyhow, Arrighetti says. At this stage, each country has its own facilitates. Any time there is a request for change, there are 27-30 are investing to do the exact same thing, which is something unreasonable and inefficient."
Arrighettis vision is that in five to ten years time, there will be room for only four to five, seven max, ACHs in Europe but five is more than enough, he says.
Clearing itself is not enough to keep a company alive. So there is a need which is not only an opportunity for ACH or payment service companies, but also for banks to concentrate on joint platform on all activities of interbank payments clearing, info exchange, but also historical tracking and data keeping. So everything that does not represent a competitive tool for banks can be shared with other banks in the interest of efficiency and cost reduction.There is more and more margin pressure on banks, which is a strong driver for banks to share a common platform and share back offices, IT technology in order to have the lowest possible cost, Arrighetti argues.
Factors to consider
Jean-Pic Berry, CEO of STET highlights several factors that will influence the ownership structure of Europes clearing market:
There will be consolidation, but I do not know to what rhythm. This is a business of fixed costs. If I want to double my volume, my costs base will stay the same, which means there is a strong incentive for consolidation. If that is to happen, things would have to change. Today, national ACHs are owned by the national banking community. That would need to change – and actually, it is changing already.
Banks own ACHs and that will most probably continue. Banks want and need to own them. I doubt a banking community would be willing to hand its business to a processor that is not bank-owned.
We [STET] are owned by the major banks in France. Would the French banking community be willing to give its business to an ACH they do not own (after the SEPA end-date)? I think the answer would be, yes. Would the banking community be willing to give its business to a processor that is not owned by banks? Most probably not. The ownership structure is independent from and has no direct relation to SEPA, he argues.
Uniform standards no reason for consolidation
Berry does believe in the consolidation of the ACH market, however.
The initial plan was coming up a level playing field. But a consolidation through uniformity has not happened, is not happening and will probably not happen for a while yet. I think it wont happen for at least another five years.
What Berry highlights is that while consolidation is quite possible, it may not revolve around the SEPA offering. Should we go standard plain vanilla European flavour, or is there a strong case for domesticity? Our position is: it is not for us (ACH) to decide. I, STET, am just a provider, I offer both solutions, he says.
Daniel Szmukler, head of communications and corporate governance at EBA Clearing has a counter question:
In tomorrows world, why would you divide your payments between cross-border payments into one channel and domestic payments into another channel? You would put all your payments into one channel – whether they are across the street or further up north or in another part of Europe. A bank would want to scale down costs by using one ACH that will reach all their customers.
Clearing is going to be a highly commoditised area. What will drive that is scale and price and these are interlinked: If you have a lot of scale in place, you can reduce that price because you can spread that price cost over a larger base of payments, if you have a low price you could and may attract more scale and volume. When a bank is going to switch it is an internal cost analysis, Szmukler says.
But Berry doe not agree with the statement that all payments will be domestic after SEPA. The market wont be fully SEPA-compliant for another 10-15 years. There isnt a rule book for cards or cheques on SEPA. SEPA is just a format, definition of payments. It is not sufficient to dictate how an ACH processes payments, he argues.
For instance, France has a continuous processing system, while others, especially those within the EBA Clearing system, have cycles. Is one more SEPA than the other?, asks Berry. One cannot say. SEPA does not say how to process the payments. So as long as you have these two different processing methods, you will have two different ACHs, Berry argues.
This difference ties in with the costs involved in switching clearing houses. Szmukler says that banks will remain shareholders as they are captive in the investment cycle in which they operate. He argues that it would be more expensive to pull out and depreciate the investment they have made over the one year instead of over ten years. The hit from that is harsher than the benefit they would get from cheap processing or easier shareholder structure, he argues.
The reality is that there are other polices that banks take into account to see whether they stay involved in this. By 2014, the ACH landscape will still not have been consolidated and ACHs will adapt to the new reality and will try to keep their shareholders. Only when one bank pulls out and the cost will have to be spread out among the remaining participants, the pressure will grow on these ACHs to reduce costs, as the remaining participants will say they can not endure more costs than they are already taking and if they cant sort out the costs the remaining participants will say lets close. So there is pressure from the shareholders that switch, Szmukler says.
There is no way around it – competition will increase. One way or another, some ACHs will disappear; others will expand both their market share and service. Within Europe, SEPA will be one of the engines not the only one of consolidations and normalisation. Outside of Europe, it seems, this will have very little effect. We are talking about very slow movements, Berry points out.
With no clear SEPA end-date in sight, the future of life afterwards is just as unclear. But just as the end-date is unavoidable, so is the question about how the ownership structure of ACHs is going to be like when the SEPA standards are implemented across Europe.
